Strategic Business Ana Ysis

“Every organiza on’s
success is driven by people

having common goal
braced by boundless
strategies”
Nizhel V. Pimentel
nvpimentel@letran-
calamba.edu.ph
STRATEGIC BUSINESS
ANALYSIS
BS Accountancy
Table of Contents
Introduc on to Strategic Analysis: Strategy Framework......................................................................................................... 5
Assessing the environment ................................................................................................................................................. 5
Strategy framework as a concept........................................................................................................................................ 5
Strategy framework as a tool .............................................................................................................................................. 6
Importance of strategic framework .................................................................................................................................... 8
Tips to consider when crea ng a strategic framework ....................................................................................................... 8
6 items to consider for your strategic framework............................................................................................................... 9
Strategy Framework: Iden fying strategic issues ................................................................................................................. 10
How Should You Identify Strategic Issues? ....................................................................................................................... 10
How Should You Reduce and Prioritize the List of Strategic Issues? ................................................................................ 10
Methodologies for Resolving Strategic Issues: ................................................................................................................. 11
How does the Strategic Issues process drive later Strategic Planning steps? .................................................................. 11
Formula ng strategies ...................................................................................................................................................... 11
6 steps to execute strategy formula on ........................................................................................................................... 12
Tips for using strategy formula on ................................................................................................................................... 13
Enterprise Analysis: Business Architecture .......................................................................................................................... 13
What is Enterprise Analysis? ............................................................................................................................................. 13
The Role of Enterprise Analysis in the Requirements Process ...................................................................................... 14
Steps Involved in Enterprise Analysis ............................................................................................................................ 14
Core Competencies for Enterprise Analysis .................................................................................................................. 14
Enterprise architecture defini on ..................................................................................................................................... 15
Goals of enterprise architecture ................................................................................................................................... 15
Benefits of enterprise architecture ............................................................................................................................... 15
Enterprise architecture methodologies ........................................................................................................................ 16
Enterprise architect role................................................................................................................................................ 16
Enterprise architecture tools and so ware .................................................................................................................. 16
Enterprise Analysis: Feasibility studies ................................................................................................................................. 17
What Is a Feasibility Study? .............................................................................................................................................. 17
Understanding a Feasibility Study ..................................................................................................................................... 17
Benefits of a Feasibility Study ........................................................................................................................................... 17
How to Conduct a Feasibility Study .................................................................................................................................. 17
What Is the Main Objec ve of a Feasibility Study? .......................................................................................................... 18
What Are the Steps in a Feasibility Study?........................................................................................................................ 18
Who Conducts a Feasibility Study? ................................................................................................................................... 19
What Are the 4 Types of Feasibility? ................................................................................................................................. 19
Enterprise Analysis: Project scope ........................................................................................................................................ 19
What Is An Enterprise Project? ......................................................................................................................................... 19
What Is Enterprise Project Management? ........................................................................................................................ 19
ERP Implementa on ......................................................................................................................................................... 20
How To Plan An Enterprise Project ................................................................................................................................... 22
Why Are Enterprise Project Plans Important? .................................................................................................................. 22
For classroom purposes only. DO NOT SHARE or PUBLISH!! P a g e 2 | 46

Enterprise Analysis: Preparing a business case .................................................................................................................... 23
Why Build an ERP Business Case? ..................................................................................................................................... 24
How to Build a Business Case............................................................................................................................................ 24
7 Steps to Building an ERP Business Case ......................................................................................................................... 24
Management Concepts and Techniques for Performance Measurement ............................................................................ 27
Introductory discussion ..................................................................................................................................................... 27
Concepts and techniques .................................................................................................................................................. 28
How to set performance management measures ............................................................................................................ 29
4. Collect performance data .......................................................................................................................................... 29
5. Devise incen ves ....................................................................................................................................................... 30
6. Remain open to sugges ons for change ................................................................................................................... 30
Responsibility Accoun ng ..................................................................................................................................................... 30
Type of responsibility centers (cost, revenue, profit and investment centers)................................................................. 30
Concepts of decentraliza on and segment repor ng....................................................................................................... 30
What is decentraliza on?.................................................................................................................................................. 30
Types of decentraliza on .................................................................................................................................................. 30
Advantages of decentraliza on ......................................................................................................................................... 30
What Is Business Segment Repor ng?.............................................................................................................................. 31
Understanding Business Segment Repor ng .................................................................................................................... 31
The Importance of Business Segment Repor ng .............................................................................................................. 31
Controllable and non-controllable costs, direct and common costs ................................................................................ 31
Controllable Costs ............................................................................................................................................................. 31
Uncontrollable Costs ......................................................................................................................................................... 31
Direct Costs ....................................................................................................................................................................... 32
Indirect Costs .................................................................................................................................................................... 32
Performance margin (manager vs. segment performance) .............................................................................................. 32
Prepara on of segmented income statement .................................................................................................................. 33
Contribu on margin .......................................................................................................................................................... 33
Segment margin ................................................................................................................................................................ 33
Fixed costs and the segmented income statement........................................................................................................... 33
Traceable fixed costs ......................................................................................................................................................... 33
Common fixed costs .......................................................................................................................................................... 34
Organiza onal segments within segments ....................................................................................................................... 34
Segment cost volume profit (CVP) analysis....................................................................................................................... 35
Breakeven calcula ons for segmented income repor ng ................................................................................................ 35
Return on investment (ROI), residual income and economic value added (EVA) ............................................................. 35
Annualized ROI .................................................................................................................................................................. 36
Advantages of ROI ............................................................................................................................................................. 38
Disadvantages of ROI ........................................................................................................................................................ 38
What Is Residual Income? ................................................................................................................................................. 38
Types of Residual Income.................................................................................................................................................. 38
How to Generate Residual Income ................................................................................................................................... 39

Residual Income vs. Passive Income ................................................................................................................................. 39
What Is Economic Value Added (EVA)? ............................................................................................................................. 40
Advantages and Disadvantages of EVA ............................................................................................................................. 40
Transfer Pricing...................................................................................................................................................................... 40
Ra onale and need for transfer price ............................................................................................................................... 40
Objec ves.......................................................................................................................................................................... 41
Importance ........................................................................................................................................................................ 42
Purpose ............................................................................................................................................................................. 42
Benefits ............................................................................................................................................................................. 42
Drawbacks ......................................................................................................................................................................... 42
Transfer Pricing Schemes (minimum transfer price, market-based transfer price, cost-based transfer price and
nego ated price) ............................................................................................................................................................... 42
Minimum transfer price ................................................................................................................................................ 42
Market-based transfer price.......................................................................................................................................... 43
Cost based transfer price .................................................................................................................................................. 43
Nego ated price................................................................................................................................................................ 43
Balanced Scorecard ............................................................................................................................................................... 43
Nature and perspec ves of balanced scorecard ............................................................................................................... 43
Four Perspec ves of the Balanced Scorecard ................................................................................................................... 44
Financial and non-financial performance measures ......................................................................................................... 44
Comparison Table.............................................................................................................................................................. 45
What is Financial Performance Measurement? ................................................................................................................ 45
Main Differences Between Financial Performance Measurement and Non-financial Performance Measurement ........ 45

PRELIM PERIOD
Introduc on to Strategic Analysis: Strategy Framework
Assessing the environment
Strategy frameworks are methods that businesses use to outline plans to achieve future goals. It aims to demonstrate how a business
or department plans to use projects and other ini a ves to uphold the overall vision of stakeholders.
A framework serves as the founda on for internal and external messaging, organizing all priori es and ini a ves into strategic drivers
or pillars that ladder up to a high-level goal or purpose.
A strong framework is aspira onal, designed to inspire stakeholders and demonstrate how the organiza on is working towards their
vision, purpose, or goals.
Developing a strategic framework is the first step in crea ng a compelling narra ve to elevate your brand. It ensures consistent
messaging, which is essen al in building brand trust. From an internal standpoint, a framework defines your strategic focus and gives
your team a clear vision of what they are working to achieve.
Types of ini a ves and business objec ves where strategic framework can be applied:
- Building brand awareness
- Expanding into a different market or niche area
- Incorpora ng more suitable prac ces into business ac vi es
- Developing a strong customer base
- Reducing long-term debts or completely ge ng rid of them within 5 years.
STRATEGY
Strategy can be defined as “a general direc on set for the company and its various components to achieve a desired state in the future.
Almost every person implements strategies in the workplace and in their personal lives. Strategies are plans formulated and
implemented with the sole purpose of a aining set goals and objec ves. O and, we have always referred to strategy as a plan to be
executed, a map to chart, and a path to traverse.
Strategy framework as a concept

Due to the popularity of the word, strategy, percep ons, and thoughts evolved through the years. Some management gurus consider
strategy as a concept, an idea, a theory, a model, or simply, views and beliefs. They include intellectual elas city, mindset, learning,
natural capital, and intellectual capital.
1. Strategy as intellectual elas city.

The concept of intellectual elas city came from Kenichi Ohmae. Considered as Japan’s only management guru, Ohmae wrote “The
mind of the Strategist” in 1982. He says, Strategies stem from crea ve minds and not from rote memory”. There are no magic formulas
for crea ng brilliant formulas. Ohmae is known for developing the concept of an idiosyncra c mode of thinking called “Strategic
Thinking”. This concept underscores that the mind of a strategist is characteris cally that of intellectual elas city. Intellectual elas city
refers to flexibility and adaptability in coming up with realis c responses to changing situa ons. When designing a business strategy,
three main players must be taken into account. They are the company, the customers, and the compe tors. For Ohmae, strategy as
intellectual elas city can be best portrayed in the following situa ons:
a. In launching radical ini a ves - strategy is referred to as crea vity.
b. In iden fying the key success factors in one’s business – strategy may be mean inves ng addi onal me, money, and effort
in the factors that have the greatest poten al to succeed.
c. In matching the company’s unique skills to the needs of the customers – strategy is having the flexibility to study and adapt
to the environment, to segmen ze, and to concre ze improvement strategies.
d. Strategy - is comparing one’s strengths with those of compe tors and exploi ng the advantages to build on superiority.
2. Strategy is mindset.
Richard Pascale, in his book MANAGING THE EDGE consider strategy as a frame of mind and an a tude. Pascale states that
organiza ons should develop within their system an outlook that is deliberate and monitored. He says further “nothing fails like
success”.
3. Strategy is learning.
One of the most widely discussed concept of strategy today is based on the learning organiza on model. This call to learn is rooted on
the reality of changing environment. Change demands learning, and learning means con nuous change. Learning, from the
organiza onal perspec ve, is a process of maintaining and improving performance experien ally. Based on facts and date, learning is
not accidental ac vity although it may happen consciously or otherwise.
Learning refers to any old and new knowledge and competencies, gained or enhance from persons, ins tu ons, books, experiences,
training, and others. It comes in the form of data, facts, informa on, skills, values, a tudes, or philosophies. Learning is not limited to
personal learning. The center of maximum learning Is in organiza ons. According to Senge (1990), learning in organiza ons is easily
iden fied and dis nguished in ac vi es. Innova on and differen a on, con nuous improvement, con nuous adapta on, and
benchmarking are forms of learning domains.
Innova on is learning new concepts and new ways of doing things. It means crea ng new knowledge, new products, and new modes
of thinking. A shade of innova on is differen a on. It is improving, enhancing, and enriching what is existent. Con nuous improvement

is an ongoing constant process of doing things be er. An improvement life cycle never ends. Con nuous adapta on refers to
responding to changes in the environment. It implies flexibility, resilience, and a spirit of openness to change. Lastly, the combina on
of con nuous improvement and con nuous adapta on encourages benchmarking.
Learning in organiza ons carry the spirit of aiming to be the best. They compare themselves with other organiza ons and learn from
them. In short, strategy is learning. It is not sta c. It adapts to the given situa on. It is revising, redesigning, rethinking, reinven ng,
genera ng, producing, and crea ng. This is when strategy is considered learning.
4. Strategy is natural capital.

With reference to Porter’s concept of compe ve advantage, Hawken et, all. (1990) look at strategy as natural capital. They
enumerated the components of natural capital, namely: natural resources, living systems, and ecosystem services. they further stated
that they are the central strategies of natural capitalism. They are the following: focusing on radical resource produc vity to further
economic gains, shi ing to biologically inspired produc on model to eliminate wastes; moving to solu on-based business model where
value is delivered as a flow of services, and reinves ng in natural capital to reverse planetary destruc on. Hawken emphasized that
both environmental and economic priori es are compa ble with one another. When taken in this light, natural capital creates
compe ve advantage. Thus, it is in this instance that strategy is considered natural capital.
5. Strategy is intellectual capital.

In a closer perspec ve, strategy is intellectual capital. The book Intellectual Capital published in 2004, considers two categories of
knowledge. One is common knowledge and the other in intellectual capital. It defines common knowledge as trite and ordinary
because it simply sa sfies minimum expecta ons and knowledge. Over and above this ordinary knowledge is knowledge that is
significant and outstanding which is referred to as intellectual capital (Young 2004).
By defini on, intellectual capital is the synerge c confluence and interrela onships of the organiza on’s valued resources. It is
intangible. Although not visible and concrete, intellectual capital can be felt. It creates and impact. It can be assessed. It is cri cal to
a aining organiza onal success. It some mes makes the difference, but o en mes it is the difference.
Strategy framework as a tool

Aside from looking at strategy as a concept, strategic management gurus consider it as a tool, a mode or approach by which goals can
be achieved. Strategy as a process, method, or technique significantly catalyzes organiza onal growth and success. Some of these
strategy tools include informa on technology and a balance scorecard.
A. McKinsey’s Strategic Horizons

Horizon 1 - Core Business
This encompasses the ac vi es that are most closely aligned to the current business.
Most of the immediate-revenue making ac vity will sit in horizon 1. If you're a retailer,
this includes the day-to-day goals associated with selling, marke ng and serving your
product and customers. The goals in horizon 1 will be mostly around improving
margins, be ering exis ng processes and keeping cash coming in.
Horizon 2 - Emerging Opportuni es
Emerging opportuni es are about taking what the industry already have and
extending it out into new areas of revenue-deriving ac vity. There may be an ini al
cost associated with your horizon 2 ac vi es. However, these investments should
return fairly reliably based on them being an extension of your current proven
business model. Examples of this could include launching new product lines or expanding your business geographically or into new
markets.
Horizon 3 - Blue Sky Your blue-sky
Horizon 3 goals will be all about taking the business in new direc ons. These may be unproven and poten ally unprofitable for a
significant period of me. This would encompass research projects, pilot programs, or en rely new revenue lines requiring a significant
upfront investment. Whilst there are no hard and fast rules, aim for a 70/20/10 split between the 3 horizons. Adapt these numbers
based on your risk appe te and resource availability.
B. Value Disciplines
The Value Disciplines framework works on the assump on that an organiza on is most likely to excel at what it is already good at. You
choose one main value discipline for your organiza on and ensure that you have sufficient components in your strategy driving towards
this discipline. By dividing your strategic goals into one of the disciplines you can make an honest assessment about whether your
strategy aligns with your stated compe ve advantage or focus.
Opera onal Excellence

An organiza on that focuses on opera onal excellence aims to provide its customers with high-quality products or services at
compe ve prices with low barriers to purchase. It focuses internally on streamlining processes - making as few errors as possible and
minimizing superfluous services. Standardizing and increasing economies of scale are part of this procedure.

Customer In macy
Your organiza on feels that its customers are the most important aspect of its business. You would con nuously work to meet the
customer’s requirements and deliver bespoke and one-on-one solu ons where you focus on building long-term customer rela onships.
Obtaining a once-only large transac on is less a rac ve than crea ng a long-las ng in macy bond with customers. In order to excel
at this strategy, you would need to use an intensive Customer Rela ons Management (CRM) process.
Product Leadership
An organiza on that focuses on product leadership will always strive for product development and innova on. It aims at becoming the
market leader of a specific product or service. It strives to create a con nuous stream of innova on that is in demand with both loyal
and new buyers. It invests a lot in R&D and has a flexible structure to s mulate the performance and crea vity of its employees. New
and innova ve products are o en “be er, smaller, faster, trendier and cheaper” than previous itera ons.
C. The Stakeholder Theory

Though not a well-known model in the broader business world, the Stakeholder Theory framework looks at strategy slightly differently.
It aims at adding value for specific groups of people. The nice thing about the stakeholder model is that it's both extremely flexible as
well as easy-to-understand for employees and people outside of the organiza on. It's also extremely mo va ng to see a clear link
between your work as an employee and direct benefit being realized by another human being.
Group 1 - The employees

It includes goals that directly enhance the well-being of employees. This could be
direct financial goals such as salary increases or intangible benefits to this group
such as training and facili es.
Group 2 - The customers
It includes goals and outcomes that benefit customers - such as product
improvements or increased accessibility.
Group 3 - The community
Most organiza ons bring an element of community benefit, such as job crea on.
Others go much further and are en rely dedicated to improving the local
community.
Group 4 - The shareholders
Whilst this model is popular among not-for-profits, many profit-making
organiza ons also adopt the stakeholder model. The components of their goals that
directly enhance the bo om line would fall into group 4.
Group 5 - The society
You could look at society as an extension of the community. Goals that will benefit the broader society (people who aren't customers
and aren't in the local community) would be categorized here. This includes major technology advancements, research or
environmental work, for example.
D. The Balanced Scorecard

Strategy as a balance scorecard. Being able to quan fy performance is a compe ve strategy. It gives organiza ons real measurement
figures, thereby allowing them to plan and devise ways of a aining their set goals. One of the most recent developments in
performance measurement in the balance scorecard. Two management gurus, Robert Kaplan and David Norton, introduced the
concept of the balance scorecard as strategy tool in their book “The Balance Scorecard”. It is a strategy template which illustrates four
important perspec ves for performance measurement, namely: knowledge educa on growth, customer, internal process, and
financial.
We couldn't round up the best strategy frameworks without men oning the Balanced Scorecard framework. Arguably the most popular
strategy execu on model on the planet. The balanced scorecard is built on the premise that your businesses strategy should be equally
divided into the 4 quadrants below:
Customer
This quadrant is about understanding and improving your customers' sa sfac on, their
requirements from your organiza on and its product or service.
Financial
The financial quadrant includes all your goals related to improving your bo om line or
other key financial KPIs (such as liquidity or margin).
Internal Business Process
This quadrant is around measuring and improving your cri cal-to-customer process
requirements and measures internally.
Knowledge, Educa on, and Growth
This quadrant (also some mes known as the people quadrant) focuses on how you
educate your employees, how you gain and capture knowledge, and how you use it to maintain a compe ve edge against your
compe tors.
The key to success with the Balanced Scorecard framework, and the thing which many organiza ons overlook, is that se ng goals
within these quadrants is not enough on its own. For organiza ons to find success using this framework, clear numerical KPIs should
be created for each quadrant of the scorecard. Then, regularly track and review them. Balancing goals between the quadrants is
important, but balancing outcomes is what the balanced scorecard is really all about.

PEOPLE AS STRATEGY FRAMEWORK
Strategy is both a concept and a tool, but it is also people. People are strategies in themselves. They are individuals who possess
effec ve management, leadership, crea vity, and monopolis c intellectual capital. They are execu ves, managers, supervisors,
subordinates, and anyone who leads, directs, and supports the organiza on toward the realiza on of objec ves. They are strategy
personified.
As strategy, management administers organiza ons and people. A manager sets objec ves, organizes and mo vates people,
communicates with his subordinates, measure output and performance, and develop people. In addi on, the func ons of
management are managing the business, managing managers and workers holis cally, managing work itself, and portraying social
responsibility. In this light effec ve people management is considered a strategy.
Importance of strategic framework
Helps ensure that all team members work toward the same goals
A strategic framework provides an organized format that clearly outlines end goals, methods for achievement and the purpose of end
goals within a business or department. At any point, team members can reference your strategic framework to redirect their focus and
remember the purpose of their work ac vi es. This ul mately ensures that each team member completes their job du es in
accordance with the same goal.
Encourages stakeholders to make dona ons:
For companies with investors or board members, having a strategic framework can influence their par cipa on and willingness to fund
certain programs or ini a ves. A good strategic framework can also help to a ract new investors over me.
Minimizes unnecessary spending:
When you have a good strategic framework in place, you have a be er understanding of what you need to do in order to achieve your
end goals. This includes understanding where to spend your budget. This prevents spending your funds on ini a ves, technologies and
other items that ul mately don't directly support your end goals.
Gives employees a focal point for mo va on:
It's easy to forget the purpose of daily job du es and business prac ces when they become rou ne. Having a strategic framework for
employees to reference can help them regain their mo va on for their work, as they understand their part in achieving company goals.
Increases chances of comple ng tasks within set deadlines:
Some professionals include deadline dates in their strategic frameworks to guide business ini a ves and ensure they stay on schedule.
By staying on schedule, businesses can save money, maintain stakeholder rela onships and ensure growth and success within their
industry.
Tips to consider when crea ng a strategic framework

Review these ps to help you cra a well-thought-out strategic framework for your company or department:
Interview stakeholders.
Stakeholders can provide insights into their vision for the company which allows you to verify their compliance with certain ini a ves
and strategic planning ideas. They can also help you iden fy a primary business objec ve to include in your strategic framework.
Review company business plan.
Your company's most recent business plan can give you ideas about areas the company has improved and areas that need more focus.
You can also reference the business plan for informa on about your company's mission statement and market data.
Do market research.
By comple ng market research, you can iden fy industry trends, customer needs, up-and-coming compe tor businesses, and
addi onal markets to expand your business. If you lead a department, you can research more about specific technologies or business
tac cs that could enhance department opera ons. Ul mately, market research helps you iden fy one or more business objec ves to
include in your strategic framework.
Review current business ini a ves and programs.
If you aren't sure where to focus your strategic framework, review current company or department programs and evaluate their worth
to employees and the company as a whole. If ini a ves and programs don't add addi onal value, you may implement new programs
as a part of your strategic framework.
Focus on long-term objec ves.
Business professionals typically use strategic frameworks to plan out long-term objec ves and how to achieve them. The average
strategic framework meline is five years and serves as a guide for business opera ons during that me.
6 items to consider for your strategic framework

Here are six items to consider for your strategic framework:
1. Vision statement
A vision statement is a short statement that includes one to two sentences. It defines what a company hopes to represent or provide
in the future. In a strategic framework, the vision statement serves as the basis for objec ves and ac on plan details. Here are some
vision statement examples:
Coffee chain: Our vision is that every customer who walks through our doors feels like they just came home.
Manufacturing plant: To be leaders in sustainable manufacturing and inspire others to do the same.
Finance firm: To provide tax services, financial planning and advisement services on an interna onal scale.
Content marke ng company: To provide outstanding content marke ng services to clients in the form of keyword research,
copywri ng, copyedi ng, graphic design and SEO.
2. Mission statement
Mission statements are two to four-sentenced statements that describe a company's purpose, and how they help customers through
their products, services and other offerings. Here are some examples of mission statements:
Coffee chain: Our mission is to help everyday people stay energized on the go and feel like a part of a community. We do this
by offering custom-made coffee blends, delicious baked goods, online order pickup sta ons and coffeehouse membership
opportuni es.
Finance firm: Our mission is to ease customer stress, help customers achieve debt-free lifestyles and guide them in making
smart investment decisions. We do this by offering a range of financial services, including investment help, financial planning,
debt and mortgage assistance, accoun ng solu ons and tax services.
3. Time frame for comple on
The me frame for comple on sec on of your strategic framework highlights one or more dates by which you expect to achieve your
objec ves. Here are a couple of examples of how you can display me frame in your strategic framework document:
Each of the objec ves listed below are expected to be completed by the 31st of December, 2026.
To ensure we meet our objec ves within a reasonable meframe, both objec ves should be completed by the 1st of January,
2024.
4. Business objec ves
You can include one or more objec ves in this sec on, depending on how much you want to accomplish through your strategic
framework. Business objec ves represent end goals or results that support the mission statement and strive to achieve the company
vision. You can use these objec ves as star ng points for more in-depth ideas on how to achieve them. Here are some examples of
business objec ves within a strategic framework:
To increase our customer-base by 40% over the next four years
To develop an internal promo on program that reduces turnover and increases job sa sfac on
To redevelop our brand and product offerings to influence conversion rates from compe tors
5. Strategies to achieve objec ves
A er highligh ng your business objec ve(s) you need to determine how you plan to achieve them. This is also called 'approach.' In this
sec on you connect each business objec ve to a poten al method for achievements. These typically include one-two sentence
statements:
To increase our customer-base by 40% over the next four years.
By crea ng a customer membership program.
By monitoring customer feedback and applying changes based on recurring feedback.
By running at least four marke ng campaigns each year.
To develop an internal promo on program that reduces turnover and increases job sa sfac on.
By working with department heads and HR to create training programs and other professional development op ons.
By asking for feedback from employees about the types of opportuni es they want.
By crea ng a referral program for managers to recommend employees for promo ons.
To redevelop our brand and product offerings to influence conversion rates from compe tors.
By working with the marke ng team and outside professionals to iden fy new brand ideas.
By comple ng market research and weighing feedback from ini al changes.
By revamping brand uniformly across social media pla orms, company websites and retail loca ons.
6. Ac on plan to provide detail into strategies

The ac on plan sec on of your strategic framework forces you to consider the individual steps you need to take within each strategy
for an objec ve. Here is an example to aide your understanding:
Objec ve:
To develop an internal promo on program that reduces turnover and increases job sa sfac on.
Strategy (approach):
Ac on plan:

1. Schedule ini al mee ng to discuss op ons
2. Assign roles during this mee ng to delegate research tasks
3. Review compe tor offerings to their employees
4. Review organiza on layout of the company
5. Work with HR and department heads to develop career tracts for each department and training needed at each level
6. Work with HR and department heads to create a shadow program for employees who want to work in other departments
1. Create an anonymous survey or feedback mechanism
2. Include several ques ons that ask employees to discuss their career goals and whether they feel they can grow at the company
3. Compose email with survey link a ached for employees to access
4. Set an end date for the survey so employees know the cut off me
5. Review feedback and recurring trends to add, maintain or change proposed training op ons
1. Create a referral document template that each person in a management posi on can use
2. Collaborate with the HR and IT departments to create a digital referral submission system
3. Compose a memo to all supervisors and managers highligh ng the new referral program and how to use it
Strategy Framework: Iden fying strategic issues
How Should You Identify Strategic Issues?

Very few Strategic Issues come out of thin air. They are the products of hard digging. Below are a couple of simple, but effective,
techniques that help identify potential Strategic Issues:
 Fully explain the concept of Strategic Issues before star ng the review of informa on and challenge your team to think about
the strategic implica ons of the informa on.
 Strongly urge each team member to highlight on the informa on worksheet, key informa on that suggests a Strategic Issue
and capture their thoughts on a pad of paper throughout the review.
Simple techniques like these permit the process to be more time-efficient and minimize the escape of key information from the
scrutiny of the team. Potential Strategic Issues often surface during the review of Strengths, Weaknesses, Opportunities and Threats
(known in Simplified Strategic Planning as Capabilities Assessment, Perceived Opportunities, Perceived Threats) or the Winner’s Profile
exercise.
Sometimes potential Strategic Issues do not readily surface. Subsequent to the Information Review, each team member should be
allowed time to formulate what they perceive to be the key issues. Recognizing that Strategic Issues are those significant and
unresolved questions that must be dealt with before Strategies can be fully articulated, each team member should:
1. review the notes they have made, the informa on they have highlighted and those cri cal items highlighted on the team
exercises
2. iden fy the most cri cal subjects that the firm needs to address
3. frame a ques on that defines what it is about that subject that needs to be discussed
The next step is to capture the key Strategic Issues on a flip chart or other medium that can be easily viewed and shared with the
entire team. Select an approach that balances the need for time efficiency and team participation.
Strategic Issues are typically somewhat unique from company to company. They will also change from year to year as some issues are
totally resolved and new ones arise. There are, however, some general topics that tend to be sources of Strategic Issues in many
companies.
Some areas that typically produce Strategic Issues are:
 Strategic Focus
 Strategic Competencies
 Culture modifica on/Organiza onal change
 Resource limita ons
 Strategic alliances/acquisi ons/mergers/joint ventures
 E-commerce products
How Should You Reduce and Prioritize the List of Strategic Issues?
Typically, the team will generate a longer list of potential Strategic Issues than they will have time to discuss and resolve. Therefore,
the list must be reduced and prioritized.
A simple “forced choice” procedure will rank your list quickly and efficiently. You will spend an average of about 30 minutes on each
Strategic Issue. We find that the truly critical Strategic Issues usually fall in the top ten.
At this point you are now ready to launch into the discussion and resolution of Strategic Issues.
Normally, it is advantageous for you to address “What should be our future Strategic Focus?” as your first issue, since Strategic Focus
is the broad answer to the Strategic Questions “what are we going to sell and to whom?”. It is, therefore, fundamental to the resolution
of many other issues.
The companion issue is “What Strategic Competencies will we require in the future?”. Since it deals with the major Strategic Question,
“How will we beat or avoid our competition?”, it will typically be the second Strategic Issue you handle. You want to assure consistency
between your Strategic Competencies and Strategic Focus and recognize the high-level role played by Strategic Competencies in
shaping your overall competitive advantage.

Resolving your Strategic Focus and Strategic Competencies issues first provides a tighter framework for discussing other Strategic
Issues and appropriately narrows the field on decision alternatives you will consider acceptable.
The remaining Strategic Issues are addressed in priority order. The number you can handle is dictated by the time available. If 6 to 8
hours are available for Strategic Issues, you should be able to cover 10 to 15 different issues.
Methodologies for Resolving Strategic Issues:

Once identified, your team must consider and seek some degree of resolution to each issue. They should be primarily concerned
with reaching a decision that defines the future direction without delving into all of the tactical sub-decisions needed for
implementation. Not all Strategic Issues can be immediately resolved. Resolve those you can at this point. For each that cannot be
resolved, be sure to state why it cannot be resolved and identify those steps, information or activities required to bring the issue to
resolution in the future.
Following are several useful approaches for Strategic Issue resolution:
 Start the discussion with basics like defini on of terms. This permits the team to start off on the same foot and begins to
define some of the scope of the issue before ge ng into the heat of the discussion.
 Ask the ques on “what is at issue?” or “why is this an issue?”. In other words, define the problem. An issue is o en half
resolved once a good defini on is developed.
 Drive the discussion un l either a decision has been reached or the addi onal steps needed to make a later decision have
been defined. A sense of future direc on must be captured - either in the form of a decision or a path to resolu on.
 Define alterna ve solu ons and record those on which there seems to be consensus. Some mes it is beneficial to let the
discussion run to the tac cal level because the team may generate material that could be useful later as a possible Strategic
Objec ve.
 Explore and evaluate, at least implicitly, the upside poten al, the downside risk, the resource consump on and the
probabili es of success for the alterna ves and select the best direc on. Seek to shortcut the process for me efficiency by
iden fying key factors that dominate all others.
Resolution of some Strategic Issues may require you to use simple versions of more sophisticated, non-mathematical decision-making
techniques. Two familiar techniques are matrices and analogies. Ferreting out conflicting, implicit assumptions and conceptions of key
cause-and-effect relationships held by different team members is frequently necessary as well.
Often a major Strategic Issue, which has been recognized and kicked around but never fully resolved for a number of years, can be
resolved rather simply following this process.
Why? Because all of the key decision-makers:
 are together in one place,
 have immersed themselves in strategic informa on,
 have reached agreement on facts and assump ons,
 are mo vated and guided by a seasoned process leader to reach a good decision, and
 know that they need to resolve this issue in order to formulate their strategy.
Before proceeding to the next step in the planning process, you should consider stepping back from the decisions you have made in
Strategic Issues and challenging their quality. In particular, you should examine your major decisions for possible downside risks and
assure yourselves that your team has not inadvertently “shot themselves in the foot”.
How does the Strategic Issues process drive later Strategic Planning steps?
Strategic Issues are links directly to the strategy formulation step called “STRATEGIES” in the Simplified Strategic Planning process.
Your strategies derive much of their content directly from Strategic Issues. This content is restated and augmented with additional
decisions and captured in a highly structured format that clearly enunciates your firm’s vision as to future course and direction.
Strategic Issues may also be linked to the process step that defines the future role of your organization (Mission Statement) and the
process step that defines the general and continuing intended results necessary and sufficient to the satisfaction of your organization’s
concept of success (Goals). The linkage may flow in two directions. Strategic Issues may arise because of your recognition that you are
not fulfilling the commitments you had made previously in your Mission Statement and Goals. Conversely, the content of your Mission
Statement and Goals may result indirectly from the resolution of Strategic Issues and its impact on your Strategies.
In turn, a comparison between your present course and direction, role and performance and your Strategies, Mission Statement and
Goals will probably reveal some misalignments. These lead to the identification of those strategic initiatives required in the next year
or so that will not happen in the normal course of business. In Simplified Strategic Planning these initiatives are called Strategic
Objectives. Your team generates them by;
(a) reviewing your Mission Statement and Goals to identify areas in need of significant effort,
(b) searching the flip charts defining your Strategies for suggestions of major initiatives, and
(c) seeking key supporting details on the flip charts documenting the resolution of Strategic Issues.
You then translate each Strategic Objective into a detailed, scheduled, step-by-step Action Plan. Action Plans are the tools to focus
your resources and drive RESULTS, and that is what you agreed you want.
And where did it all begin? It began with high quality information, but it largely took shape through a robust process that identified
and resolved Strategic Issues and then linked them to where the action was.
Formula ng strategies
Strategy formulation is the process of establishing goals and determining the proper plan of action to achieve those goals. An
organization uses strategy formulation to plan for success and make improvements to workplace strategies as needed. Strategy
formulation is essential for achieving and measuring the attainability of goals. After creating strategies, an organization typically
educates its employees so they know the organization's purpose, workplace objectives and goals.

Levels of strategy formulation
In business, there are three levels of strategy. Defining a strategy for each of these levels may help your team align your efforts and
optimize your operations. It may also help you visualize the future of the organization and determine what steps you should take to
scale your operations along with changing market conditions. Here are the three levels of strategy:
 Corporate level: How you structure the organization and coordinate across business units
 Business level: How you target and retain customers and compete with other organizations in your market
 Functional level: How you plan to grow and improve the organization
6 steps to execute strategy formula on

When formulating a strategy, consider the following steps:
1. Develop a strategic mission
A strategic mission is a foundational statement that includes the organization's values and long-term goals. To identify your company
values, think of practices you would like to see your employees implementing on a daily basis. A strategic mission is a high-level
understanding of a company's purpose and philosophies, and it can guide your strategies. The three major components of a strategic
mission are as follows:
 Time: Think of where you'd like the business to be in one, five and 10 years from now. Having long-term perspective can help
you identify aspects of your strategic mission which may involve your target market, customers and challenges.
 Core values: Understanding core values can help you decide how to achieve goals and identify why you're working toward
achieving these goals, how they could affect the company and what outcome they may produce. A mission often includes
core values that have a deeper meaning to the organization.
 Business description: A description of what the organization does and hopes to achieve can also assist with developing a
strategic mission. Ask yourself what industry your organization is in, what you hope to create and how you plan to sell your
goods or services.
2. Establish organizational goals

Organization goals are actionable objectives that can bring your team closer to achieving your strategic mission and improving your
operations. Understanding what you're working toward can help you develop appropriate processes and procedures to reach your
business goals efficiently. To identify organizational goals, consider the following factors:
 Target market: This factor identifies a specific demographic and market an organization would like to sell its products or
services to.
 Customers: Identifying purchasing habits and behaviors of target customers is a large part of developing a business goal, so
consider how they might use your product and what factors guide purchasing decisions.
 Offerings or goods: Reflect on how you can distinguish and improve your products or services, explore the benefits of your
offerings and determine what price point is best to sell the products or services.
 Adaptation to changes and challenges: Anticipating obstacles and planning solutions to them can help an organization
develop a plan of action to mitigate risk and excel.
3. Create departmental plans

Then, you can dissect your goals and develop a plan for each department, team or business unit. This help you create tasks for
employees to reach company goals and improve key performance indicators (KPIs). At this stage, you can establish numerical targets
that you aim or establish practical goals toward which you can take action. Here are some examples of departmental goals:
 Develop and use a customer database.
 Improve workplace safety.
 Invest in customer management.
 Convert more than 10 leads per month.
 Increase company revenue by 15%.
4. Conduct a performance analysis

After gaining perspective on what to achieve, an organization might conduct a performance analysis on internal and external
departments to assess its current performance. This may help you learn if the organization is competitive and valuable, if its goals are
attainable and if it aligns with trends in the industry. An analysis can reveal gaps between your stasis and your goals, and it may help
you determine what techniques are the best fit for your needs/
One common type of analysis you might perform is a SWOT analysis, which investigates the following:
 S: Strengths
 W: Weaknesses
 O: Opportunities for growth
 T: Threats to the business
A SWOT analysis helps you objectively assess your current operations while also making future plans. You can use this tool to identify
risks, implement management procedures and policies, reduce error and develop realistic predictions for sales. An effective SWOT
analysis can help you implement proactive strategies to help you remain resilient.
5. Implement a plan of action

Define what methods you plan to use to active your strategy. You can also make adjustments to your strategies as market or industry
changes occur. It may be helpful to have regular meetings with management across all departments to discuss how the strategy applies

to their team's work. Allocate business resources accordingly so each team can promote organizational goals. Some examples of
strategies include:
 Creating a website to increase customer reach
 Implementing a new online advertising campaign to increase sales
 Using unique features for products to increase product differentiation
 Gaining a technological advantage by investing in new software programs or technology devices to improve productivity and
perform market research
6. Revise your strategy as needed

As you implement a new strategy to reach organizational goals, be sure to monitor your progress and consistently conduct analyses
to evaluate the effectiveness of a strategy. Using metrics to evaluate the results of your strategy may help you make objective, data-
backed decisions. Remember to monitor industry news and relevant financial markets so you can adapt your strategy accordingly. It's
vital to set regular times to review progress and re-evaluate strategies like every month, quarter or year.
Tips for using strategy formula on

There are many factors that can contribute to successful strategy formulation. It's important to adapt and allow for new ideas and ask
for feedback throughout the strategy formulation process. While planning a new strategy, it may be helpful for you to review the
following tips:
Use SMART goals

SMART stands for specific, measurable, achievable, relevant and time-based goals. SMART goals can help you craft a specific objective
that's easy to measure or track and has a clear and concise plan for success. Using the SMART acronym as a framework for identifying
organizational goals can ensure you're planning a strategy that can make your organization highly competitive in its industry. Here's
an example of a SMART goal for a business that plans to start new social media accounts to grow the customer base:
Catarina's Confectionary Creations Company wants to utilize social media to connect with potential customers. They plan to create 15-
second videos to post on three different social media platforms showing customers how they bake each of their products. They're
aiming to gain at least 1,000 engagements and 250 followers on each site by the end of the month.
 Specific: The organization states the exact measures they can take to achieve their goal.
 Measurable: They include numerical goals, so they can clearly understand whether they met their goal at the end of the
month.
 Achievable: Since the organization is new to social media, they set realistic goals for slowly building a follower base rather
than expecting to go viral immediately.
 Relevant: The actions Catarina's Confectionary Creations Company plans to take are relevant to their overall strategy, which
is to start using social media to attract customers.
 Time-based: The business hopes to complete their goal by the end of the month.
Enterprise Analysis: Business Architecture
What is Enterprise Analysis?

Enterprise analysis (also known as strategic enterprise analysis or company analysis) is defined as focusing “on understanding the
needs of the business as a whole, its strategic direction, and identifying initiatives that will allow a business to meet those strategic
goals.” Enterprise analysis involves a thorough examination of not only the business problem (need) and its proposed business solution
(if one already exists), but also an in-depth look into whether the proposed solution is truly the best solution, a detailed analysis of
what the solution entails, its risks, and its feasibility in the existing organizational climate. Because so much research and examination
are involved in the process of enterprise analysis work, they are routinely done at a project’s inception. (Or, for agile projects, they
are done throughout the project.)
A thorough enterprise analysis endeavor will include:
 An examination of currently proposed business initiatives for both viability
and effectiveness
 An identification of the true, core business need(s) at hand, regardless of
what has been proposed thus far
 A description of the ideal solution to the need
 An evaluation of strategic risks and returns associated with any proposed
business solution
 The scope of the business analyst’s proposed solution(s) to the business
need, meaning what tools and processes are involved in getting to the
solution
 The creation of business requirements defining the business need and
proposed solution, complete with visuals and a sound business case
Because the work is so specialized—and so crucial—many organizations have senior
analysts to spearhead their enterprise analysis endeavors. However, the understanding
and application of business analysis is useful for a number of roles in the business world that may have interest in pre-project research
and solution justification, including but not limited to business analysts, project managers, stakeholders, business owners, and
software engineers.

The Role of Enterprise Analysis in the Requirements Process
As was mentioned above, enterprise analysis is the key starting point to the requirements process, identifying the scope of the
business need and justifying its solution. According to BABOK, “It is through enterprise analysis activities that business requirements
are identified and documented.” Enterprise analysis is the foundational research that undergirds any successful set of requirements.
In addition to being a crucial starting point, enterprise analysis is continually referenced and refined throughout any business analysis
endeavor, particularly in agile development.
It is important to note that while many aspects of business analysis—including requirements gathering and implementation—are often
done in concert with IT, enterprise analysis ideally is performed irrespective of IT. The work of enterprise analysis is business-focused,
and while enterprise analysis may consider what IT can bring to the table in terms of solutions, its primary focus is on business,
including changes in business processes, models, and strategies.
Steps Involved in Enterprise Analysis

BABOK has identified five main steps in the process of enterprise analysis, which are outlined below.
1. Define the business need. A business need may already be stated prior to a project’s inception, but it may or may not
be the true need that the business needs to address in order to achieve its goals. “The definition of the business need is
frequently the most critical step in any business analysis effort.” This is because without a correct identification of the
need, one will never arrive at a viable solution and all efforts toward that end will be wasted. “An issue encountered in
the organization, such as a customer complaint, a loss of revenue, or a new market opportunity, usually triggers the
evaluation of a business need.[4] It is common for organizations to act to resolve the issue without investigating the
underlying business need.” It is incumbent on the business analyst, therefore, to examine the underlying causes of the
need in order to accurately identify it and bring all viable solutions to the table for stakeholders’ examination. During this
stage, it is imperative that the analyst avoid group think, assumptions, and preconceived ideas in order to bring an
effective, objective voice to the process. In order for an analyst to accurately define the business need, she must identify
the following (as outlined by BABOK):
i.The quantifiable consequences of the perceived business problem to the organization (such lost revenue,
dissatisfied customers, and so forth).
ii.The payback that is expected from any potential solution (greater profits, reduced spending, and so forth).
iii.How fast the solution can be implemented, and the consequences of doing nothing.
iv.The business problem’s real, underlying source.
This is also the stage in which the analyst must elicit the perceived business requirements from the business owners.
2. Assess the capability gaps. Capability analysis is a key part of enterprise analysis. Separate from defining the business
need, capability analysis defines whether the organization has the capability to meet that need. (For a succinct description
of capabilities analysis versus requirements analysis, see John Owens’ article “Capability vs Requirement,” BABOK notes
that if an organization does not have sufficient capabilities to meet a business need, then it is incumbent on the analyst
to identify the capabilities that need to be added.
3. Determine the solution approach. In this stage, the analyst must determine (based on research done in previous steps)
the most viable solution to what has been determined to be the business need. The approach must describe what is
needed to implement the business solution—such as new software, a revised website, a change in business processes, or
some combination of these. More than one solution, or multiple parts to a solution, may be proposed. If capability gaps
prohibit a smooth implementation of the ideal solution, solution alternatives must be anticipated. It is ideal for the analyst
to make any list of solution alternatives as exhaustive as is humanly possible. Each solution must include any
accompanying assumptions, constraints, or risks.
4. Define the solution scope. According to BABOK, the function of this enterprise analysis stage is “to define which new
capabilities a project or iteration will deliver.” This stage puts the flesh on the bones of the solution approach, helping
stakeholders understand the path to the solution’s arrival, and the tools that will be required to implement it. Examples
of items that may be included in the scope are data warehouses, databases, software, processes, and so on. According to
BABOK, “The solution scope will change throughout a project, based on changes in the business environment or as the
project scope is changed to meet budget, time, quality, or other constraints.”
5. Define the business case. What are the practical, tangible benefits of the solution? “The business case describes the
justification for the project in terms of the value to be added to the business as a result of the deployed solution, as
compared to the cost.” In other words, how is the proposed solution truly beneficial, from a business sense, to the
organization? The business case is all about quantifying the solution’s benefits (with greater specificity than was done in
stage 1 in describing the expected payback). A specific amount of revenue, dollars saved, and other quantifiable benefits,
with a description of the metrics that helped the analyst arrive at those numbers.
A final, polished description of business need, capability gaps, proposed solution and scope, and business case are normally included
in the business requirements that are presented to stakeholders. As with any set of requirements, stakeholder involvement,
agreement, and communication are keys to their implementation success.
Core Competencies for Enterprise Analysis
A business analyst must possess certain core competencies in order to effectively lead enterprise analysis projects. These include (but
are not necessarily limited to) the abilities to:

 Create and maintain business architecture. To perform this, an analyst must be able to research and discern where a
business is (baseline architecture) and where it should be (target business architecture). According to BABOK, business
architecture “defines an organizations current and future state, including its strategy, its goals and objectives.”
 Conduct feasibility studies. A feasibility study looks at the options that are proposed and examines whether they are
technically possible within the organization and whether they will meet the organization’s goals.
 Perform opportunity identification and analysis. This is the practice of identifying and analyzing “new business
opportunities to perform organizational performance. This is typically done in consultation with subject matter experts.
 Prepare and maintain the business case. For this competency, an analyst must be able to identify the cost in time,
money and resources that the proposed solution will consume and weighs that against the tangible benefits that the
solution will offer.
 Understand and perform risk management. For this skill, an analyst must understand the risks (technical, financial,
business, and so on) of implementing the proposed solution and weigh those against the risk of not implementing the
solution.
Enterprise architecture defini on

Enterprise architecture (EA) is the practice of analyzing, designing, planning, and implementing enterprise analysis to successfully execute
on business strategies. EA helps organization’s structure IT projects and policies to achieve desired business results, to stay agile and resilient
in the face of rapid change, and to stay on top of industry trends and disruptions using architecture principles and practices, a process also
known as enterprise architectural planning (EAP).
Modern EA strategies now extend this philosophy to the entire business, not just IT, to ensure the business is aligned with digital
transformation strategies and technological growth. EA is especially useful for large businesses going through digital transformation,
because it focuses on bringing legacy processes and applications together to form a more seamless environment.
Goals of enterprise architecture

EA is guided by the organization’s business requirements — it helps lay out how information, business, and technology flow together. This
has become a priority for businesses that are trying to keep up with new technologies such as the cloud, IoT, machine learning, and other
emerging trends that will prompt digital transformation.
The process is driven by a “comprehensive picture of an entire enterprise from the perspectives of owner, designer, and builder,” according
to the EABOK. Unlike other frameworks, EA doesn’t include a formal documentation structure; instead, it’s intended to offer a more holistic
view of the enterprise.
Another main priority with EA is agility and ensuring that your EA strategy has a strong focus on agility and agile adoption. With a solid EA
strategy, companies can better weather complex and fast-moving change, and can even put your organization in a position to thrive during
turbulent times. Organizations that scored in the top quartile for EA maturity in a recent Bizzdesign survey were three times more likely to
report having organizational agility, which has been crucial during the past few years with the COVID-19 pandemic. Only 20% of respondents
said that their EA programs allowed for faster innovation and faster time to market, while just 6% claimed that enterprise architects were
included in agile teams and had the authority to influence technology decisions.
A good EA strategy considers the latest innovations in business processes, organizational structure, agility, information systems, and
technologies. It will also include standard language and best practices for business processes, including analyzing where processes can be
integrated or eliminated throughout the organization. The goal of any good EA strategy is to improve the efficiency, timeliness, and
reliability of business information. Of course, to implement any EA strategy, you will also need to ensure that you have buy-in from other
executives and stakeholders.
EA, and its goals, however, are constantly evolving. According to Bizzdesign’s survey of over 1,000 enterprise architects and IT business
leaders, the top priorities to improve the impact of EA in 2022 include improving communication about the value of EA to the business
(56%) as well as improving the development and adoption of EA processes (50%). Other priorities include delivering more strategic insights
(41%), getting more active support from senior management (33%), and investing in additional EA resources, training, and certification
(32%).
Benefits of enterprise architecture

There are several benefits to enterprise architecture, including resiliency and adaptability, managing supply chain disruptions, staff
recruitment and retention, improved product and service delivery, and tracking data and APIs. EA can offer support for redesigns and
reorganization, especially during major organizational changes, mergers, or acquisitions. It’s also useful for bringing more discipline into the
organization by standardizing and consolidating processes for more consistency.
Bizzdesigns asked respondents what IT benefits their EA program currently delivers and the top response was improved IT investment
decisions. Other benefits include improved service-orientation via APIs and the cloud, rationalized and less costly application portfolios,
reduced risk and cost of unsupported technology, improved information management and security, solutions to reuse existing IT assets,
better performance and resilience, faster and more successful implementations and updates, and better automation.
In terms of business benefits, respondents cited improvements with the alignment of capabilities with strategy, business investment
decisions, compliance and risk management, business processes, collaboration between functions, business insights, business agility and
continuity, and a faster time to market and innovation. Companies leading the way for EA maturity were more likely to cite experiencing
these benefits from the company’s EA strategy compared to the companies that are lagging behind in EA maturity.
EA is also used in systems development, IT management and decision-making, and IT risk management to eliminate errors, system failures,
and security breaches. It can also help businesses navigate complex IT structures or to make IT more accessible to other business units.
According to CompTIA, benefits of EAP include:
 Allowing more open collaboration between IT and business units
 Giving business the ability to prioritize investments

 Making it easier to evaluate existing architecture against long-term goals
 Establishing processes to evaluate and procure technology
 Giving comprehensive view of IT architecture to all business units outside of IT
 Providing a benchmarking framework to compare results against other organizations or standards
Enterprise architecture methodologies

Enterprise architecture can appear vague as a framework because it’s meant to address the entire organization, instead of individual needs,
problems, or business units. Therefore, several more specific frameworks have evolved to help companies effectively implement and track
EAP, including the following four leading EA methodologies, according to CompTIA:
 The Open Group Architectural Framework (TOGAF): TOGAF provides principles for designing, planning, implementing, and
governing enterprise IT architecture. The TOGAF framework helps businesses create a standardized approach to EA with a common
vocabulary, recommended standards, compliance methods, suggested tools and software and a method to define best practices.
The TOGAF framework is widely popular as an enterprise architect framework, and according to The Open Group it’s been adopted
by more than 80% of the world’s leading enterprises.
 The Zachman Framework for Enterprise Architecture: The Zachman framework is named after one of the original founders of
enterprise architecture and it’s another popular EA methodology. It’s better understood as a “taxonomy,” according to CompTIA,
and it spans six architectural focal points and six primary stakeholders to help standardize and define the IT architecture
components and outputs.
 Federal Enterprise Architecture Framework (FEAF): FEAF was introduced in 1996 as a response to the Clinger-Cohen act, which
introduced mandates for IT effectiveness in federal agencies. It’s designed for the U.S. government, but it can also be applied to
private companies that want to use the framework.
 Gartner: After acquiring The Meta Group in 2005, Gartner established best practices for EAP and adapted them into the company’s
general consulting practices. While it’s not an individual framework, CompTIA recognizes it as a “practical” methodology that
focuses on business outcomes with “few explicit steps or components.”
Other EA methodologies include the European Space Agency Architectural Framework (ESAAF), the Ministry of Defence Architecture
Framework (MODAF), and the SAP Enterprise Architecture Framework, among many others. These frameworks are specifically targeted to
individual industries or products, targeting more of a niche market than the more generalized EA methodologies listed above.
Enterprise architect role

Enterprise architects typically report to the CIO or other IT managers. They’re responsible for analyzing business structures and processes
to see that they align with business goals effectively and efficiently. As an enterprise architect, you’ll also be responsible for ensuring these
structures and processes are agile and durable, so they can swiftly adapt and withstand major change.
It’s a lucrative role, with a reported average salary of $137,900 per year, with a reported salary range of $97,000 to $201,000 per year,
according to data from PayScale. Enterprise architects often go on to work as a CTO, software engineering or development director, or CIO.
To become an enterprise architect, you’ll need an undergraduate degree in computer science, information technology, or a related field
and at least 10 years of experience in IT or a related field. You’ll also need hands-on experience working with computer systems, hard
drives, mainframes, and other architecture technology. Enterprise architects need several soft skills to be successful, including
communication, problem-solving, critical thinking, leadership, and teamwork.
According to PayScale, the most commonly reported hard skills for an IT enterprise architect include:
 Microsoft SharePoint Server
 Artificial intelligence (AI)
 Microsoft Azure
 Data warehouse
 Business intelligence
 Data modeling
 Strategy development
 Enterprise solutions
 Enterprise application integration
 Software architecture
Enterprise architecture tools and so ware

Microsoft Excel and PowerPoint are the two most basic tools you’ll use for enterprise architectural planning. However, there are other
third-party tools and software suites that will help you create advanced EA strategies for your business.
There are plenty of ways to integrate EA tools into your organization so that they support other systems and processes in the business. In
the Bizzdesign survey, respondents were asked which systems and content types were integrated into the company’s EA management
tools and business process models (59%), data modeling system (49%), project management tools (35%), ITSM tool (31%), and configuration
management platform (31%) were among the top five responses.
According to data from Gartner Peer Insights, here are some of the popular options currently on the market:
 Orbus Software
 Sparx Systems
 Software AG
 Avolution
 Mega
 Erwin

 BiZZdesign
 Planview
 SAP
 BOC Group
Enterprise Analysis: Feasibility studies

What Is a Feasibility Study?
A feasibility study is a detailed analysis that considers all of the critical aspects of a proposed project in order to determine the
likelihood of it succeeding.
Success in business may be defined primarily by return on investment, meaning that the project will generate enough profit to justify
the investment. However, many other important factors may be identified on the plus or minus side, such as community reaction
and environmental impact.
Although feasibility studies can help project managers determine the risk and return of pursuing a plan of action, several steps should
be considered before moving forward.
Understanding a Feasibility Study

A feasibility study is an assessment of the practicality of a proposed plan or project. A feasibility study analyzes the viability of a
project to determine whether the project or venture is likely to succeed. The study is also designed to identify potential issues and
problems that could arise while pursuing the project.
As part of the feasibility study, project managers must determine whether they have enough of the right people, financial resources,
and technology. The study must also determine the return on investment, whether this is measured as a financial gain or a benefit
to society, as in the case of a nonprofit project.
The feasibility study might include a cash flow analysis, measuring the level of cash generated from revenue versus the
project's operating costs. A risk assessment must also be completed to determine whether the return is enough to offset the risk of
undergoing the venture.
Benefits of a Feasibility Study

There are several benefits to feasibility studies, including helping project managers discern the pros and cons of undertaking a project
before investing a significant amount of time and capital into it.
Feasibility studies can also provide a company's management team with crucial information that could prevent them from entering
into a risky business venture.
Such studies help companies determine how they will grow. They will know more about how they will operate, what the potential
obstacles are, who the competition is, and what the market is.
Feasibility studies also help convince investors and bankers that investing in a particular project or business is a wise choice.
How to Conduct a Feasibility Study

The exact format of a feasibility study will depend on the type of organization that requires it. However, the same factors will be
involved even if their weighting varies.
Preliminary Analysis
Although each project can have unique goals and needs, there are some best practices for conducting any feasibility study:
 Conduct a preliminary analysis, which involves getting feedback about the new concept from the appropriate stakeholders
 Analyze and ask questions about the data obtained in the early phase of the study to make sure that it's solid
 Conduct a market survey or market research to identify the market demand and opportunity for pursuing the project or
business
 Write an organizational, operational, or business plan, including identifying the amount of labor needed, at what cost, and
for how long
 Prepare a projected income statement, which includes revenue, operating costs, and profit
 Prepare an opening day balance sheet
 Identify obstacles and any potential vulnerabilities, as well as how to deal with them
 Make an initial "go" or "no-go" decision about moving ahead with the plan
Suggested Components
Once the initial due diligence has been completed, the real work begins. Components that are typically found in a feasibility study
include the following:
 Executive summary: Formulate a narrative describing details of the project, product, service, plan, or business.
 Technological considerations: Ask what will it take. Do you have it? If not, can you get it? What will it cost?
 Existing marketplace: Examine the local and broader markets for the product, service, plan, or business.
 Marketing strategy: Describe it in detail.
 Required staffing: What are the human capital needs for this project? Draw up an organizational chart.
 Schedule and timeline: Include significant interim markers for the project's completion date.
 Project financials.
 Findings and recommendations: Break down into subsets of technology, marketing, organization, and financials.
Examples of a Feasibility Study

Below are two examples of a feasibility study. The first involves expansion plans for a university. The second is a real-world example
conducted by the Washington State Department of Transportation with private contributions from Microsoft Inc.
A University Science Building

Officials at a university were concerned that the science building—built in the 1970s—was outdated. Considering the technological
and scientific advances of the last 20 years, they wanted to explore the cost and benefits of upgrading and expanding the building.
A feasibility study was conducted.
In the preliminary analysis, school officials explored several options, weighing the benefits and costs of expanding and updating the
science building. Some school officials had concerns about the project, including the cost and possible community opposition. The
new science building would be much larger, and the community board had earlier rejected similar proposals. The feasibility study
would need to address these concerns and any potential legal or zoning issues.
The feasibility study also explored the technological needs of the new science facility, the benefits to the students, and the long-
term viability of the college. A modernized science facility would expand the school's scientific research capabilities, improve its
curriculum, and attract new students.
Financial projections showed the cost and scope of the project and how the school planned to raise the needed funds, which included
issuing a bond to investors and tapping into the school's endowment. The projections also showed how the expanded facility would
allow more students to be enrolled in the science programs, increasing revenue from tuition and fees.
The feasibility study demonstrated that the project was viable, paving the way to enacting the modernization and expansion plans
of the science building.
Without conducting a feasibility study, the school administrators would never have known whether its expansion plans were viable.
A High-Speed Rail Project

The Washington State Department of Transportation decided to conduct a feasibility study on a proposal to construct a high-speed
rail that would connect Vancouver, British Colombia, Seattle, Washington, and Portland, Oregon. The goal was to create an
environmentally responsible transportation system to enhance the competitiveness and future prosperity of the Pacific Northwest.
The preliminary analysis outlined a governance framework for future decision-making. The study involved researching the most
effective governance framework by interviewing experts and stakeholders, reviewing governance structures, and learning from
existing high-speed rail projects in North America. As a result, governing and coordinating entities were developed to oversee and
follow the project if it was approved by the state legislature.
A strategic engagement plan involved an equitable approach with the public, elected officials, federal agencies, business leaders,
advocacy groups, and indigenous communities. The engagement plan was designed to be flexible, considering the size and scope of
the project and how many cities and towns would be involved. A team of the executive committee members was formed and met
to discuss strategies, lessons learned from previous projects and met with experts to create an outreach framework.
The financial component of the feasibility study outlined the strategy for securing the project's funding, which explored obtaining
funds from federal, state, and private investments. The project's cost was estimated to be between $24 billion to $42 billion. The
revenue generated from the high-speed rail system was estimated to be between $160 million and $250 million.
The report bifurcated the money sources between funding and financing. Funding referred to grants, appropriations from the local
or state government, and revenue. Financing referred to bonds issued by the government, loans from financial institutions, and
equity investments, which are essentially loans against future revenue that needs to be paid back with interest.
The sources for the capital needed were to vary as the project moved forward. In the early stages, most of the funding would come
from the government, and as the project developed, funding would come from private contributions and financing measures. Private
contributors included Microsoft Inc., which donated more than $570,000 to the project.
The benefits outlined in the feasibility report show that the region would experience enhanced interconnectivity, allowing for better
management of the population and increasing regional economic growth by $355 billion. The new transportation system would
provide people with access to better jobs and more affordable housing. The high-speed rail system would also relieve congested
areas from automobile traffic.
The timeline for the study began in 2016 when an agreement was reached with British Columbia to work together on a new
technology corridor that included high-speed rail transportation. The feasibility report was submitted to the Washington State land
Legislature in December 2020.
What Is the Main Objec ve of a Feasibility Study?

A feasibility study is designed to help decision-makers determine whether or not a proposed project or investment is likely to be
successful. It identifies both the known costs and the expected benefits.
In business, "successful" means that the financial return exceeds the cost. In a nonprofit, success may be measured in other ways. A
project's benefit to the community it serves may be worth the cost.
What Are the Steps in a Feasibility Study?

A feasibility study starts with a preliminary analysis. Stakeholders are interviewed, market research is conducted, and a business plan
is prepared. All of this information is analyzed to make an initial "go" or "no-go" decision.
If it's a go, the real study can begin. This includes listing the technological considerations, studying the marketplace, describing the
marketing strategy, and outlining the necessary human capital, project schedule, and financing requirements.

Who Conducts a Feasibility Study?
A feasibility study may be conducted by a team of the organization's senior managers. If they lack the expertise or time to do the
work internally it may be outsourced to a consultant.3
What Are the 4 Types of Feasibility?
The study considers the feasibility of four aspects of a project:
Technical: A list of the hardware and software needed, and the skilled labor required to make them work.
Financial: An estimate of the cost of the overall project and its expected return.
Market: An analysis of the market for the product or service, the industry, competition, consumer demand, sales forecasts, and
growth projections
Organizational: An outline of the business structure and the management team that will be needed.
Enterprise Analysis: Project scope
According to studies by the Project Management Institute (PMI), failing to integrate project management into an organization's
practices may increase project failure rate by a factor of two to three overall.
This is a staggering statistic that highlights the complexity of managing large projects. As the importance of these types of projects
continues to grow, it has become increasingly crucial to have a comprehensive enterprise project plan in place that accounts for all
the required resources, timelines, goals and risks.
In this blog post, I will explore what an enterprise project is, the importance of enterprise project plans, and how to plan an
enterprise project effectively. I will also provide examples of enterprise project plans, highlighting best practices that can be
adopted in this field.
Additionally, I will discuss enterprise project management software and how it can assist in the planning and execution of these
types of projects.
What Is An Enterprise Project?

According to lawinsider.com, an enterprise project is defined as follows:
“Enterprise project means an endeavor undertaken by an enterprise over a fixed period of time using information technology,
which would have a significant effect on a core business function or which affects multiple government programs, agencies, or
institutions. Enterprise project includes all aspects of planning, design, implementation, project management, and training relating
to the endeavor.”
Simply put, an enterprise project can be defined as a large-scale project that affects an entire organization. Enterprise projects are
typically multiphase, cross-functional, and high-impact initiatives that involve significant investment in people, technology, and
resources.
One of the primary benefits of enterprise projects is that they allow large organizations to optimize their resources and achieve
their strategic goals more efficiently. Enterprise projects enable organizations to identify opportunities for improvement,
streamline business processes, and promote collaboration among employees.
It's essential to note that enterprise projects are not just about implementing new technology or systems, but also about
transforming the organization's culture and behavior. Thus, enterprise projects often require significant change
management efforts to achieve the desired outcomes.
Managing enterprise projects requires a different approach than managing regular projects. As a project manager, you need to
ensure that you have a solid understanding of the organization's goals, stakeholders, and project scope. You also need to work
closely with your project sponsors and executive sponsors to align the project objectives with the overall business strategy.
Because enterprise projects involve many stakeholders, it's crucial to establish clear lines of communication and collaboration
channels. You should also develop a comprehensive project plan that outlines the project scope, timelines, budget, and resources
required.
It's also essential to leverage project management software and other tools to manage enterprise projects effectively. Project
management software can help you with scheduling, resource allocation, task assignments, and progress tracking.
You can also use project management tools such as Gantt charts, stakeholder maps, and risk registers to identify project risks, track
progress, and report on project status. Additionally, you can use agile methodologies to manage enterprise projects, enabling you
to adapt to changes quickly and improve project outcomes continuously.
What Is Enterprise Project Management?

As a project manager, you're responsible for efficiently managing a team while maximizing profits. In today's complex business
environment, it's easy to get lost in the details and lose sight of the big picture. That's where enterprise project management (EPM)
comes in.
Enterprise project management is a structured way of handling projects that align with the strategic goals of an organization. Unlike
regular project management, which focuses on individual projects, EPM focuses on the entirety of project management.
When you use EPM techniques, you're optimizing both the project and the resources used. It helps you manage and prioritize
projects across departments, streamline project management processes, and find timely solutions for potential issues.
By using EPM, you can choose the right projects to help you achieve your organizational goals, ensure that the project is aligned
with the direction of the organization, implement a uniform project management process, achieve high levels of efficiencies, and
enhance the reputation of the organization.
EPM has a range of benefits, from reducing risk exposure to increasing project visibility. Organizations that use EPM are more likely
to complete projects on time and within a budget, and they're more likely to reach their business objectives. With EPM, companies
can streamline their project management processes and collaborate more effectively on strategic initiatives.

It's important to remember that EPM is not a one-size-fits-all solution. Different organizations will require different EPM
approaches, depending on their unique goals, timelines, and resource constraints. It's crucial to put in the time and effort to
understand how EPM techniques can be applied to your organization before implementing them.
Enterprise Project Plan Examples

Enterprise projects can range from enterprise resource planning (ERP) software to building a new factory to implementing a new
business strategy. Unlike standalone projects, enterprise projects require involvement and participation from various stakeholders
across departments, project teams, and levels.
ERP Implementa on
When it comes to enterprise projects, an ERP implementation project is the crème de la crème. Why? Think about it—an ERP
system manages all the key business processes of an organization, including sales, inventory, purchasing, and financials.
This means that the project is complex, touches all areas of the business, and requires an immense amount of planning,
coordination, and execution. But, when done right, an ERP implementation can revolutionize the way a company operates and
streamline processes in a way that drives growth and success.
To plan this type of project, start by identifying the scope of the project and define specific goals for this particular ERP
implementation. Then focus on including timelines, budgets, resources, stakeholders, and any other considerations necessary for
success while planning the project.
Besides that, take additional steps like assessing the organization’s readiness, securing sufficient resources and support, and
creating a communication plan ahead of the project execution start.
To sum up, an ERP implementation project will test your team's abilities and truly have an impact on your organization. Therefore,
it is a prime example of an enterprise project.
Building a New Factory

Building a new factory stands out as another prime example when it comes to enterprise project management. Project managing
the building of a new factory requires a comprehensive and thorough project plan that considers all aspects of the project.
Components involved in planning such a project include identifying project goals and objectives, determining resources needed for
the project, creating a project schedule, and defining roles and responsibilities of team members.
Additionally, it's crucial to account for potential risks and budget constraints throughout the planning process. By creating a project
plan that addresses each of these components and ensures clear communication and collaboration among team members, the
project is more likely to succeed.
But the real test of a successful project lies in the ability to adapt to unexpected challenges that inevitably arise. Whether it's a
shortage of materials or a technical glitch, the team must be able to think on their feet and find innovative solutions to keep the
project on track. Building a new factory is a true test of skill, making it the perfect example of enterprise project management at
its finest.
A work breakdown structure for a project to build a new factory (source).

Implementation of a New Business Strategy
When a business decides to implement a new strategy, it becomes a new project on a grand scale. It requires planning, preparation,
and execution at the enterprise level. However, what makes a new business strategy so unique is the level of creativity and planning
that is involved in its development.
The first step in implementing a new business strategy for a company is to conduct a thorough analysis of the current situation.
This includes identifying the business goals and objectives, defining the scope of the project, and assessing the available resources.
Once this is done, you can develop a comprehensive project plan that outlines the timeline, milestones, and deliverables. It should
also include a communication plan, risk analysis, and quality control measures.
After a successful implementation, the results for an organization can be truly remarkable, which makes it a great example of an
enterprise project that requires a clever approach to bring about success.
Here’s a visual of what your project plan for implemen ng a new business strategy might look like.
It is clear that when it comes to enterprise projects, there are no shortcuts and the stakes are high. Even the most seemingly simple
of projects requires input from associates in multiple departments and an understanding of the complexities and nuances of project
management.
To truly succeed, every element must be perfected before launch. It takes a village, as they say. By taking time to plan accordingly
and engaging the right stakeholders, any project can be completed successfully with a minimum of drama—no matter how big or
small!
How To Plan An Enterprise Project
Project management at an enterprise level requires a different approach than project management for smaller organizations.
Enterprise-level projects involve multiple stakeholders, various teams with different skill sets, and a range of technologies.
Therefore, it is essential to have a clear and concise plan that outlines every aspect of the project. Here, I will outline the critical
components to consider when planning an enterprise-level project.
1. Define Project Scope

The first step in planning an enterprise project is to define the scope of the project. In other words, what is the project trying to
achieve, and what are the deliverables? This step might include creating a project charter, outlining specific goals, and defining
stakeholder expectations.
A project charter will provide you with the necessary guidelines for setting milestones and allocating resources.
2. Select a Methodology
Enterprise projects can require different methodologies and processes than smaller projects. Once you have defined the scope of
the project, determine which methodology is best suited for your project.
Popular project management methodologies include agile, waterfall, and hybrid. Agile is best suited for projects with changing
requirements, while the traditional project management (waterfall) approach is best for sequential, linear projects.
3. Set Milestones
Milestones are significant goals within the project timeline that act as touchpoints for measuring progress.
Establishing milestones will help your team to stay on track and ensure that the project is moving along as planned. It is best to set
milestones at the end of each project phase or after the completion of a key activity to ensure that you track the team's progress
closely.
4. Allocate Resources
Allocating resources is a critical aspect of project planning. Identify the resources needed to complete the project and ensure that
they are available when needed.
Resources can include personnel, software, hardware, and other tools. Make sure that you have sufficient resources to meet your
timelines and milestones.
5. Define Communication Plan

In an enterprise-level project, communication is key. Poor communication can lead to significant misunderstandings and delays.
Therefore, it is crucial to establish a clear communication plan that outlines how stakeholders will communicate with each other,
how often they will communicate, and which communication tools will be used. It is essential to keep stakeholders informed about
the project's status, progress, and any changes.
6. Identify Risks
Identifying potential risks and their potential impact is vital in enterprise-level project planning. Risks can include resource
constraints, scheduling conflicts, budget issues, technology failures, and more. Identify potential risks and create a risk
management plan to mitigate them.
7. Define Metrics
Finally, define metrics to measure project success. Metrics should be linked directly to the project goals and milestones set at the
beginning of the project. Metrics can include milestones achieved, defects found, stakeholder satisfaction, and more.
Why Are Enterprise Project Plans Important?

As a project manager, you must have heard the term enterprise project plan countless times. But do you know why it's essential to
have one in place?
1. Clarity and Direction

Indeed, a project without a plan is like navigating in the dark. An enterprise project plan provides a clear understanding of project
goals, timelines, and deliverables. It helps your team stay on track and ensures everyone is working towards a shared vision.
With a project plan, you can identify potential obstacles and take corrective measures before they become major issues. This clarity
and direction provide a crucial foundation for the success of any project.
2. Resource Allocation
One of the major benefits of an enterprise project plan is that it assists in resource allocation. A good project plan provides a
detailed inventory of the resources needed for the project, from personnel to equipment, and materials.
This information allows project managers to allocate resources optimally to minimize redundancies and maximize efficiency. With
the right resource allocation, enterprises can save time and resources, helping to keep the project within the budget.
3. Cost Management
Creating an enterprise project plan provides project managers with a bird's eye view of the entire project. This visibility enables
project managers to anticipate expenses and allocate the budget accordingly.
With a project plan, organizations can provide accurate cost estimates to stakeholders, identify areas of potential cost savings, and
manage project expenses more effectively.

4. Change Management
The business environment is constantly changing. Project managers need to be prepared and adaptable to deal with unexpected
changes in the project.
Creating a comprehensive enterprise project plan can assist project managers in monitoring the project's progress and quickly
identify areas where modifications are needed. A flexible project plan allows project managers to adapt to new situations and keep
the project on track.
5. Risk Management
Risk management is a crucial aspect of project management, and an enterprise project plan is an excellent tool in this regard.
A project plan helps identify potential risks that could derail the project so appropriate measures can be taken to mitigate these
risks. Anticipating these potential risks, project managers can execute contingency plans, ensuring smooth project execution and
completion.
In conclusion, an enterprise project plan is a vital tool that helps in successful project delivery. The plan provides a roadmap for the
project, clarifying tasks, timelines, and deliverables. Resource allocation, cost management, change management, and risk
management are some significant benefits that make an enterprise project plan an invaluable tool for project managers.
Enterprise Project Management Software

As a project manager in an enterprise setting, you have probably been through the all too familiar experience of managing multiple
interdependent complex projects, all while ensuring that deadlines are met, budgets are adhered to, and stakeholders are kept
informed.
In fact, you might be familiar with the feeling of being lost amidst a sea of Microsoft Excel spreadsheets, emails, and documents,
all adding to the complexity of your workday. But luckily, enterprise project management software comes to the rescue. Let’s look
at how it can help you to become more efficient:
1. One-Stop Shop for Project Management
Enterprise project management solutions can unite all the different tasks and subtasks of a project in a single platform, making it
easier for you to track progress, compile status updates, and handle dependencies and approvals. This forms the foundation for a
project management plan that can be shared and accessed by all team members, in real-time.
2. Integration with Other Work Tools
Most enterprise project management software is designed to integrate with various work management tools such as calendars,
email, and other in-house project management software. This can help you automate workflows and eliminate redundant data
entry.
3. Efficient Resource Management and Allocation
Enterprise project management software is built to help project managers easily identify which resources are available and best
suited for a particular task or project. By having a clear overview of the available resources, you can better allocate them to the
right project, preventing burnout, and making the most of your resources.
4. Improved Communication and Collaboration
EPM software promotes better communication and team collaboration among team members, especially for those who work
remotely or are spread across different regions. Team members can access necessary files, documents, and updates at any time,
ensuring transparency, and everyone stays on the same page (more about project planning for remote teams here).
All standard enterprise project management tools integrate with a range of apps, so you have all the right tools for task
management and time-tracking at your fingertips.
5. Advanced Analytics and Reporting
Enterprise project management software can generate customizable and interactive dashboards, advanced analytics, and reporting
that help project managers monitor project progress, budget, and other significant metrics.
This valuable feedback allows you to adjust your project management plan, identify areas for improvement, and conduct informed
decision-making in real-time, ensuring successful project delivery.
Enterprise project management software has revolutionized project management in an enterprise setting. The features offered by
these software solutions streamline project management, reduce complexity, and promote clear communication and collaboration
among team members.
Enterprise Analysis: Preparing a business case
Because ERP consolidates and automates critical business processes like accounting, inventory management, HR, CRM, financial
planning and more, implementing it is both an exciting and serious undertaking that takes time and resources to accomplish
effectively.
Most organizations considering an ERP implementation must therefore build an ERP business case that goes beyond outlining pain
points and into the overarching benefits of an ERP. The business case details and formally presents the costs and benefits of such an
implementation, along with the opportunities and risks—and we’ll outline that process for you here.
If your company is not yet enjoying the benefits of a modern ERP, the first step is to build a business case that illustrates the benefits,
costs, opportunities and risks of launching an implementation project. By breaking down data silos, ERP connects the dots on business
processes including accounting, operations, manufacturing, sales and HR; enables better FP&A and reporting; and adds efficiencies
through automation technology.
A tailored ERP business case enables any organization to evaluate its specific benefits, costs and risks. The document may also serve
as the basis of an ERP implementation plan because it provides the project team with clear direction on priorities and responsibilities.

Why Build an ERP Business Case?
Implementing an ERP system typically requires a significant investment in data migration, change management and leader buy-in over
three to four months of effort. Furthermore, the system will change the way that people do their jobs across the organization.
Before implementing an ERP, leaders and departmental stakeholders need to be convinced that the effort is justified—particularly
since some of the people expected to use the system will likely resist the change.
Building a business case for ERP solves that challenge. It gives the organization’s stakeholders a tool for measuring the value that the
system will deliver, so they can weigh that value against the costs and risks. It presents a variety of ERP use cases, describes exactly
why the organization needs an ERP and the specific business benefits that the organization may expect.
For example, a business case may pinpoint the inefficiencies in order processing and fulfillment, show how the ERP system will improve
those processes and estimate the business value of those improvements. That value can include both tangible benefits, such as cost
reductions or the ability to handle more orders without hiring more staff, and intangible—but sometimes equally important—benefits
such as higher customer satisfaction.
How to Build a Business Case

When an organization starts seriously investigating whether to implement an ERP, it generally sets up a project team that includes an
executive sponsor—the CEO, CFO or other senior manager. One of the project team’s first jobs is to build an ERP business case.
Often, the team enlists the help of an external consultant who can provide a fresh perspective and has the expertise to build an ERP
requirements checklist to analyze how the system may help the business.
This isn’t just a PowerPoint you throw together, but a thorough, numbers-based detailed analysis that is a process of documenting all
of the benefits (both tangible and intangible), putting KPIs behind it all and weighing the benefits of ERP against the costs. The focus
is detail how the investment will deliver true business value—why the project is needed and what benefits it will offer when finished.
7 Steps to Building an ERP Business Case

The process of building a business case generally includes at least seven major steps:
1. Iden fy and analyze current issues
2. Assess the benefits of ERP
3. Evaluate ERP op ons
4. Es mate project costs
5. Determine ROI
6. Iden fy implementa on risks
7. Create a high-level ERP implementa on plan
Identify and analyze current issues

The first step is to analyze the specific problems that the organization wants to solve, measuring the business impact of those
problems wherever possible and analyzing the processes that cause those issues.
Typical issues include:
Costly process inefficiencies: Many organizations have processes that involve time-consuming, error-prone manual steps.
Employees may have to reenter customer data into different systems, or manually extract order information from an online
sales system and transfer it to another system for processing and fulfillment. It’s often possible to quantify how much these
processes cost and to use benchmarking information to compare your costs with those of other organizations. One local
government found that its accounts payable staff, for example, was processing less than half as many invoices, on average,
as comparable organizations. A pharmaceutical repackaging company found that the need to reenter data into multiple
systems resulted in error rates of 15% to 25%—and as a result, it had to employ staff whose sole function was to check data
accuracy.
Obstacles to growth: Business growth may be pushing current systems beyond their limits by requiring that you add more
users, transactions or data than the tools can handle. An over-reliance on manual processes may limit your ability to grow
without forcing costly finance hires before the company really needs that expertise. Or, you may need more sophisticated
capabilities as your business grows globally—for example, the volume and complexity of sales data may expand to the point
where it’s almost impossible to analyze using spreadsheets.
Inability to meet customer expectations: Is the organization continually missing deadlines or shipment dates? Are orders
frequently inaccurate, are there service disruptions? Resolving customer services issues such as order status and processing
inquiries faster will avoid customer displeasure and may even reduce churn.
Lack of real-time data for decision-making: As the business grows and becomes more complex, it often becomes more
difficult to find out what’s happening across the organization in real time. While up-to-the-minute views are often necessary
to enable managers to make decisions that help the business thrive, the data that managers need may be buried within
various sales force automation, CRM, project management, inventory management, supply chain, human resource and
customer service systems. People may spend more time trying to find data than analyzing it and making decisions.
Cost of existing systems: A business case should factor in the current cost of operating the multiple systems that will be
replaced by ERP—including the cost of any technology staff as well as product licensing, IT infrastructure—such as servers,
switches, routers, networks, etc.—and support.
Analyze the benefits of ERP

Next, the organization begins building a list of achievable goals for the ERP implementation.
At least initially, the list may be broad, but aim to address the main pain points identified in the previous step. Reexamine
each pain point to analyze how the ERP system will address the issue, then define realistic goals.
To illustrate, consider a manufacturing company that has an inefficient raw materials purchasing process, which is becoming
increasingly unmanageable as the business grows. Purchasing agents work with each supplier on contracts then create
purchase orders and get internal approvals—all of which are manual processes.
An ERP expert hired by the company determines that the manufacturing plant is operating below capacity in part because
the purchasing function is a bottleneck. The consultant uses their knowledge of ERP and the company’s operations to show
how, by implementing ERP, the company could redeploy or avoid adding purchasing staff while increasing manufacturing
output, enabling the company to grow total sales revenue.
The consultant estimates the reductions in staff costs that can be achieved by automating the purchasing processes, as well
as the additional potential revenue due to better utilization of manufacturing capacity. Both of these benefits become part
of the business case, and the consultant moves on to examine the next process issue.
A best practice is to ensure that goals are specific, measurable, achievable, realistic and time-based—generally condensed to
the acronym “SMART.”
Examples of high-level SMART goals could include:
 Reduce manufacturing defects by 20% this year.
 Reduce inaccurate orders by 25% within six months of ERP implementa on.
 Increase the number of invoices processed per employee by 35% by August 1.
The types of benefits that companies realize by implementing ERP typically include:
Greater efficiency and productivity: The transition to ERP typically enables organizations to automate manual steps and
eliminate the need to enter data, providing measurable reductions in the time needed for processes. The resulting
improvements in productivity can also enable the organization to handle business growth without hiring more staff.
Optimized inventory levels: ERP systems give the organization a clear view across the supply chain, facilitating better demand
forecasting and helping the organization optimize inventory. That can reduce inventory costs while ensuring the company
can meet demand in a timely way, keeping customers happy.
Better cash flow: More efficient invoicing can help ensure faster payment, so the company has more cash available rather
than tied up in receivables.
Improved customer service: With better visibility into customer information and orders, the organization can respond more
quickly to customer requests and solve problems more easily.
Higher employee retention: With more processes automated, employees find their jobs to be easier and are more likely to
stay with company.
Better workforce management: With a centralized data model, ERP systems can connect employee performance to business
performance giving decision makers better insights on how to plan and manage the workforce.
Better decision-making: Managers have access to more complete data from across the business in real time, gathering data
from sales, HR, financial and inventory. Executives can use this information to make more informed decisions and take
advantage of new opportunities.
For example, with ERP, the CFO may have access to financial reports in a fraction of the time that would be required to extract
and combine information from multiple systems. This also frees the CFO to spend more time on financial forecasting, finding
areas for savings, producing better KPIs and other strategic activities.

Revenue and profitability: Greater productivity, accelerated processes and better relations with customers drive revenue
and profitability.
Evaluate ERP solutions

If you haven’t already begun evaluating specific ERP solutions, now is a good time to start. The analysis of current issues and
desired benefits should give the organization a clear picture of the ERP modules and specific features that it needs. As with
any important business decision, start by clarifying your goals and expectations to help you choose your ERP, and involve key
stakeholders who have the most to gain from a successful implementation (and the most to lose if there are problems). Once
you have an ERP implementation team, identify the offerings that might be appropriate for your business.
You have a wide variety of ERP solutions to choose from. They include cloud-based ERP systems, which you access over the
internet and generally pay for on a subscription basis. There are also on-premises systems that an organization installs in its
own data center and manages itself. Hybrid ERP is also a possibility.
Because organizations typically rely on the ERP system to run many aspects of the business, factors such as support and the
long-term viability of the supplier are important considerations.
Estimate project costs

A realistic business case will depend on getting an accurate estimate of the cost of the new ERP system. There are several key
factors to consider. The most obvious are the licensing costs for the software itself. If you’re buying a cloud-based ERP
system, you’ll need to factor in a subscription cost based on factors such as the number of modules and users. If you’re using
an on-premises system, the cost will include software licenses, the hardware needed to run the system, and any technology
experts or ERP professionals needed to install, run and maintain the system.
But you also need to consider the costs of implementing the new system. These include:
Software configuration and deployment: For all systems, you’ll need to include the cost of setting up the system and
customizing it to your business needs if necessary, for which you’ll probably need professional help—or at least someone on
your IT team who has experience and expertise with the system you’re implementing. If you choose an on-premises system,
also include the cost of on-site hardware and software licenses, plus the cost of the expertise needed for installation and
maintenance.
Process redesign: Improved business processes are a key goal of many ERP implementations. Companies generally either
need professional help or they need to allocate internal resources to determine how to redesign business processes. Data
migration—moving data from legacy systems into the ERP is a time consuming and tedious process. Determine how much
history you need in the new ERP and how you can still get historical information from the previous systems. Most companies
take no more than 3 years of data forward into the new ERP to help reduce implementation costs.
Report writing: Most projects include a report writer who will develop customized reports for people throughout the
company. Good ERP solutions will include a decent selection of standard reports; some of them make creating customized
reports manageable for most power users.
Training: Include costs for training employees on how to use the system, plus any training required for the IT staff needed to
install on-premises systems and other specialists, such as the report writer. Change management—change is inevitable with
any ERP implementation. Not just for employees who use the new systems but also for customers who get a new looking
invoice, suppliers who have to learn a new purchasing process or managers who receive new reports.

Analyze returns on investment
A comparison of the value of the anticipated business benefits with the costs involved is key in the decision whether to go
forward. The analysis should include both tangible benefits, such as reduced costs and increased revenue, and less-tangible
benefits, such as customer satisfaction. The ROI analysis will include a comparison of the cost of the ERP software with the
operating costs of the systems it will replace.
In practice, ERP statistics show companies achieve a wide variety of measurable benefits. A Forrester analysis of four
companies’ experiences found that they reported average finance reporting and management efficiencies of more than
$408,000 due to improved procurement efficiency and ability to reduce hiring, revenue growth due to improved customer
and order management and communication and reduced and avoided IT costs of nearly $749,000.
Identify implementation risks

All major changes to the organization include risks, and a business plan should explain those risks—including the risk that the
implementation may be unsuccessful. Careful planning of the ERP implementation can mitigate those risks.
For example, involving all departments that will use the ERP system during the design phase can help to ensure that users
take full advantage of the system when it is deployed, improving the chances the organization will actually realize predicted
benefits. Different implementation strategies can be used, depending on the organization’s risk tolerance and how quickly it
wants to reap the benefits of the new system. For example, rolling out an ERP system in stages is less risky than a “big bang”
all-at-once deployment, but a staged approach may result in a slower payback.
Create a high-level implementation plan

The business case should include a high-level implementation strategy—not a detailed step-by-step description, but enough
information to give everyone an idea of how the project will proceed, the resources that will be needed and the expected
timeframe for achieving results.
MIDTERM PERIOD
Management Concepts and Techniques for Performance Measurement

Introductory discussion
Performance measurement is an essential element of every total quality management system. Responsibility for implementing a
performance measurement program rests with your organization's managers and front-line supervisors, and the first step in the
process is educating and training company managers and supervisors. After they are trained, company leadership should take the
knowledge gained to enlist your employees in the process of continual improvement.
Measuring Up
When you implement a performance measurement system, you aim to find out how well your organization is doing in the
effort to provide a quality product for customers or stakeholders. It can determine if your organization is meeting short-
and long-term goals, if your customers are satisfied with the products and services provided and if established process
improvement measures are in place and functioning properly. Your company's process improvement team looks at key
performance indicators that come from the data you should be collecting on every transaction that takes place each day
your company is in operation.
Process Improvement Team
Your teams examine output from your organization's processes for compliance with expected standards, which can be
internally established expectations or requirements established by federal, state or local jurisdictions. Output may be a
product or service you are making for consumers or for other businesses or government agencies. If a deficiency is found,
the team determines what steps need correction. For example, an automotive wheel bearing part must meet exacting
tolerances and durability standards. If you are producing a substandard part, your team must find out at what point in the
process there is a shortfall and initiate corrective action.
Quality and Quantity
The ultimate measure of quality rests with customers. They will continue to purchase your product as long as it meets the
consumer's requirements for durability, usefulness and value. If your products are not meeting expectations, your
customers will purchase what they need from your competitors. The performance measurement process uses techniques
such as consumer surveys, product testing protocols, independent market surveys and KPI to determine if the products
and services you are selling meet customer demands. If a problem is detected, the team determines which steps in the
process are defective and initiates corrective action.
On-Time Delivery
Customers demand that products be available when they are ready to buy. If you cannot deliver when the customer is
ready to buy, your competitors will fill the need. Smaller companies may be able to manually track on-time delivery
statistics on a program such as Excel, but larger companies need to implement performance measurement software that
tracks all of the KPI associated with their business operations.
Safety Key Performance Indicators
Several KPI that prove or disprove whether a company is serious about safety. When conducting a safety performance
review, you can examine how often safety inspections are completed, how long it takes to investigate and correct a safety
issue, how often safety training is conducted, information on close calls, preventive maintenance actions and how often
the safety team meets formally. Your performance measurement team determines if any safety processes need
improvement and initiates corrective actions as needed.
Concepts and techniques
Performance measurement is a process of quan fying and assessing the effec veness and efficiency of an organiza on or individual in
achieving their objec ves or goals. It aims to clearly understand how well an organiza on or individual is performing and iden fy areas
for improvement.
It aims to facilitate decision-making and resource alloca on by providing data-driven insights into what works and is not. Moreover, It
mo vates individuals and teams by giving feedback on their performance and incen vizing them to improve. In addi on, it
communicates performance to stakeholders such as customers, investors, and regulators.
Performance Measurement Process Explained

Performance measurement and evaluation are critical for organizations and individuals looking to improve their performance. By
selecting appropriate performance metrics, collecting and analyzing data, and communicating performance to stakeholders,
organizations can identify areas for improvement, make data-driven decisions, and ultimately achieve tremendous success.
The process of it typically involves several steps, including:
1. Iden fying performance objec ves or goals: The first step is clearly defining goals, and what success looks like. Further, the
plans could be increasing sales or reducing costs, or an abstract idea, such as improving customer sa sfac on.
2. Selec ng performance metrics or indicators: A er iden fying performance objec ves, the next step is to choose metrics or
indicators that can be used to measure progress towards those goals. For example, these could be quan ta ve measures,
such as revenue or profit margins, or qualita ve criteria, such as customer feedback or employee sa sfac on.
3. Collec ng and analyzing data: The next step is to collect data on the selected metrics or indicators and analyze it to determine
how well the performance is. Therefore, this could involve collec ng data from internal systems, financial or customer
databases, or external sources, such as market research or industry benchmarks.
4. Repor ng and communica ng performance: The final step is to write and share the report with stakeholders. This could
involve crea ng performance dashboards or reports that provide insights into performance trends and areas for improvement
or presen ng performance data to senior management or external stakeholders.
5.
Methods
Organizations can use several measurement methods to evaluate their effectiveness and efficiency in achieving their goals. Some of
the most common forms of organizational performance measurement include:
1. Key Performance Indicators (KPIs): These metrics measure progress towards a par cular objec ve. They are o en used to
track performance over me and can be used to benchmark performance against industry standards or compe tors.
2. Balanced Scorecard: It is a framework for measuring and managing performance across mul ple dimensions, including
financial performance, customer sa sfac on, internal processes, and learning and growth. It uses a mix of financial and non-
financial metrics to provide a more comprehensive view of an organiza on’s performance.
3. Six Sigma: Six Sigma is a data-driven methodology for improving process quality by reducing defects and minimizing variability.
It uses a set of sta s cal tools and techniques to measure performance and iden fy opportuni es for improvement.
4. Performance Appraisals: Performance appraisals are a formal process for evalua ng an individual’s performance against
predetermined goals or objec ves. They can be used to iden fy strengths and weaknesses and provide feedback on
performance.
5. Customer Sa sfac on Surveys: Customer sa sfac on surveys measure customer sa sfac on with a product or service. They
can be used to iden fy areas for improvement and improve customer loyalty.
6. Benchmarking: Benchmarking is a process of comparing an organiza on’s performance to industry standards or best
prac ces. It can be used to iden fy areas for improvement and best prac ces that can be adopted.
7. Return on Investment (ROI): ROI measures the return on investment for a par cular project or ini a ve. It evaluates the
effec veness of an investment and determines whether it is worth pursuing.
Types
Organizations can use several measurement types to evaluate their productivity. Some of the most common types include:
1. Input-based measures: Input-based measures focus on the resources used to produce a par cular output or outcome. For
example, it includes the me, money, or workforce used to achieve a specific objec ve.
2. Output-based measures: Output-based measures focus on the tangible results of a par cular ac vity or process. Examples
include the number of products produced, the number of customers served, or the amount of revenue generated.
3. Outcome-based measures: Outcome-based measures focus on the impact of a par cular ac vity or process on a specific
objec ve or goal. Examples include the effect on customer sa sfac on, employee engagement, and environmental
sustainability.
4. Process-based measures: Process-based measures focus on the produc vity and usefulness of a par cular process or ac vity.
Examples include the me it takes to complete a task, the number of errors or defects in a product, or the level of customer
service.
5. Quality-based measures: Quality-based measures focus on the quality of a par cular product or service. Examples include
the level of customer sa sfac on, the number of defects or errors in a product, or the level of compliance with regulatory
standards.
6. Financial measures: Financial measures focus on the financial performance of an organiza on or project. Examples include
revenue, profit margins, return on investment, or cost savings.
Example #1
Let’s say a company produces and sells shoes. One of its goals is to increase sales by 10% in the next quarter. To measure performance,
the company could use the following performance measures:

 Input-based measure: The number of salespeople hired.
 Output-based measure: The number of shoes sold.
 Outcome-based measure: The increase in sales revenue.
 Process-based measure: The me it takes to manufacture a pair of shoes.
 Quality-based measure: The number of returns or complaints about the quality of shoes.
 Financial measure: The increase in profits from shoe sales.
Example #2
In December 2021, the global ride-hailing company, Uber, announced that it was launching a new feature called “Driver Destinations”
on its app in India. This feature is designed to help drivers optimize their time and earnings by allowing them to select a destination
for their next ride.
The feature is an example of IT used to improve the efficiency of Uber’s operations and the performance of its drivers. By allowing
drivers to select their destination, they can prioritize rides that take them in the direction they want to go, reducing their downtime
and increasing their earnings. The feature also benefits riders by giving them faster access to available drivers.
Advantages And Disadvantages

A performance measurement system can improve accountability, decision-making, motivation, and resource allocation.
Advantages
Some of its merits are as follows.
1. Improved accountability: It provides a straigh orward way to track progress toward goals and iden fy areas of strength and
improvement. This can help individuals and organiza ons take responsibility for their ac ons and outcomes and take steps to
improve performance.
2. Be er decision-making: It provides data that helps to make informed decisions. In other words, by analyzing performance
data, individuals and organiza ons can iden fy trends, pa erns, and opportuni es.
3. Increased mo va on: It can provide a sense of accomplishment and inspira on for individuals and teams. By se ng clear
goals and measuring progress towards those goals, individuals and groups can see the impact of their efforts, which can
increase mo va on and job sa sfac on.
4. Improved resource alloca on: It can help organiza ons iden fy areas of resource wastage wasted or underu liza on and
reallocate them to the most needed places. This can improve efficiency and reduce costs.
Disadvantages
Some of its drawbacks are discussed below.
1. Over-reliance on metrics: It can focus on achieving specific metrics at the expense of other important factors, such as
crea vity, innova on, and customer sa sfac on. In other words, it can create a culture of “gaming the system” rather than
focusing on what is truly important.
2. Unintended consequences: Above all, it can lead to unintended consequences, such as neglec ng essen al areas that need
to be measured or manipula ng data to make performance look be er than it is.
3. Inaccurate or incomplete data: It relies on accurate and complete data, which can be challenging. Thus, precise only or
exclusive data can lead to correct conclusions and be er decision-making.
4. Time and resource-intensive: It requires me and resources to collect, analyze, and interpret data. Therefore, it can be costly
and me-consuming, especially for small organiza ons or individuals.
How to set performance management measures

Performance management measures can help you evaluate how effective your strategies and systems are. Creating and executing
performance management measures that are understandable, efficient and clear is the goal of any performance management
program. Here are six steps for setting effective performance management measures:
1. Research best practices

Establishing what excellent performance means and looks like in your business organization is the first critical step in assessing
performance management. Consider researching performance management trends within your industry. This can help you create a
baseline from which you can evaluate yourself.
2. Involve staff members in creating personal goals

Involving employees in creating personal performance measures creates a dynamic and goal-oriented work environment that
empowers staff to have an ownership stake in their evaluation criteria. This transparency helps employees know exactly what criteria
they are being evaluated on and what goals they need to meet. This may increase productivity and performance.
3. Set clear organizational goals

After creating personal goals, you can begin writing goals for the larger organization or team. Consider what performance measures
you want your team or company to achieve. For example, the leadership team of a tutoring company might set an organizational goal
to expand their services to a new market. You can use these goals to plan the steps in your performance management strategy.
4. Collect performance data

Collecting, organizing and sharing collected performance data helps create a successful performance management plan. Your data will
vary depending on your goals, but consider collecting data from surveys, customer reviews, sales records and income sheets. For
example, if you want to improve customer satisfaction by 10% in a year, you may gather data from customer surveys and reviews to
measure and track this performance.

5. Devise incen ves
Incentivizing employees to not only meet but exceed performance goals is an effective way to drive your organization to the meeting
of its strategic goals. Clearly outlining what incentives exist for achieving specific performance goals allows employees to know exactly
what they are working toward goal-wise and what they can gain from their achievements. For example, many sales organizations have
an escalator clause in their commission structure, where representatives earn a higher percentage of commission when their total
sales amount exceeds their monthly quota.
6. Remain open to sugges ons for change

Having a well-established performance management measure plan also means remaining open to suggestions for change. People and
organizations are dynamic, and external factors such as competition, market changes and economic factors can cause changes to
performance plans. Consider staying flexible and reviewing your management plan frequently to adjust to changes.
Responsibility Accoun ng
Responsibility Accoun ng is a system of accoun ng where specific individuals are made responsible for accoun ng in par cular areas
of cost control. In this accoun ng system, responsibility is assigned based on knowledge and skills. If the costs increase, the person
assigned is held accountable and answerable.
Type of responsibility centers (cost, revenue, profit and investment centers)
#1 – Cost Center
This center consists of individuals responsible only for cost control. A person responsible for a particular cost center is held accountable
only for controllable expenses. Therefore, it is essential to differentiate this center’s controllable and uncontrollable costs. The
performance of each center is evaluated by comparing the actual vs targeted price.
#2 – Revenue Center
The revenue center takes care of revenue, with the company’s sales teams being mainly responsible.
#3 – Profit Center
A profit center refers to a center whose performance is measured in cost and revenue. Generally, the company’s factory is treated
as a profit center where raw material consumption is a cost and finished product sold to other departments is revenue.
#4 – Investment Center
A manager responsible for this center is responsible for utilizing the company’s assets in the best manner to earn a good return on
capital employed.
Concepts of decentraliza on and segment repor ng
What is decentraliza on?

Decentralization is a way of organizing a system where power and authority are distributed among different levels or units.
The objective of decentralization is that power (and decision-making) is not concentrated in a few people or areas and is delegated to
areas with less hierarchy, granting them greater autonomy and freedom.
Decentralization helps decision-making to be more agile, especially when there is a problem that must be solved quickly. In addition,
it works as an incentive for lower-ranking employees, who feel more involved in the organization.
Decentralization, on the other hand, implies that higher-ranking employees should not be overworked information or responsibilities
but focus on certain areas or issues.
Types of decentraliza on
There are different types of decentralization. Some of them are the following:
 Horizontal. Power is distributed among areas that have the same level.
 Ver cal. Power is distributed to lower levels (delega on).
 Territorial. Decision-making is granted to an en ty or area that decides on a delimited territory.
 Func onal. Certain competencies of a certain sector of ac vity are recognized in a certain area.
 Fiscal. It aspires to greater efficiency in financing and in the quality of public services. This type of decentraliza on
seeks to balance expenses, taxes and transfers between the different governments.
Within the business sphere, two types of decentralization can be identified:
 Macroeconomic. The distribu on of power occurs to other countries and results in the consolida on of regional
administra ons that acquire economic and poli cal authority.
 Microeconomics. Decision-making is distributed among different areas and hierarchical levels of the company or
organiza on.
Advantages of decentraliza on
Some of the advantages attributed to decentralization are:
 Streamlines decision-making and encourages input from members steeped in the subject.
 It lowers costs in rela on to coordina on thanks to the independence acquired by the different areas.
 It allows decision makers to have a greater volume of informa on because they focus on few areas, which allows
them to handle issues in greater depth.
 It allows the top of the organiza on to ignore certain issues and focus on the transcendental ones.
 Makes be er use of staff me and skills.
 Provides training and educa on to the middle ranks.
 It mo vates middle-ranking personnel, who feel part of the decision-making processes and can plan a career within
the organiza on with growth expecta ons.
 Makes control processes more efficient.
 Facilitates and clarifies the evalua on of the results.
What Is Business Segment Repor ng?

Business segment reporting breaks out a company's financial data by company divisions, subsidiaries, or other kinds of
business segments. In an annual report, business segment reporting provides an accurate picture of a public company's performance
to its shareholders. Management uses business segment reporting to evaluate the income, expenses, assets, and liabilities of each
business division to assess its general health—including profitability and potential pitfalls.
Understanding Business Segment Repor ng

A segment is a component of a business that generates its own revenues and creates its own product, product lines, or service
offerings. In general, if a unit of a business can be lifted out of the larger company and remain a self-sufficient entity, then it may be
classified as a business segment.
The Financial Accounting Standards Board (FASB) sets the accounting standards for business segment reporting. FASB Accounting
Standards Codification (ASC) 280-10-10-1 requires that all segments of a company's business align with the company's reporting
structure. A company does not need to report all of its business segments, however. According to U.S. Generally Accepted Accounting
Principles (GAAP), public companies must report a segment if it accounts for 10% of total revenues, 10% of total profits, or 10% of
total assets. International standards differ somewhat.
The Importance of Business Segment Repor ng

For Shareholders and Management
Segment reporting can help a company's shareholders gain a complete picture of the firm's operations. Segment reporting adds a
detailed perspective that is critical for upper management's decision-making.
For Investors
Segment reporting provides information about the different types of business activities in which a public company engages and the
different economic environments in which it operates. This information helps investors to
 better understand and evaluate a company's performance,
 assess its prospects for future net cash flows,
 understand the business as a whole,
 make more informed judgments about the company, and
 make clearer decisions about their investments.
Business segment reporting generally appears as a series of footnotes to a company's financial statements. Investors and other
financial statement users view the segment footnote as very important to their investment decisions.
Example of Business Segment Reporting

Most large banks are comprised of multiple divisions based on their various business functions. As an example, say a bank has three
divisions: consumer lending, commercial lending, and credit cards. When compiling the bank's financial statements, its financial
officer would be required to separate all three of these divisions in terms of their income items as well as the assets listed on
the balance sheet.
After breaking them out, the officer then would combine all of the divisions into a large income statement and balance sheet. This
results in a set of consolidated financials, which is easier to read. However, if an investor wanted to read deeper into the numbers
provided, then they would be able to see which business segments were most successful. If the bank had operations in both North
America and Latin America, it might report on those separately as well.
Controllable and non-controllable costs, direct and common costs
Controllable Costs
Controllable costs are costs that can be influenced or regulated by the manager or head responsible for it.
For example: direct materials, direct labor, and certain factory overhead costs are controlled by the production manager. Another
example: the sales manager has control over the salary and commission of sales personnel.
Uncontrollable Costs
From the term itself, uncontrollable costs are those that are not under the control of a specified manager. These cannot be
influenced by decisions or actions of the manager. These costs are imposed by the top management or allocated to several
departments. For example, a company-wide advertising cost that is allocated by the central office to different departments is
not under the control of the department heads.
Other examples include depreciation, insurance, share in rent, share in organization-wide security costs, etc.

Example
To effectively evaluate the performance of the production department of ABC Company, the management accountant wants
to determine the controllable and uncontrollable costs from the following items:
1. Direct materials
2. Direct labor
3. Factory overhead and other charges
a. Indirect materials
b. Indirect labor (supervision)
c. Deprecia on
d. Insurance
e. Allocated repairs and maintenance
f. Allocated rent and u li es expense
Direct Costs
Direct costs are those that can be easily traced to or associated directly with a specific cost object. A cost object is something for
which cost is measured such as a specific product, a specific department or a specific branch.
For instance, ABC Company produces plastic food containers. The cost of plastic used in production can be easily traced to the
food containers. However, the cost spent for electricity is not directly traceable to the food containers since such cost was not
used solely for the production of the product.
Examples of direct costs include direct materials, direct labor, and other costs incurred for a particular product such as advertising
and promotion costs for, say "Product A".
If the cost object is a department or a branch, all costs that can be associated directly to a particular department or branch
are direct costs. For example, salaries of sales personnel are directly traceable to the selling department of the organization.
Also, the salaries of the sales personnel of "Branch A" can be traced directly to that branch.
Indirect Costs
Indirect costs are difficult to trace directly to a specific cost object. These costs are commonly shared by multiple products,
different departments, or branches; hence, such costs cannot practically be traced to a cost object.
Examples of indirect costs include factory overhead costs, organization-wide advertising, taxes, and other common or joint costs.
Example
Classify the following costs as (D) direct costs or (I) indirect costs in relation to a specific product. Suppose the company
produces trousers and shoes.
1. Fabric in trouser produc on
2. Income tax
3. Factory supplies
4. Wood for soles
5. Training and development
6. Machine maintenance
7. Leather used in manufacturing shoes
8. Supervisor's salary
9. Deprecia on of factory equipment
10. Direct labor hours
Performance margin (manager vs. segment performance)
Segment Margin:
The profitability of the segment after it has covered all its direct costs.
Variable costs are always direct costs.
Performance Measurement
The following formulas are most commonly used for performance measurement
Return on Investment
Operating Income
Average Operating Assets
Operating Income is income before interest expense and tax expense
Operating Assets
Cash, accounts receivable, inventory, plant and equipment and all other assets that are used in the operations of the business
Average Operating Assets = (beginning + ending) / 2
Plant and equipment is valued at book value
(Cost less Accumulated Depreciation)
Fair market value is not used due to reliability, consistency, and comparability

Prepara on of segmented income statement
A segmented income statement is based on the contribu on margin income statement format. The contribu on margin income
statement and segmented income statement by division for Media Masters is presented in Exhibit 5-2. No ce that net opera ng
income $25,000 is the same on both statements. Although variable and fixed costs are allocated differently on the segmented income
statement, net opera ng income will always be the same.
There are two major differences between a segmented income statement and a contribu on margin income statement. First,
contribu on margin income statement reports one contribu on margin whereas the segmented income statement reports the
contribu on margin as well as the segment margin. Second, the contribu on margin income statement reports fixed expenses in total
whereas the segmented income statement divides fixed expenses between traceable fixed expenses or costs and common fixed
expenses or costs. Both of these differences are discussed in detail in the below sec ons.
Contribu on margin
Segmented income reporting traces sales revenue, variable costs, and fixed costs to the organizational segments responsible for
generating the sales revenue or costs. Since sales revenue and variable costs are typically driven by units sold these items can be
easily traced to a particular segment. For example, it is easy to determine if a sale was a social media game or a cell phone game.
As illustrated, both the contribution margin income statement and the segmented income statement report contribution margin.
Contribution margin is computed the same way on both statements. Contribution margin is calculated as sales revenue less variable
expenses. Sales revenue is considered a variable revenue. Both sales revenue and variable expenses are typically driven by units of
sales or units of production. Since unit sales and units of production are easily traceable to a division, sales revenue and variable
expenses are generally easy to allocate to a specific segment.
Segment margin
Refer to Exhibit 5-2. The contribution margin is $335,000 for both the contribution margin income statement and the segmented
income statement. Contribution margin is the sales revenue less variable expenses on both statements. On the segmented income
statement, traceable fixed costs are subtracted from the contribution margin to calculate the segment margin. Segment margin
represents the sales revenue of a particular segment less variable expenses and fixed expenses that are traceable to the segment. Or,
segment margin can be interpreted as the profitability of a particular segment before common fixed costs are incurred.
Common fixed costs are not allocated to a particular segment since they are common costs. Instead, common fixed costs are
subtracted from the total company segment margin to arrive at net operating income. For Media Masters in Exhibit 5-2, the total
divisional segment margin is $75,000. Common fixed costs are subtracted from the total divisional segment margin to arrive at net
operating income of $25,000.
Fixed costs and the segmented income statement

Unlike variable revenue and variable costs, fixed costs are more difficult to allocate to segments since some fixed costs are generated
by a particular segment and some fixed costs are common to all the segments.
Traceable fixed costs

Traceable fixed costs are costs that can be traced directly to an organizational segment. For example, assume that the social media
games segment employs a product developer that works solely on social media games. Her salary is a fixed cost that is traceable to

that division. Another way to look at traceable fixed costs is that they are costs that would be eliminated if the segment were
eliminated.
Refer to the contribution margin income statement in Exhibit 5-2. Total fixed costs for Media Masters is $310,000. Now refer to the
segmented income statement in Exhibit 5-2. Of the $310,000 in total fixed costs, management determined that $260,000 were
traceable to the two divisions, with $140,400 traceable to the social media games division and $119,600 traceable to the cell phone
games divisions.
Common fixed costs

Common fixed costs are costs that are common to, or shared by, all organizational segments. For example, the President of Media
Masters manages both divisions. Her salary would be considered a common fixed cost since it is not traceable to a particular segment.
For the purposes of segment income reporting, common fixed costs are not used to calculate the segment margin since these costs
are not traceable to the segment and would not be eliminated if the segment were eliminated. Instead, common fixed costs are
deducted from the segment margin to arrive at net operating income.
Refer to the segmented income statement above. Total fixed costs less traceable fixed costs leaves common fixed costs, $310,000 –
260,000 = $50,000 common fixed costs. Since these costs are shared by the segments, they are not used to calculate the segment
margin.
Organiza onal segments within segments

An organization can have many layers of segments. Larger organizational segments can be further divided into segments within that
segment. Refer to Exhibit 5-3 below. Media Masters has two large divisions–social media games and cell phone games. The social
media games division can be further divided into product lines–role playing games and puzzle games.
It is important to note, that common fixed costs are not considered when a larger segment is divided into smaller segments. The
segment margin for the larger segment is the total amount allocated to the smaller segments. Refer to Exhibit 5-3 below, the segment
margin for social media games is $43,200. When further segmented by product lines within the social media games segment, this
amount becomes the total amount for the social media games segment. Variable revenue and variable expenses are then allocated
between the product lines. Total segment fixed costs are divided into fixed costs traceable to the project lines and common fixed
costs. To illustrate, of the $140,400 of total fixed costs allocated to the social media games segment, $31,950 and $58,250 are traceable
to role playing games and puzzle games respectively. The remaining $140, 400 – 31,950 – 58,250 = $50,200 becomes common fixed
costs allocated to the social media games segment.
The above table illustrates the functionality of segmented income statement reporting. Media Masters is reporting net operating
income of $25,000. While total company net operating income is valuable information, it does not show which segments within the
organization are performing well and which are not. As shown in Exhibit 5-3, the social media games division is profitable overall
however only one of the product lines within that division is profitable. Segmented income statements provide detailed information
for management to make informed decisions about particular segments within an organization.

Segment cost volume profit (CVP) analysis
Cost volume profit (CVP) analysis can be applied to the whole organiza on and to par cular segments within the organiza on. Cost
volume profit analysis is covered in detail in chapter 4. Cost volume profit analysis requires a contribu on margin format income
statement. Segmented income statements for segments within an organiza on or subsegments within a larger segment are prepared
using the contribu on margin format, so it is possible to use cost volume profit analysis on individual segments. Cost volume profit
analysis is used to make important decisions about selling prices, sales volume, unit variable costs, total fixed costs, and the mix of
products sold.
Breakeven calcula ons for segmented income repor ng

Breakeven is the point at which net opera ng income equals zero. Breakeven can be computed for the whole organiza on or for
individual segments within the organiza on. Or, an organiza on or segment breaks even when its sales revenue covers its total costs–
both variable and fixed. The formulas to compute breakeven in sales dollars for the whole organiza on as well as breakeven in sales
dollars for segments within the organiza on are provided below.
Return on investment (ROI), residual income and economic value added (EVA)
Return on investment (ROI) is the key measure of the profit derived from any investment. It is a ratio that compares the gain or
loss from an investment relative to its cost. It is useful in evaluating the current or potential return on investment, whether you are
evaluating your stock portfolio's performance, considering a business investment, or deciding whether to undertake a new project.
In business analysis, ROI and other cash flow measures—such as internal rate of return (IRR) and net present value (NPV)—are key
metrics that are used to evaluate and rank the attractiveness of a number of different investment alternatives.
Although ROI is a ratio, it is typically expressed as a percentage rather than as a ratio.
How to Calculate Return on Investment (ROI)

ROI can be calculated using either of two methods.
Interpreting ROI
When interpreting ROI calculations, it's important to keep a few things in mind. First, ROI is typically expressed as a percentage
because it is intuitively easier to understand than a ratio. Second, the ROI calculation includes the net return in the numerator
because returns from an investment can be either positive or negative.
When ROI calculations yield a positive figure, it means that net returns are in the black (because total returns exceed total costs).
But when ROI calculations yield a negative figure, it means that the net return is in the red because total costs exceed total returns.
Finally, to calculate ROI with the highest degree of accuracy, total returns and total costs should be considered. For an apples-to-
apples comparison between competing investments, annualized ROI should be considered.
The ROI formula can be deceptively simple. It depends on an accurate accounting of costs. That's easy in the case of stock shares,
for example. But it is more complicated in other cases, such as calculating the ROI of a business project that is under consideration.
ROI Example
Assume an investor bought 1,000 shares of the hypothetical company Worldwide Wickets Co. at $10 per share. One year later, the
investor sold the shares for $12.50. The investor earned dividends of $500 over the one-year holding period. The investor spent a
total of $125 on trading commissions in order to buy and sell the shares.
The ROI for this investor can be calculated as follows:

Here is a step-by-step analysis of the calculation:
1. To calculate net returns, total returns and total costs must be considered. Total returns for a stock result from capital
gains and dividends. Total costs include the initial purchase price and any trading commissions paid.
2. In the above calculation, the gross capital gain (before commissions) from this trade is ($12.50 - $10.00) x 1,000. The $500
amount refers to the dividends received by holding the stock, while $125 is the total commissions paid.
If you further dissect the ROI into its component parts, it is revealed that 23.75% came from capital gains and 5% came from
dividends. This distinction is important because capital gains and dividends are taxed at different rates.
An Alternative ROI Calculation

If, for example, commissions were split, there is an alternative method of calculating this hypothetical investor's ROI for the
Worldwide Wickets Co. investment. Assume the following split in the total commissions: $50 when buying the shares and $75 when
selling the shares.
Annualized ROI
The annualized ROI calculation provides a solution for one of the key limitations of the basic ROI calculation. The basic ROI calculation
does not take into account the length of time that an investment is held, also referred to as the holding period. The formula for
calculating annualized ROI is as follows:
Assume a hypothetical investment that generated an ROI of 50% over five years. The simple annual average ROI of 10%–which was
obtained by dividing ROI by the holding period of five years–is only a rough approximation of annualized ROI. This is because it
ignores the effects of compounding, which can make a significant difference over time. The longer the time period, the bigger the
difference between the approximate annual average ROI, which is calculated by dividing the ROI by the holding period in this
scenario, and annualized ROI.
From the formula above,
This calculation can also be used for holding periods of less than a year by converting the holding period to a fraction of a year.
Assume an investment that generated an ROI of 10% over six months.
In the equation above, the numeral 0.5 years is equivalent to six months.
Comparing Investments and Annualized ROI

Annualized ROI is especially useful when comparing returns between various investments or evaluating different investments.
Assume that an investment in stock X generated an ROI of 50% over five years, while an investment in stock Y returned 30% over
three years. You can determine what the better investment was in terms of ROI by using this equation:
According to this calculation, stock Y had a superior ROI compared to stock X.

Combining Leverage With ROI
Leverage can magnify ROI if the investment generates gains. By the same token, leverage can amplify losses if the investment proves
to be a losing investment.
Assume that an investor bought 1,000 shares of the hypothetical company Worldwide Wickets Co. at $10 per share. Assume also
that the investor bought these shares on a 50% margin (meaning they invested $5,000 of their own capital and borrowed $5,000
from their brokerage firm as a margin loan).
Exactly one year later, this investor sold the shares for $12.50. The shares had earned dividends of $500 over the one-year holding
period. The investor also spent a total of $125 on trading commissions when buying and selling the shares.
The calculation must also account for the cost of buying on margin. In this example, the margin loan carried an interest rate of 9%.
When calculating the ROI on this example, there are a few important things to keep in mind. First, the interest on the margin loan
($450) should be considered in total costs. Second, the initial investment is now $5,000 because of the leverage employed by taking
the margin loan of $5,000.
Thus, even though the net dollar return was reduced by $450 on account of the margin interest, ROI is still substantially higher at
48.50% (compared with 28.75% if no leverage was employed).
As another example, consider if the share price fell to $8.00 instead of rising to $12.50. In this situation, the investor decides to take
the loss and sell the full position.
Here is the calculation for ROI in this scenario:
In this case, the ROI of -41.50% is much worse than an ROI of -16.25%, which would have occurred if no leverage had been employed.
The Problem of Unequal Cash Flows

When evaluating a business proposal, it's possible that you will be contending with unequal cash flows. In this scenario, ROI may
fluctuate from one year to the next.
This type of ROI calculation is more complicated because it involves using the internal rate of return (IRR) function in a spreadsheet
or calculator.
Assume you are evaluating a business proposal that involves an initial investment of $100,000. (This figure is shown under the "Year
0" column in the Cash Outflow row in the following table.)
The investment will generate cash flows over the next five years; this is shown in the Cash Inflow row. The row called Net Cash Flow
sums up the cash outflow and cash inflow for each year.
Investopedia / Sabrina Jiang

Using the IRR function, the calculated ROI is 8.64%.
The final column shows the total cash flows over the five-year period. Net cash flow over this five-year period is $25,000 on an initial
investment of $100,000. If this $25,000 was spread out equally over five years, the cash flow table would then look like this:
Investopedia / Sabrina Jiang

In this case, the IRR is now only 5.00%.

The substantial difference in the IRR between these two scenarios—despite the initial investment and total net cash flows being the
same in both cases—has to do with the timing of the cash inflows. In the first case, substantially larger cash inflows are received in
the first four years. Considering the time value of money, these larger inflows in the earlier years have a positive impact on IRR.
Advantages of ROI
The biggest benefit of ROI is that it is a relatively uncomplicated metric. It is easy to calculate and intuitively easy to understand.
Due to its simplicity, ROI has become a standard, universal measure of profitability. As a measurement, it is not likely to be
misunderstood or misinterpreted because it has the same connotations in every context.
Disadvantages of ROI
There are some disadvantages to the ROI measurement. First, it does not take into account the holding period of an investment,
which can be an issue when comparing investment alternatives.
For example, assume investment X generates an ROI of 25%, while investment Y produces an ROI of 15%. One cannot assume that X
is the superior investment unless the time frame of each investment is also known. It's possible that the 25% ROI from investment X
was generated over a period of five years, while the 15% ROI from investment Y was generated in only one year.
Calculating annualized ROI can overcome this hurdle when comparing investment choices.
No Risk Adjustment
A second disadvantage of ROI is that it does not adjust for risk.
Investment returns have a direct correlation with risk: the higher the potential returns, the greater the possible risk. This can be
observed firsthand in the stock market, where small-cap stocks are likely to have higher returns than large-cap stocks but also are
likely to have significantly greater risks.
An investor who is targeting a portfolio return of 12%, for example, would have to assume a substantially higher degree of risk than
an investor whose goal is a return of 4%. If that investor hones in on the ROI number without also evaluating the associated risk, the
eventual outcome may be very different from the expected result.
Some Costs May Be Omitted

ROI figures can be inflated if all possible costs are not included in the calculation. This can happen deliberately or inadvertently.
For example, in evaluating the ROI on a piece of real estate, all associated expenses should be considered. These include mortgage
interest, property taxes, and insurance. They also include maintenance costs, which can be unpredictable.
These expenses can subtract from the expected ROI. Without including all of them in the calculation, the ROI figure may be grossly
overstated.
Some Issues May Be Ignored

Finally, like many profitability metrics, ROI considers only financial gains when evaluating the returns on an investment. It does not
consider ancillary benefits, such as social or environmental costs.
A relatively new ROI metric, known as social return on investment (SROI), helps to quantify some of these benefits for investors.
What Is Residual Income?

Residual income is the money that continues to flow after an initial investment of time and resources has been completed. Examples
of residual income include artist royalties, rental income, interest income, and dividend payments.
The term residual income is used in other contexts:
 In personal finance, residual income can refer to an individual's discretionary income, or the total amount of money left over
after paying all personal debts and obligations.
 In corporate finance, residual income is a measurement of corporate performance that reflects the total income generated
after paying all relevant costs of capital.
How Residual Income Works

Residual income broadly speaking is a measurement of tangential profits earned after subtracting all costs of capital related to
generating that income. Other terms for residual income include economic value-added, economic profit, and abnormal earnings.
Types of Residual Income
Stock Valuation
Residual income is also a valuation method for estimating the intrinsic value of a company's common stock. It accounts for the cost
of capital, meaning the combination of debt and equity expended to finance the company's operations.
The residual income valuation model values a company as the sum of book value and the present value of expected future residual
income. Residual income in this case is the profit remaining after the deduction of opportunity costs for all sources of capital.
Residual income is calculated as net income less a charge for the cost of capital. This is known as the equity charge and is calculated
as the value of equity capital multiplied by the cost of equity or the required rate of return on equity.
The formula is:

Residual Income = Net Income - Equity Charge
Given the opportunity cost of equity, a company can have positive net income but negative residual income.

Corporate Finance
Managerial accounting defines residual income for a company as the amount of leftover operating profit after paying all costs of
capital used to generate the revenues. It is also considered the company's net operating income or the amount of profit that exceeds
its required rate of return.
Residual income in this case may be used to assess the performance of a capital investment, a team, a department, or a business
unit.
The calculation of residual income is as follows: Residual income = operating income - (minimum required return x operating assets).
Personal Finance
In personal finance, residual income is synonymous with monthly disposable income. It is the total income that remains after paying
all monthly debts.
Thus, residual income is often a key factor when a lender considers a loan application. An adequate amount of residual income
indicates that the borrower can cover the monthly loan payment.
How to Generate Residual Income

Most sources of residual income require an upfront investment of money, sweat equity, or both. Some examples:
 Buy bonds. Once the bonds are purchased, the owner has a stream of cash available until the bonds reach their maturity.
 Buy a rental property. Renting out a second home or investment property is a sound way to add to your income without
much effort after the initial investment. If you lack the seed money, consider renting out a spare bedroom.
 Invest in index funds: Your profits can grow over time even if you don't actively manage your investment.
 Peer-to-peer lending: The internet has opened the way to various types of residual income, including peer-to-peer lending.
A number of platforms are available to facilitate personal unsecured loans between individuals at competitive rates of
interest.
 Sell your stuff: In the broadest sense, residual income can be any side gig that adds to your income outside your regular job.
eBay is good for cleaning out your closet and making money at the same time. Etsy is great for creative types who want to
monetize a hobby.
Residual Income vs. Passive Income

The differences are subtle. Residual income may be passive income but passive income isn't necessarily residual.
In personal finance, passive income may be derived from stock dividends or from renting a room on Airbnb. There was an initial
outlay of money to buy the stocks or the house, but a tangential benefit that costs little in additional time or effort has been derived
from the initial investment. It is residual income as well as passive income.
 Passive income is earned with little or no effort required after the initial investment.
 Residual income, for an individual, means the free cash available for spending after all obligations are met.
Is Residual Income Taxable?

Yes, almost all residual income is taxable. Maybe the income from some tax-exempt municipal bonds is not taxed. Otherwise,
whether you got the tax from stock dividends or renting your spare bedroom, it's taxable income.
Why Is Residual Income Important?
Residual income is often passive income. Passive income is, by definition, relatively effortless. Stock dividends and bond premiums
are examples. To quote legendary investor Warren Buffet: "If you don't find a way to make money while you sleep, you will work
until you die."
How Do I Calculate My Residual Income?
If you are applying for a loan, your residual income is the amount of money you have to spend after all of your monthly obligations
have been paid. This is also called discretionary income.
If you are planning your long-term future, residual income takes on a different meaning. It is the amount of money you generate (or
plan to generate in the future) from passive sources such as dividends and interest.
The Bottom Line
Residual income is not free money. It requires an upfront investment of money, hard work, or sweat equity. But once that work is
completed, a stream of income has been established that takes little or no effort to maintain.
Residual Income:
Residual income is the operating income an investment center earns over and above the minimum required rate of return on the
investment in assets
Actual Operating Income

– Required Operating Income (see below)
= Residual Income
Average Operating Assets
X Required Rate of Return %
= Required Operating Income
(average = beginning + ending / 2)
Disadvantage to using Residual Income:

Can’t easily compare a division’s performance to other divisions because the size of each division can differ significantly.
Can encourage short-term thinking when minimizing the investment in assets increases residual income

What Is Economic Value Added (EVA)?
Economic value added (EVA) is a measure of a company's financial performance based on the residual wealth calculated by deducting
its cost of capital from its operating profit, adjusted for taxes on a cash basis. EVA can also be referred to as economic profit, as it
attempts to capture the true economic profit of a company. This measure was devised by management consulting firm Stern Value
Management, originally incorporated as Stern Stewart & Co.
Understanding Economic Value Added (EVA)

EVA is the incremental difference in the rate of return (RoR) over a company's cost of capital. Essentially, it is used to measure the
value a company generates from funds invested in it. If a company's EVA is negative, it means the company is not generating value
from the funds invested into the business. Conversely, a positive EVA shows a company is producing value from the funds invested
in it.
The formula for calculating EVA is:
EVA = NOPAT - (Invested Capital * WACC)
Where:
 NOPAT = Net operating profit after taxes
 Invested capital = Debt + capital leases + shareholders' equity
 WACC = Weighted average cost of capital
Special Considerations
The equation for EVA shows that there are three key components to a company's EVA—NOPAT, the amount of capital invested, and
the WACC. NOPAT can be calculated manually but is normally listed in a public company's financials.
Capital invested is the amount of money used to fund a company or a specific project. WACC is the average rate of return a company
expects to pay its investors; the weights are derived as a fraction of each financial source in a company's capital structure. WACC can
also be calculated but is normally provided.
The equation used for invested capital in EVA is usually total assets minus current liabilities—two figures easily found on a firm's
balance sheet. In this case, the modified formula for EVA is NOPAT - (total assets - current liabilities) * WACC.
As noted by Stern Value Management, in 1983 the management team developed EVA, "a new model for maximizing the value created
that can also be used to provide incentives at all levels of the firm." The goal of EVA is to quantify the cost of investing capital into a
certain project or firm and then assess whether it generates enough cash to be considered a good investment. A positive EVA shows
a project is generating returns in excess of the required minimum return.
Advantages and Disadvantages of EVA

EVA assesses the performance of a company and its management through the idea that a business is only profitable when it creates
wealth and returns for shareholders, thus requiring performance above a company's cost of capital.
EVA as a performance indicator is very useful. The calculation shows how and where a company created wealth, through the inclusion
of balance sheet items. This forces managers to be aware of assets and expenses when making managerial decisions.
However, the EVA calculation relies heavily on the amount of invested capital and is best used for asset-rich companies that are
stable or mature. Companies with intangible assets, such as technology businesses, may not be good candidates for an EVA
evaluation.
FINAL PERIOD
Transfer Pricing
Ra onale and need for transfer price
Transfer pricing is the price determined for the transac ons between two or more related en es within a mul -company organiza on.
This price is also known as the cost of transfer which shows the value of such transfer between the related en es in terms of goods or
even transfer of employees or labor across different departments.

Transfer pricing at a corporate level refers to the transac ons of goods and services between two en es owned by a single parent
company. Mul na onal companies take advantage of different tax regimes in different countries of their opera ons and to allocate
their profits at the end of a financial year to boost their retained earnings a er tax.
Article 9 describes the rules for determining the arms-length transaction prices for related party transactions between associated
enterprises in the OECD Model Tax Convention. Such an arm’s length price is fairly a market price for such a commodity or service.
This price is widely accepted by tax authorities and users of financial statements. It assists entities in determining their real income.
The transfer price agreement is vastly related to the market price of the product or service involved in such related party transactions.
This will eliminate the entities purchasing or selling such products or services in the market as they can buy or sell them between the
related parties at the market price itself; this is the reason it is more of an accounting concept that accounts for the transaction
between such related entities at a correct and fair price.
This is determined based on a few widely accepted methods such as comparable uncontrolled price, cost-plus pricing, resale price,
Transactional Net margin, and transactional profit split methods.
The above-listed methods are used based on the transaction, such as if there are comparable products or services in the market for
which there is a market price determined, then such price could be used to determine Transfer Pricing. Similarly, if the product is
resaleable and such resale price is determined along with profit on such sale, then the resale price method can be utilized. Related
entities use other methods.
Objec ves
Let us understand the transfer pricing agreement through getting to know their objectives from the explanation below.
 True and fair repor ng of financial statements
 Be er es ma on of profits generated by en es from associated transfers
 Avoidance of double taxa on and avoiding tax evasion by en es
 Promo ng compe veness among the associated enterprises.
Examples
Let us understand different transfer pricing methods with the help of a couple of examples.
Example #1
Two associated entities X and Y, where X is situated in a high tax country. On the other hand, y is located in a Low tax country which
is a tax haven destination; in this case, X would shift most of the revenue generated to Y through means of some associated transfers
to avoid taxation or reduce the incidence of tax for the company, with the use of these provisions, such type of tax avoidance
transactions could be eliminated. Similarly, due to this, there will not be the eradication of revenue from one country to another by
benefiting the country of source of generating such revenue.
Example #2
The assembly division of an automobile company, ABC Company, offers to purchase 50,000 tires from the tire division of the same
company for $100 per unit. The production costs per tire at a volume of 200,000 tires per year are as follows:
The tire division typically sells 200,000 tires every year to arm’s length customers at $140 per unit. In addition, the capacity of the tire
division is 300,000 batteries/year. The assembly division typically buys the tires from arm’s length suppliers at $125 per unit.
Now, the question is whether or not the tire division manager should accept the offer? If yes, how will the company benefit from
this internal transfer?
The tire division has a surplus capacity of (300,000-200,000) = 100,000 tires per year. So the relevant costs to the tire division will be
$82 / battery (total of $124 minus the fixed factory overhead of $42).
And the increased margin to the tire division would be 50,000*$(100 –82) = $0.9 million.
Due to the above benefits to the tire division, its manager must undoubtedly accept the offer.
The assembly division pays $125 to external suppliers for a tire that could be purchased internally at an incremental cost of just $82.
So, the overall cost saved by the company would be 50,000 * $(125–82) = $2.15 million per year.
This is how the company will benefit from the internal transfer.
Now, what should be the price range in this case?

The transfer price should be kept between $82 and $125. If it goes below $82, the tire division will be at a loss, while if it goes beyond
$125, the assembly division will be paying more than what it pays to the external suppliers.

On which legal entities should the practice of transfer pricing be applied?
The entities which can adopt this practice must be legally related entities. In other words, if two companies are owned wholly or with
the majority by the parent corporation, then those companies can be considered to be under the control of a single corporation. And
since they are under the control of a single corporation, they are also legally related entities, and hence, transfer pricing can be applied
to them and can be practiced by them.
Under certain jurisdictions, entities are considered under common control if they share family members on their boards of
directors even though they may not be related legally, as described in the above paragraph.
Importance
Transfer pricing methods prove to be extremely useful for individuals and multinational companies alike. Let us understand how
through the discussion below.
 The cri cal importance of Transfer Pricing provisions is that there will be an equal and fair distribu on of resources between
associated en es leading to non-discriminatory trade transac ons.
 This provides opportuni es for associated enterprises to transact business between them as the transac ons are valued at
market price; this will enhance the scope of business and have a posi ve impact on the group company as a whole due to
internal profits generated by these associated en es,
 Also, it is useful for the tax authori es to determine the actual value of such transac ons and es mate the profits derived
from such transac ons taking place between associate en es. Without transfer pricing provision, there would be a reduc on
or avoidance of tax by misleading authori es and transferring or repor ng profits based on the limita on presented in tax
provisions.
 It is used not only by mul -company organiza ons but also by en es that sa sfy the condi ons of associated enterprises.
Purpose
Let us understand the purpose of a transfer pricing agreement through the discussion below.
 Determina on of a fair and equitable price of a transac on that takes place between two related enterprises involving the
purchase and sale of goods and services;
 Other purposes include accoun ng for a transac on as per its market price, avoiding any collusion among associated
enterprises, and providing a base for es ma ng income generated from such transac ons. Also, this concept is useful for true
and fair repor ng of transac ons between associated enterprises in the financial statements of such en es.
Functions and Risks

Regardless of transfer pricing methods being useful for individuals and MNCs, it also has its share of risks and intricate detailing to it.
Let us understand them through the discussion below.
 This concept func ons basically on the principles of price determina on that is available in the market for such commodi es
or services involved in the transac on.
 Due to such a func on, there are few risks involved, such as the valua on of those transac ons that involve the use of
intellectual property, services that are highly valued, and transac ons that are not of financial nature. The exchange of goods
and services with unrelated goods and services between associated enterprises, etc.
 Also, there is a risk of mispricing a self-generated commodity or service that is not related to any other resource in the market
due to limita ons present in domes c pricing rules.
Benefits
Let us discuss the importance of inculcating transfer pricing methods through the points below.
 Assists the en es to transact at market prices elimina ng inconsistency in pricing a transac on.
 It helps the tax authori es to determine taxes and helps reduce tax evasion.
 Fair presenta on of financial statements
Drawbacks
To understand the transfer pricing agreement completely it is important to understand its drawbacks as well. Let us do so through
the explanation below.
 This would require addi onal administra ve costs and a me-consuming process.
 There are few limita ons in determining arm’s-length prices as two products cannot be compared due to the homogenous
nature of such commodi es or services.
Transfer Pricing Schemes (minimum transfer price, market-based transfer price, cost-based transfer price and nego ated price)
Minimum transfer price

The minimum transfer price equals the incremental cost to create one product. The incremental price includes direct labor, direct
material and direct overhead costs but excludes the expenses the transferring center would have incurred whether or not it made the
product.
Minimum Transfer Price and Tax Regulations
For accounting purposes, large corporations will evaluate their divisions separately for profit and loss. When these different divisions
conduct business with one another, the minimum transfer price for a particular good will usually be close to the prevailing market
rate for that good. That means that the division selling a good to another division will charge an amount equal to what they could
achieve by selling to retail customers.

However, in some instances, companies will attempt to increase or decrease the transfer costs between divisions in order to lower
the amount they pay in taxes. This deliberate manipulation of costs is more likely to occur when the divisions are located in different
countries where one country is a tax haven and has a much lower tax rate than the other.
Obviously, the tax authorities in countries with higher tax rates frown upon this practice as it means lost revenue for them. Thus,
these countries have strict regulations to prevent companies from using transfer pricing as a tax avoidance strategy.
Regulators look at the company's financial statements to ensure their transfer pricing is in line with current market pricing. In
general, these regulations attempt to ensure companies abide by arm's length practices, which prevents collusion between divisions
within the company to misstate transfer prices.
Market-based transfer price

Market-based transfer pricing is a method of allocating price or cost differences to one or more markets. A market is the basis for
market-based transfer prices and represents the market environment in which an entity buys and sells related products and services.
The market prices used in market-based transfer prices are the market prices of related products and services in uncontrolled
transactions between market participants at arm's length, based on market comparability. The strength of using market-based
transfer pricing is that is allows for all the areas of a company to stay competitive - from sourcing to marketing to production itself.
The weakness of market-based transfer pricing is that it does not allow for any special favors or allowances. That is why there is
adjusted transfer pricing (discussed further in the following sections).
Cost based transfer price
Cost-based transfer pricing is a method of setting prices when selling products to divisions within the same company. Several factors
affect the price, including:
 Production costs
 Managers' reviews
 Taxation
 Competitor price
There are different methods to select the cost-based transfer price, such as:
 Marginal cost: In this method, a company's division records all the parts to make a product and it adds variable overhead,
such as energy bills and cost to rent factory space.
 Full production or cost plus a markup: In this method, a company adds fixed overhead expenses—expenses that stay the
same despite changes to the number of components — to the cost of each item.
 Production cost plus a markup: In this method, the full cost-plus price includes the cost of the item plus a markup or other
profit allowance, which means the selling division earns a profit on transferred items.
Cost-based transfer pricing is used to reduce tax payments. For example, if a company owns and operates a factory in a country with
a low tax rate but sells its products in a country with a higher tax rate, it pays fewer taxes by setting a high transfer price.
Nego ated price

Negotiated Price. If the Purchasing Members or legal representative of the Disassociated Member can agree on a negotiated price for
the Interest, then that price will be used; if not, · Estimated Market Value within 12 Months: The Series Manager may annually
determine the Estimated Market Value of the Company and/or its Series and report it to the Series Members. An Estimated Market
Value calculated by the Series Manager in any commercially accepted manner within the last twelve (12) months shall conclusively be
used to determine the value of a Disassociated Member’s Interest. The purchase price of shall be the product of the Disassociated
Member’s Percentage Interest in a Series and the Estimated Market Value of the Series adjusted for the Member Class, if applicable.
Balanced Scorecard
Nature and perspec ves of balanced scorecard
Balanced Scorecard
A strategic planning framework that companies use to assign priority to their products, projects, and services; communicate about
their targets; and plan their routine activities
What is a Balanced Scorecard?

A balanced scorecard is a strategic planning framework that companies use to assign priority to their products, projects, and
services; communicate about their targets or goals; and plan their routine activities. The scorecard enables companies to monitor
and measure the success of their strategies to determine how well they have performed.

The balanced scorecard acts as a structured report that measures the performance of company management. The management team
can be evaluated against Key Performance Indicators (KPIs) to show their contributions to the strategy and attainment of the targets
set forth. Success is measured against the specified goals or targets to determine the rate at which the business is growing and how it
compares to its competitors.
Other personnel in the organizational hierarchy can depend on the balanced scorecard to show their contribution to the growth of
the business, or their suitability for job promotions and salary reviews. The key features of a balanced scorecard include a focus on a
strategic topic relevant to the organization, and the use of both financial and non-financial data to create strategies.
Four Perspec ves of the Balanced Scorecard

The following are the key areas that a balanced scorecard focuses on:
1. Financial perspective
Under the financial perspective, the goal of a company is to ensure that it earns a return on the investments made and manages key
risks involved in running the business. The goals can be achieved by satisfying the needs of all players involved with the business, such
as the shareholders, customers, and suppliers.
The shareholders are an integral part of the business since they are the providers of capital; they should be happy when the company
achieves financial success. They want to be sure that the company is continually generating revenues and that the organization meets
goals such as improving profitability and developing new revenue sources. Steps taken to achieve such goals may include introducing
new products and services, improving the company’s value proposition, and cutting down on the costs of doing business.
2. Customer perspective
The customer perspective monitors how the entity is providing value to its customers and determines the level of customer satisfaction
with the company’s products or services. Customer satisfaction is an indicator of the company’s success. How well a company treats
its customers can obviously affect its profitability.
The balanced scorecard considers the company’s reputation versus its competitors. How do customers see your company vis-à-vis
your competitors? It enables the organization to step out of its comfort zone to view itself from the customer’s point of view rather
than just from an internal perspective.
Some of the strategies that a company can focus on to improve its reputation among customers include improving product quality,
enhancing the customer shopping experience, and adjusting the prices of its main products and services.
3. Internal business processes perspective

A business’ internal processes determine how well the entity runs. A balanced scorecard puts into perspective the measures and
objectives that can help the business run more effectively. Also, the scorecard helps evaluate the company’s products or services
and determine whether they conform to the standards that customers desire. A key part of this perspective is aiming to answer the
question, “What are we good at?”
The answer to that question can help the company formulate marketing strategies and pursue innovations that lead to the creation
of new and improved ways of meeting the needs of customers.
4. Organizational capacity perspective

Organizational capacity is important in optimizing goals and objectives with favorable results. The personnel in the organization’s
departments are required to demonstrate high performance in terms of leadership, the entity’s culture, application of knowledge, and
skill sets.
Proper infrastructure is required for the organization to deliver according to the expectations of management. For example, the
organization should use the latest technology to automate activities and ensure a smooth flow of activities.
Financial and non-financial performance measures
To keep up with the present compe ve world, all companies, businesses, and organiza ons have to take up some steps that will
provide them success in terms of the finance and non-finance aspects of the company.
Financial performance measurement and non-financial performance measurement are steps that help a company to achieve its goals.
Financial performance management refers to the calcula on of financial performance made by the company in terms of profit, loss,
cash in and out-flow. Non-Financial performance management refers to the management of a company’s success factors other than
financial like customer sa sfac on, etc.
Financial performance measurement is a measure that is taken by any company or business to boost the monetary condi on of any
organiza on or company.
These measures can successfully narrate how a company is using all its resources to produce the maximum income. These financial
reports are accessible to the shareholders of that company.
Non-financial performance measurement indicates such steps that are taken in order to assess the non-financial aspects of an
organization.
These measures or efforts make sure the organiza on sees the face of prosperity in the future. Primarily NGOs and charitable trusts
a empt such measures as financial measures are of no use to them.

Comparison Table
Parameters of
Financial Performance Measurement Non-financial Performance Measurement
Comparison
Main focus Financial performance measurement focuses on the Non-financial performance measurement focuses on
areas that will offer short-term success to a business. the areas that will offer a long-term fortune to the
business or organiza on.
The main Shareholders are regarded as the primary addressee An organiza on’s management team appears as the
addressee in such cases. main addressee of the non-financial performance
measurement.
Territory Financial performance measurements are external Non-financial performance measurements are an
factors. internal ma er.
Applied in Mostly, companies and businesses that aim to earn Non-profitable organiza ons and chari es use non-
profits and increase revenues use financial financial performance measurements.
performance measurement.
Manipula on Financial performance measurement can be Non-financial performance measurement has a

subjected to manipula on and fabrica on with the nominal chance of becoming a vic m of
use of various tools and methods. manipula on.
What is Financial Performance Measurement?
Financial performance measurement has only one goal: to bring betterment to a company’s financial department. These measures
can deliver short-term success to the company.
A company can also know how it has been using its resources through these measures.
The manager of the company and potential investors rely on various financial performance measures for the utmost profit.
Every company generates their financial statements in order to get a clear idea about its financial performance.
These reports can show where the company is lacking and thus according to that the financial performance measures can be decided
for future.
The objective of these financial statements is that they reach the public.
External connections, such as stakeholders, are allowed to access the reports. The balance sheet of the company with the statement
of profit and loss are stated in these reports.
What is Non-financial Performance Measurement?

The non-financial performance measures are related to a company’s performance which is not related to money. It ensures the
prosperity of the company in the long run.
Non-financial measures support the strategies of the organization. A fixed objective to improve the customer’s experience can be
helped by non-financial measurement.
Non-financial measures are small steps, but they are eligible to make a big difference. The employees are required to act on the
measures taken to meet the objectives.
Fulfilling the daily tasks can add up to the strategies and give the fruit of improvement.
Non-financial measurement is essential for any company. That point can not be avoided. But undertaking too many non-financial
measures can also not provide the ideal picture.
If a company implements lots of measures, then that will take on a big amount of money as well as time. It also needs an investment
in IT infrastructure. So it is vital to use these measures as they are needed.
Main Differences Between Financial Performance Measurement and Non-financial Performance Measurement
1. As its name implies, financial performance measurement is taken to achieve financial goals. It enables businesses and
companies to thrive in the aspect of finance. On the other hand, non-financial performance measurement jus fies its name
as well. This measurement is taken to assess and evaluate the performance of the company. The financial aspect has nothing
to do with it.
2. Financial performance measurement focuses on the economic advancement of any business, company, or organiza on,
whereas non-financial performance measurement focuses on the performance growth of the organiza on.
3. Financial performance measurement focuses on short-term success, while non-financial performance measures look a er the
organiza on’s long-term prosperity.
4. Financial performance measurement is an area to which externals like stakeholders get access. It is a public report, while on
the other hand, non-financial performance measurement is to sort out internal issues.
5. Companies who are aspired to achieve profit undertake this financial performance measurement. Whereas in contrast, non-
financial performance measurement is mostly undertaken by NGOs and charity homes.
6. Financial performance measurement can fall prey to manipula on easily, but falsifying non-financial performance
measurement is not effec ve at all.

Reference:
Strategic Issues - The Pivotal Process for Strategic Success (cssp.com)
Bryson. chapter 6. iden fying strategic issues facing the organiza on (slideshare.net)
An Overview of Enterprise Analysis > Business Analyst Community & Resources | Modern Analyst
What is enterprise architecture? A framework for transforma on | CIO
What is enterprise architecture? A framework for transforma on | CIO
Feasibility Study (investopedia.com)
Building an ERP Business Case: How-To & Template | NetSuite
Performance Measurement Concepts & Techniques (chron.com)
Performance Measurement - What Is It, Example, Methods, Types (wallstreetmojo.com)
5 Methods to Effec vely Measure Performance Management | Indeed.com
Responsibility Accoun ng - Meaning, Types and Examples (wallstreetmojo.com)
Decentraliza on - Concept, types and advantages - Daily Concepts (conceptdaily.com)
Business Segment Repor ng Defini on, Importance, Example (investopedia.com)
Controllable Costs and Uncontrollable Costs - Accoun ngverse
Direct Costs and Indirect Costs - Accoun ngverse
Segment Repor ng and Performance Evalua on | Accoun ng Test Prep
Economic Value Added (EVA) Defini on: Pros and Cons, With Formula (investopedia.com)
Residual Income: What It Is, Types, and How to Make It (investopedia.com)
How to Calculate Return on Investment (ROI) (investopedia.com)
Segmented Income Repor ng – Principles of Managerial Accoun ng (pressbooks.pub)
Transfer Pricing What Is It, Examples, Objec ves, Benefits (wallstreetmojo.com)
Market-Based Transfer Pricing | Overview & Example - Video & Lesson Transcript | Study.com
What Is Cost-Based Transfer Pricing? | Indeed.com
Nego ated Price Defini on | Law Insider
Balanced Scorecard - Overview, Four Perspec ves (corporatefinanceins tute.com)
Financial vs Non-financial Performance Measurement: Difference and Comparison (askanydifference.com)

Strategic Business Ana Ysis

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“Every organiza on’s

success is driven by people

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Strategy framework as a concept

1. Strategy as intellectual elas city.

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4. Strategy is natural capital.

5. Strategy is intellectual capital.

Strategy framework as a tool

A. McKinsey’s Strategic Horizons

Opera onal Excellence

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C. The Stakeholder Theory

Group 1 - The employees

D. The Balanced Scorecard

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Importance of strategic framework

Tips to consider when crea ng a strategic framework

6 items to consider for your strategic framework

6. Ac on plan to provide detail into strategies

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Strategy Framework: Iden fying strategic issues

How Should You Identify Strategic Issues?

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Methodologies for Resolving Strategic Issues:

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6 steps to execute strategy formula on

2. Establish organizational goals

3. Create departmental plans

4. Conduct a performance analysis

5. Implement a plan of action

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6. Revise your strategy as needed

Tips for using strategy formula on

Use SMART goals

Enterprise Analysis: Business Architecture

What is Enterprise Analysis?

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Steps Involved in Enterprise Analysis

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Enterprise architecture deﬁni on

Goals of enterprise architecture

Beneﬁts of enterprise architecture

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Enterprise architecture methodologies

Enterprise architect role

Enterprise architecture tools and so ware

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Enterprise Analysis: Feasibility studies

Understanding a Feasibility Study

Beneﬁts of a Feasibility Study

How to Conduct a Feasibility Study

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A University Science Building

A High-Speed Rail Project

What Is the Main Objec ve of a Feasibility Study?

What Are the Steps in a Feasibility Study?

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Enterprise Analysis: Project scope

What Is An Enterprise Project?

What Is Enterprise Project Management?