Include Separately:

COBIT
Groiener Model
Principles of CSR
Sustainability Reporting
Conflict
Health and Safety STRATEGY, STAKEHOLDERS AND MISSION
Future Basing
BCG BUSINESS MANAGEMENT AND STRATEGY
Strategic Space CFAP-3 (ICAP)
Lock in Stratgies
Pyramid Tool
Building Block Model
Change management
Business Process re-engineering

Prepared and Delivered by

MUHAMMAD ADEEL
Instructor for CFAP-3
TSB Education, Karachi
Past Paper Analysis

Mission, Strategy and Stakeholders

Question Marks
85

33 30
18 15
9 9
5 2 1

Mission Strategy and Decision making Objectives Stakeholders

Strategic Planning
How examiner tested ?

Mission and Vision Strategy and Strategic Planning

1 Define vision and mission
2 Purpose of mission and vision statement
3 Ingredients of mission and vision statement
4 Approarch to develop mission statement
5 Draft mission statement
6 Examples of vision and mission
7 Drawbacks of copying mission statements
1 Define strategies
2 Types of strategies
3 Levels of strategies
4 Planning levels
5 Short term and long term strategies
6 Strategic Management (Complete Book)
7 Importance of strategic management
8 How strategy is implemented (Chapter 07)

Stakeholders Decision Making

1 Define stakeholders 1 Levels of decision making
2 List stakeholders 2 Decision making process
3 Innovative corporate strategies
3 Reasons of conflict among stakeholders
4 Analyze stakeholders
Objectives
1 Goals and objectives
2 Difference between goals and objectives
3 Reason of variances
4 Strategic objectives
Examiner‟s expectations
Chapter 1 Roadmap

• Strategic Management – Levels of strategy

– Define strategic management
– Rational model of strategic management
– Strategic planning model by JS&W
• Mission and Vision
– Define mission and vision
– Examples of mission and vision statements
– Difference between mission and vision statements
– Components of mission statements (Drafting mission statements)
– Analysis of company mission statements
– Why do companies prepare mission (Role of mission statement)
• Translation of mission into goals and objectives
– Define goals and objectives
– Example of goals and objectives
– Reasons of Variance
• Plans into Actions (Strategizing)
– Define strategy
– Types of strategies
• Stakeholders
– Define stakeholders
– List stakeholders
– Stakeholders‟ interests in company and conflict thereof
– Sources of powers of various stakeholders
– Tool to manage stakeholders
– Implications of stakeholder‟s mapping
• Benefits or importance of strategic management
• Limitations of strategic management
Strategic Management Process

Vision and Mission Chapter 1

Goals and Objectives Chapter 1

Environment Analysis Chapter 2-4, 16, 17

Strategy Formulation Chapter 6, 8-14, 18-20

Strategy Implementation Chapter 7, 15

Strategic Evaluation Chapter 14

Corporate target Chapter 5

Strategic Management (Rational Approach)
Defined
• It‟s an ongoing process. Its mainly concerned with deciding on strategy and managing how strategy is to be put
into action via strategic analysis, choices and implementation
(Johnson, Scholes and Wittington )

Steps in strategic management process 4. Strategy implementation:

1. Defining strategic intent a. Developing structures and systems
a. Establishing a vision b. Managing the behavioral and functional implementation`
b. Designing mission
c. Setting objectives
5. Strategic Evaluation and Control
2. Environmental Analysis
a. Performing evaluation
a. Economic environment analysis
b. Exercising control
b. Industry analysis
c. Recreating strategies
c. Internal environment analysis
3. Strategy Formulation
a. Considering strategies
b. Carrying out strategic analysis
c. Preparing a strategic plan
Strategic Planning Model by JS&W
Model by JS&W
• Components: Position Analysis, Strategic Choices and Strategy Implementation
• Only 3 elements or components of strategic planning
• One can begin Strategic planning from any point
• Elements are interdependence
• Pictorial diagram of JS&W model
Strategic Position Analysis (Element of Strategic Planning)

Analyzing strategic position means:

• Assessing external environment

1. Micro environment
2. Macro environment
• Evaluating organization‟s strategic capability
• Assessing organizational culture
• Assessing and analyzing stakeholders
Strategic Position Analysis (Element of Strategic Planning)
4 components of strategic position analysis are
• External environment
– Environmental variables
– Historical trends
– Present status
– Future expected changes
• Internal environment
– Resources
– Competencies
– Coordination among them
• Organizational culture
– Components (Values, beliefs and assumptions)
– Culture defines attitudes acceptable in organizational performance
– Culture defines structure
• Stakeholders
– Groups directly or indirectly connected
– Power and interest level
– Analysis (e.g. major stakeholder is risk averse and pressurizes management not to go for risk taking)
Strategic Choices (Element of Strategic Planning)

3 elements of strategic choices are

• Generation of strategic options

– Competitive strategies (cost leadership, differentiation and focus)
– Growth strategies (Product – Market Strategies by Ansoff)
– Institutional Strategies (strategic alliances: JVs, partnerships, mergers and acquisitions etc.)
– Strategic options at each level in organization (strategic, business, functional and operational levels)
• Evaluation and Selection of strategic options
– Using 3 criteria: SFA by JS&W
– Assessment criteria: Financial and non financial
– Examine in context of strategic analysis
Strategy Implementation (Element of Strategic Planning)

3 elements of strategy implementation are

• Organizational Structure
– Chain of command and communication
– Span of control and accountability structure
– Decision making (Centralization or decentralization)
– Control activities (Governance structure)
• Organization of Resources
– Resources (financial, Human, Technical, Information, Intangible)
– Resource planning (acquisition, disposal, hiring, firing, training, development etc.)
– Capacity building and utilization decisions
• Change management
– Continuous assessment of environment to assess need for change
– Avoidance from strategic drift
– Implementation of change strategy (incremental or transformational)
– Managing resistance to change
Vision
Defined
• Reason behind existence of an organization
• Reflects desired position a firm wants to achieve in future
– e.g. “Living in a world without Diabetes”
(International Diabetes Federation)
• Communicated by the leaders (BOD)
• Characteristics
– Future focused
– Simple and specific
– Clear and understandable
– Directional
– Relevant and purpose driven
– Unique and memorable
– Inspiring
Vision - Examples
Mission
Defined
• How does a firm realize its vision
• What an organization does to achieve its ultimate goal
• Describes the organization‟s basic function in society, in terms of the products and services it produces for its
customers
(Mintzberg)

Characteristics of a Good Mission Statement

• Should be Precise
• Clear enough
• Specific but open ended
• Realistic to state purpose of organization
• Longevity and usually not time bounded
• Distinctive in nature
• Should communicate something about company‟s strategies
Examples of Mission Statements
Components of mission statement
Components
1. Type of organization (commercial, NGO or non profit)
2. Operations
3. Customers
4. Products and services
5. Markets (basis and geographical area)
6. Technological orientation
7. Values and beliefs behind strategic decisions Our dream is a world free of poverty. To fight poverty with
passion and professionalism for lasting results. (6)
8. Concern for survival
9. Corporate social responsibility (social and environmental responsibility)
To help poor people (1, 2) help themselves and their
10. Concern for employees (e.g. how they are facilitated) environment (1), by providing resources, sharing
knowledge, building capacity and forging partnerships in
the public and private sectors.(4, 3)

To be an excellent institution able to attract, excite and

nurture diverse and committed staff with exceptional skills
who know how to listen and learn (8, 9)
Surgery of Mission Statements
Surgery of Mission Statements
Role of mission statement
Importance
• Details the vision
• Defines scope of business
• Guides to establish organizational culture
• Basis for strategic planning
• Guides strategic decision making
• Delivers attitude of company towards its employees
• An overview for stakeholders about its expected plans and goals;
• Encourages performance analysis
Difference between vision and mission

Vision Mission

• About • Describes ultimate goal of an organization • Describes how to achieve vision

• Reflects desired position in future • Purpose of existence of organization

• Time • Describes future state of an organization • Reflects what organization is currently doing
• Future focuses • Current status

• Answers • Answers the question “Why” • Answers the question “How”

• Change • Should remain intact even if the market • May change. But it should still tie back to its
changes dramatically core values (vision)

• Wordings • Motivational • Informational

 Translating mission into goals and objectives (Hypothetical Example)

Mission For everyone in Pakistan who needs hi-tech, cost effective and eco friendly plastic accessories
Strategic Goal To lead market with 90% market share within next 10 years (Strategic Goal)
SBU Target Required annual production after 10 years 1,500,000 Chairs (Tactical Objectives)
Current annual production 200,000 Chairs
Required average growth rate 22.3224% (calculated using geometric mean)
Year 1 2 3 4 5
Required annual production 244,645 299,255 366,056 447,768 547,721
Current annual production 200,000 Chairs

Departmental Objective Required production per quarter 61,161 Chairs

Current production per quarter 50,000 Chairs

Operational Target Required production per month 20,387 Chairs

Required production per day 680 Chairs
Current production per day 548 Chairs
Goals and objectives
Goals
• Aims of the entity to achieve
• Expressed in narrative terms
• These are broad intentions
• e.g. increase international customer base
• Normally long term in nature

Objectives
• Derived from the goals
• Ore specified than goals
• Usually quantified
• Time bounded usually medium to short term
• Narrower than objectives
• e.g. Acquire 28% more customers from UK and USA within next 6 months
Reasons of variance in budgets (set objectives)
Management perspectives
• Unrealistic goals
• Goals are not based on market research
• Lack of proper communication within organization
• No regular review
• Goals and targets don‟t inspire employees

Resource Limitations – Demotivated staff

• Financial Resources – Fluctuating wages
– Insufficient allocated funds • Material
– Misappropriation of financial resources – Not available
• Technical resources – Drastic changes in cost of material
– No required technical equipment
– Mismanagement of technical resources
• Human Resources
– Incompetent staff
– Labor not available
Plans into actions (strategizing)
Strategy defined
• A plan which determines
– How to Configure resources and competencies
– Achieve Competitive Advantage
(Michael Porter)

Levels of strategy
• Corporate Strategy
• Business Unit Strategy
• Functional Strategy
• Operational Strategy
Corporate Strategy
Defined
• Overall strategy of an organization.
• Strategy which defines
– Scope
• Businesses and product range
• Geographical area Manchester
USA
– Direction
• Invest or divest
• Increase investment through
– Organic growth
– External development
– Resource allocation among SBUs London

Scotland
Corporate Strategy (Examples)

1. AliBaba.com purchased Daraz.pk in Pakistan

2. HSBC operations in Pakistan merged with Meezan Bank

3. UCP‟s backward integration by opening Allied Schools

4. Allied Schools‟ expansion through Franchising

5. Warid Group merged in Jazz

6. Joint venture of HBL and Pakistan Post to start a new venture in Pakistan

7. Uber acquired Careem in Pakistan

8. Dawn Group‟s diversified investment (paper, electronic media, education sector)

Business Strategy (Examples)
Defined
• Focuses on competitive strategy of firm to decide
– Value proposition for target customers
– Firm‟s position in industry
• Cost leader or differentiator
– Formulated for specific strategic business unit

Strategies
• Porter‟s Generic Strategies
– Cost leadership strategies
– Differentiation strategies
– Focus strategies
• Bowman‟s Strategic Clock
– Refer chapter no. 5
Business Strategy (Examples)
• Differentiated electronic items by Apple Inc.
• Highly differentiated services cars by Rolls Royce for premium customers only
• Easy Jet Airlines ticket price of £5 for domestic flights in UK
• Virgin airlines in Australia following Hybrid Strategy
Functional Strategy
Defined
• Related to different functional areas in an SBU
• More detailed and specific than corporate and business strategies Customer Care
• Deals with
• Gain, retain and develop resources and competencies Finance
• Allocation of resources among different operations
• Coordination between functions
• Formulated by functional heads
• Aligned with business level objectives and strategies Production IT Function

Human Resource

Procurement
Strategy and management hierarchy

Management Level of Strategy Purpose of strategy

Corporate Head Corporate Strategy • Direction of organization

• Scope of organization

Business Unit Head Business Strategy • Competitive Strategies

• Coordinate managerial activities

Functional Heads Functional Strategies • Coordinate employee activities

• Responsible for producing goods
• Formulate departmental strategies
• Procurement strategies
Corporate • Production Planning
Head
• Sales and Marketing
• Customer Relationship plans
Business Head • Financial Strategy
• Investment and Portfolio Management
• HR strategies
• Research and Development
Functional Head
Types of strategies
Intended strategies
• Planned in advance
• Conscious decision of BODs
• Monitored continuously and altered according to environment
• Indicates strategic direction of organization

Emergent strategies
• New strategy which come up without formal planning
• Result of reaction to change
• Also called realized strategy
• Develops over time
• e.g. e-commerce during COVID-19 by different educational institutes to go online

Enforced strategies
• Management is forced to choose a specific strategy (e.g. Key stakeholder is insisting to choose a particular strategy)
• Everyone in industry is doing the same thing (e.g. Nokia adopted smart phones technology, Walmart to compete Amazon in USA)
• Management has no other choice of strategy
• Sign of weak management
Stakeholders
Defined
• An individuals, groups of individuals or external organizations that have an interest (a „stake‟) in what the entity
does or is trying to achieve.

Stakeholders
• Controlling shareholder and other classes of shareholders
• Bondholders and Lenders
• Suppliers
• Customers
• Directors and senior executive managers
• Employees
• Government (local or national government)
• Pressure groups (such as human rights groups, environment protection groups))
• General public.

Strategic concern
• Power and interest level of every stakeholder varies
• Can influence firm‟s strategic decisions
Stakeholders‟ Expectations
Equity holders • Regular dividends • Power to make decisions
• Capital appreciation • Fair presentation of financial affairs
• Business continuation
Management • More decision making power • Pay increase
• Development opportunities • Promotion
• Power to control resources (e.g. employees, data)
Employees • Fair reward system • Safe working conditions
• Development opportunities • Active disciplinary procedures
• Promotion • Business continuation
Customers • Fair pricing • Timely delivery
• Quality of product • Warranty and guarantee
Suppliers • Long term business relationship
• Timely payments
Lenders • True and fair presentation of financial affairs
• Timely payment of contractual payments
Government • Tax collection • Environment friendly
• Follow legislation • Participation in economic development
Public • Employment opportunities • Environmental friendly policies and operational
• Pollution ways
Stakeholder groups‟ influential sources
Equity holders Management
• Shareholding • Political involvement (nominee)
• Control over resources (e.g. project sponsor) • Skills (e.g. SAP)
• Knowledge (e.g. R&D related knowledge)
• Position in company (Nominee director)
Customers and Suppliers Community
• Refer to chapter 3 (bargaining power • Laws and regulations
of customers and suppliers) • NGOs (supporting society)
• Human rights & Child labor
• Women commission
• Environment protection
Employees
• Trade unions
• Skilled employees
• Knowledgeable employees
• HR dependent industry (non-tech)
• Laws and regulations
Government
• Position of entity in industry
• Importance of firm for economy
• Government policy for industry
• Laws and regulations
Conflicts among stakeholders (Examples)

Conflicting Parties 1st Group’s Interest 2nd Group’s Preference

Management versus employees • Cost efficiency • Payment increase

• Bonuses
• Promotion
• Development opportunities
• Participation in decision making
• Profit sharing

Customer versus shareholders • Better value proposition • Reduce expenses

• Better quality in minimum price • Increase profits

Public versus shareholders • CSR activities • Reduce expenses

• Increase profits

Government versus shareholders • Fair presentation of financial affairs • Reduce expenses

• Tax payments • Increase profits

There is need to manage conflicts among different interest groups

Management analyzes its stakeholders using a tool; Mandelow‟s Stakeholder‟s Mapping
Stakeholders‟ Analysis
Defined
• A process of finding out the key stakeholders relating to a project.

Process
• Process starts with identifying Keep Satisfied Manage Closely
• People influencing project • High power • High power
• Low Interest • High interest
• Level of influence
• Project supporters
• Non supporters of project
• Motivation and interest of stakeholders

POWER
– Financial interest Keep monitoring Keep Informed
– Emotional interest • Low power • Low power
• Low interest • High interest
– Looking for Power
• Level of interest
• People affected by project
• People who can‟t be considered as stakeholders

INTEREST
Tool for analysis
• Mandelow‟s Stakeholders‟ Mapping Tool
Potential benefits of strategic management
• Proactive rather than reactive approach
• Prepares for future challenges
• Better understanding of its own weakness and strengths
• Better and informed decision making
• Resource utilization according to need of the age
• Better understanding of competitor‟s strategic moves
• Makes business longevity sure
• Focus to gain and sustain competitive advantage for long run
• Remain in touch with customers‟ needs
• Fosters innovation
Limitations of strategic management
• Complex process
• Strong analytical skills
• Huge financial resources
• Time limitation
• Tough implementation
– No participation from employees end
– Structural and behavioral changes
• Stickiness to a plan is hurdle
• Pressure from major stakeholders may direct o choose wrong strategy
STRATEGY, STAKEHOLDERS AND MISSION
BUSINESS MANAGEMENT AND STRATEGY
CFAP-3 (ICAP)

Prepared and Delivered by

MUHAMMAD ADEEL
Instructor for CFAP-3
TSB Education, Karachi
Past Paper Analysis

Mission, Strategy and Stakeholders

Question Marks
85

33 30
18 15
9 9
5 2 1

Mission Strategy and Decision making Objectives Stakeholders

Strategic Planning
How examiner tested ?

Mission and Vision Strategy and Strategic Planning

1 Define vision and mission
2 Purpose of mission and vision statement
3 Ingredients of mission and vision statement
4 Approarch to develop mission statement
5 Draft mission statement
6 Examples of vision and mission
7 Drawbacks of copying mission statements
1 Define strategies
2 Types of strategies
3 Levels of strategies
4 Planning levels
5 Short term and long term strategies
6 Strategic Management (Complete Book)
7 Importance of strategic management
8 How strategy is implemented (Chapter 07)

Stakeholders Decision Making

1 Define stakeholders 1 Levels of decision making
2 List stakeholders 2 Decision making process
3 Innovative corporate strategies
3 Reasons of conflict among stakeholders
4 Analyze stakeholders
Objectives
1 Goals and objectives
2 Difference between goals and objectives
3 Reason of variances
4 Strategic objectives
Examiner‟s expectations
Chapter 1 Roadmap

• Strategic Management – Levels of strategy

– Define strategic management
– Rational model of strategic management
– Strategic planning model by JS&W
• Mission and Vision
– Define mission and vision
– Examples of mission and vision statements
– Difference between mission and vision statements
– Components of mission statements (Drafting mission statements)
– Analysis of company mission statements
– Why do companies prepare mission (Role of mission statement)
• Translation of mission into goals and objectives
– Define goals and objectives
– Example of goals and objectives
– Reasons of Variance
• Plans into Actions (Strategizing)
– Define strategy
– Types of strategies
• Stakeholders
– Define stakeholders
– List stakeholders
– Stakeholders‟ interests in company and conflict thereof
– Sources of powers of various stakeholders
– Tool to manage stakeholders
– Implications of stakeholder‟s mapping
• Benefits or importance of strategic management
• Limitations of strategic management
Strategic Management Process

Vision and Mission Chapter 1

Goals and Objectives Chapter 1

Environment Analysis Chapter 2-4, 16, 17

Strategy Formulation Chapter 6, 8-14, 18-20

Strategy Implementation Chapter 7, 15

Strategic Evaluation Chapter 14

Corporate target Chapter 5

Strategic Management (Rational Approach)
Defined
• It‟s an ongoing process. Its mainly concerned with deciding on strategy and managing how strategy is to be put
into action via strategic analysis, choices and implementation
(Johnson, Scholes and Wittington )

Steps in strategic management process 4. Strategy implementation:

1. Defining strategic intent a. Developing structures and systems
a. Establishing a vision b. Managing the behavioral and functional implementation`
b. Designing mission
c. Setting objectives
5. Strategic Evaluation and Control
2. Environmental Analysis
a. Performing evaluation
a. Economic environment analysis
b. Exercising control
b. Industry analysis
c. Recreating strategies
c. Internal environment analysis
3. Strategy Formulation
a. Considering strategies
b. Carrying out strategic analysis
c. Preparing a strategic plan
Strategic Planning Model by JS&W
Model by JS&W
• Components: Position Analysis, Strategic Choices and Strategy Implementation
• Only 3 elements or components of strategic planning
• One can begin Strategic planning from any point
• Elements are interdependence
• Pictorial diagram of JS&W model
Strategic Position Analysis (Element of Strategic Planning)

Analyzing strategic position means:

• Assessing external environment

1. Micro environment
2. Macro environment
• Evaluating organization‟s strategic capability
• Assessing organizational culture
• Assessing and analyzing stakeholders
Strategic Position Analysis (Element of Strategic Planning)
4 components of strategic position analysis are
• External environment
– Environmental variables
– Historical trends
– Present status
– Future expected changes
• Internal environment
– Resources
– Competencies
– Coordination among them
• Organizational culture
– Components (Values, beliefs and assumptions)
– Culture defines attitudes acceptable in organizational performance
– Culture defines structure
• Stakeholders
– Groups directly or indirectly connected
– Power and interest level
– Analysis (e.g. major stakeholder is risk averse and pressurizes management not to go for risk taking)
Strategic Choices (Element of Strategic Planning)

3 elements of strategic choices are

• Generation of strategic options

– Competitive strategies (cost leadership, differentiation and focus)
– Growth strategies (Product – Market Strategies by Ansoff)
– Institutional Strategies (strategic alliances: JVs, partnerships, mergers and acquisitions etc.)
– Strategic options at each level in organization (strategic, business, functional and operational levels)
• Evaluation and Selection of strategic options
– Using 3 criteria: SFA by JS&W
– Assessment criteria: Financial and non financial
– Examine in context of strategic analysis
Strategy Implementation (Element of Strategic Planning)

3 elements of strategy implementation are

• Organizational Structure
– Chain of command and communication
– Span of control and accountability structure
– Decision making (Centralization or decentralization)
– Control activities (Governance structure)
• Organization of Resources
– Resources (financial, Human, Technical, Information, Intangible)
– Resource planning (acquisition, disposal, hiring, firing, training, development etc.)
– Capacity building and utilization decisions
• Change management
– Continuous assessment of environment to assess need for change
– Avoidance from strategic drift
– Implementation of change strategy (incremental or transformational)
– Managing resistance to change
Vision
Defined
• Reason behind existence of an organization
• Reflects desired position a firm wants to achieve in future
– e.g. “Living in a world without Diabetes”
(International Diabetes Federation)
• Communicated by the leaders (BOD)
• Characteristics
– Future focused
– Simple and specific
– Clear and understandable
– Directional
– Relevant and purpose driven
– Unique and memorable
– Inspiring
Vision - Examples
Mission
Defined
• How does a firm realize its vision
• What an organization does to achieve its ultimate goal
• Describes the organization‟s basic function in society, in terms of the products and services it produces for its
customers
(Mintzberg)

Characteristics of a Good Mission Statement

• Should be Precise
• Clear enough
• Specific but open ended
• Realistic to state purpose of organization
• Longevity and usually not time bounded
• Distinctive in nature
• Should communicate something about company‟s strategies
Examples of Mission Statements
Components of mission statement
Components
1. Type of organization (commercial, NGO or non profit)
2. Operations
3. Customers
4. Products and services
5. Markets (basis and geographical area)
6. Technological orientation
7. Values and beliefs behind strategic decisions Our dream is a world free of poverty. To fight poverty with
passion and professionalism for lasting results. (6)
8. Concern for survival
9. Corporate social responsibility (social and environmental responsibility)
To help poor people (1, 2) help themselves and their
10. Concern for employees (e.g. how they are facilitated) environment (1), by providing resources, sharing
knowledge, building capacity and forging partnerships in
the public and private sectors.(4, 3)

To be an excellent institution able to attract, excite and

nurture diverse and committed staff with exceptional skills
who know how to listen and learn (8, 9)
Surgery of Mission Statements
Surgery of Mission Statements
Role of mission statement
Importance
• Details the vision
• Defines scope of business
• Guides to establish organizational culture
• Basis for strategic planning
• Guides strategic decision making
• Delivers attitude of company towards its employees
• An overview for stakeholders about its expected plans and goals;
• Encourages performance analysis
Difference between vision and mission

Vision Mission

• About • Describes ultimate goal of an organization • Describes how to achieve vision

• Reflects desired position in future • Purpose of existence of organization

• Time • Describes future state of an organization • Reflects what organization is currently doing
• Future focuses • Current status

• Answers • Answers the question “Why” • Answers the question “How”

• Change • Should remain intact even if the market • May change. But it should still tie back to its
changes dramatically core values (vision)

• Wordings • Motivational • Informational

 Translating mission into goals and objectives (Hypothetical Example)

Mission For everyone in Pakistan who needs hi-tech, cost effective and eco friendly plastic accessories
Strategic Goal To lead market with 90% market share within next 10 years (Strategic Goal)
SBU Target Required annual production after 10 years 1,500,000 Chairs (Tactical Objectives)
Current annual production 200,000 Chairs
Required average growth rate 22.3224% (calculated using geometric mean)
Year 1 2 3 4 5
Required annual production 244,645 299,255 366,056 447,768 547,721
Current annual production 200,000 Chairs

Departmental Objective Required production per quarter 61,161 Chairs

Current production per quarter 50,000 Chairs

Operational Target Required production per month 20,387 Chairs

Required production per day 680 Chairs
Current production per day 548 Chairs
Goals and objectives
Goals
• Aims of the entity to achieve
• Expressed in narrative terms
• These are broad intentions
• e.g. increase international customer base
• Normally long term in nature

Objectives
• Derived from the goals
• Ore specified than goals
• Usually quantified
• Time bounded usually medium to short term
• Narrower than objectives
• e.g. Acquire 28% more customers from UK and USA within next 6 months
Reasons of variance in budgets (set objectives)
Management perspectives
• Unrealistic goals
• Goals are not based on market research
• Lack of proper communication within organization
• No regular review
• Goals and targets don‟t inspire employees

Resource Limitations – Demotivated staff

• Financial Resources – Fluctuating wages
– Insufficient allocated funds • Material
– Misappropriation of financial resources – Not available
• Technical resources – Drastic changes in cost of material
– No required technical equipment
– Mismanagement of technical resources
• Human Resources
– Incompetent staff
– Labor not available
Plans into actions (strategizing)
Strategy defined
• A plan which determines
– How to Configure resources and competencies
– Achieve Competitive Advantage
(Michael Porter)

Levels of strategy
• Corporate Strategy
• Business Unit Strategy
• Functional Strategy
• Operational Strategy
Corporate Strategy
Defined
• Overall strategy of an organization.
• Strategy which defines
– Scope
• Businesses and product range
• Geographical area Manchester
USA
– Direction
• Invest or divest
• Increase investment through
– Organic growth
– External development
– Resource allocation among SBUs London

Scotland
Corporate Strategy (Examples)

1. AliBaba.com purchased Daraz.pk in Pakistan

2. HSBC operations in Pakistan merged with Meezan Bank

3. UCP‟s backward integration by opening Allied Schools

4. Allied Schools‟ expansion through Franchising

5. Warid Group merged in Jazz

6. Joint venture of HBL and Pakistan Post to start a new venture in Pakistan

7. Uber acquired Careem in Pakistan

8. Dawn Group‟s diversified investment (paper, electronic media, education sector)

Business Strategy (Examples)
Defined
• Focuses on competitive strategy of firm to decide
– Value proposition for target customers
– Firm‟s position in industry
• Cost leader or differentiator
– Formulated for specific strategic business unit

Strategies
• Porter‟s Generic Strategies
– Cost leadership strategies
– Differentiation strategies
– Focus strategies
• Bowman‟s Strategic Clock
– Refer chapter no. 5
Business Strategy (Examples)
• Differentiated electronic items by Apple Inc.
• Highly differentiated services cars by Rolls Royce for premium customers only
• Easy Jet Airlines ticket price of £5 for domestic flights in UK
• Virgin airlines in Australia following Hybrid Strategy
Functional Strategy
Defined
• Related to different functional areas in an SBU
• More detailed and specific than corporate and business strategies Customer Care
• Deals with
• Gain, retain and develop resources and competencies Finance
• Allocation of resources among different operations
• Coordination between functions
• Formulated by functional heads
• Aligned with business level objectives and strategies Production IT Function

Human Resource

Procurement
Strategy and management hierarchy

Management Level of Strategy Purpose of strategy

Corporate Head Corporate Strategy • Direction of organization

• Scope of organization

Business Unit Head Business Strategy • Competitive Strategies

• Coordinate managerial activities

Functional Heads Functional Strategies • Coordinate employee activities

• Responsible for producing goods
• Formulate departmental strategies
• Procurement strategies
Corporate • Production Planning
Head
• Sales and Marketing
• Customer Relationship plans
Business Head • Financial Strategy
• Investment and Portfolio Management
• HR strategies
• Research and Development
Functional Head
Types of strategies
Intended strategies
• Planned in advance
• Conscious decision of BODs
• Monitored continuously and altered according to environment
• Indicates strategic direction of organization

Emergent strategies
• New strategy which come up without formal planning
• Result of reaction to change
• Also called realized strategy
• Develops over time
• e.g. e-commerce during COVID-19 by different educational institutes to go online

Enforced strategies
• Management is forced to choose a specific strategy (e.g. Key stakeholder is insisting to choose a particular strategy)
• Everyone in industry is doing the same thing (e.g. Nokia adopted smart phones technology, Walmart to compete Amazon in USA)
• Management has no other choice of strategy
• Sign of weak management
Stakeholders
Defined
• An individuals, groups of individuals or external organizations that have an interest (a „stake‟) in what the entity
does or is trying to achieve.

Stakeholders
• Controlling shareholder and other classes of shareholders
• Bondholders and Lenders
• Suppliers
• Customers
• Directors and senior executive managers
• Employees
• Government (local or national government)
• Pressure groups (such as human rights groups, environment protection groups))
• General public.

Strategic concern
• Power and interest level of every stakeholder varies
• Can influence firm‟s strategic decisions
Stakeholders‟ Expectations
Equity holders • Regular dividends • Power to make decisions
• Capital appreciation • Fair presentation of financial affairs
• Business continuation
Management • More decision making power • Pay increase
• Development opportunities • Promotion
• Power to control resources (e.g. employees, data)
Employees • Fair reward system • Safe working conditions
• Development opportunities • Active disciplinary procedures
• Promotion • Business continuation
Customers • Fair pricing • Timely delivery
• Quality of product • Warranty and guarantee
Suppliers • Long term business relationship
• Timely payments
Lenders • True and fair presentation of financial affairs
• Timely payment of contractual payments
Government • Tax collection • Environment friendly
• Follow legislation • Participation in economic development
Public • Employment opportunities • Environmental friendly policies and operational
• Pollution ways
Stakeholder groups‟ influential sources
Equity holders Management
• Shareholding • Political involvement (nominee)
• Control over resources (e.g. project sponsor) • Skills (e.g. SAP)
• Knowledge (e.g. R&D related knowledge)
• Position in company (Nominee director)
Customers and Suppliers Community
• Refer to chapter 3 (bargaining power • Laws and regulations
of customers and suppliers) • NGOs (supporting society)
• Human rights & Child labor
• Women commission
• Environment protection
Employees
• Trade unions
• Skilled employees
• Knowledgeable employees
• HR dependent industry (non-tech)
• Laws and regulations
Government
• Position of entity in industry
• Importance of firm for economy
• Government policy for industry
• Laws and regulations
Conflicts among stakeholders (Examples)

Conflicting Parties 1st Group’s Interest 2nd Group’s Preference

Management versus employees • Cost efficiency • Payment increase

• Bonuses
• Promotion
• Development opportunities
• Participation in decision making
• Profit sharing

Customer versus shareholders • Better value proposition • Reduce expenses

• Better quality in minimum price • Increase profits

Public versus shareholders • CSR activities • Reduce expenses

• Increase profits

Government versus shareholders • Fair presentation of financial affairs • Reduce expenses

• Tax payments • Increase profits

There is need to manage conflicts among different interest groups

Management analyzes its stakeholders using a tool; Mandelow‟s Stakeholder‟s Mapping
Stakeholders‟ Analysis
Defined
• A process of finding out the key stakeholders relating to a project.

Process
• Process starts with identifying Keep Satisfied Manage Closely
• People influencing project • High power • High power
• Low Interest • High interest
• Level of influence
• Project supporters
• Non supporters of project
• Motivation and interest of stakeholders

POWER
– Financial interest Keep monitoring Keep Informed
– Emotional interest • Low power • Low power
• Low interest • High interest
– Looking for Power
• Level of interest
• People affected by project
• People who can‟t be considered as stakeholders

INTEREST
Tool for analysis
• Mandelow‟s Stakeholders‟ Mapping Tool
Potential benefits of strategic management
• Proactive rather than reactive approach
• Prepares for future challenges
• Better understanding of its own weakness and strengths
• Better and informed decision making
• Resource utilization according to need of the age
• Better understanding of competitor‟s strategic moves
• Makes business longevity sure
• Focus to gain and sustain competitive advantage for long run
• Remain in touch with customers‟ needs
• Fosters innovation
Limitations of strategic management
• Complex process
• Strong analytical skills
• Huge financial resources
• Time limitation
• Tough implementation
– No participation from employees end
– Structural and behavioral changes
• Stickiness to a plan is hurdle
• Pressure from major stakeholders may direct o choose wrong strategy
MACRO ENVIRONMENT ANALYSIS
BUSINESS MANAGEMENT AND STRATEGY
CFAP-3 (ICAP)

Prepared and Delivered by

MUHAMMAD ADEEL
Instructor for
CFAP-3 (ICAP), SBL (ACCA), SM-6 (ICMAP)
Environment Analysis
• means analyzing variable in environment affecting
1. all businesses in a country
• Factors called as macro-environment
• Analysis tool; (PESTLE and Porter’s Diamond Model)

2. businesses in a specific industry or market

• Factors called as micro-environment
• Analysis tool; (Porter’s Five Forces Model)

• Data is required & is collected for environmental analysis

• Sources of information
– Trade publications, newspapers, business publications, trade shows,
– public polls, academic research
– Suppliers and customers

• Boundary spanning positions can obtain great deal of this information

Macro Environment
• Composition of environmental dimensions in broader
society that influence business fraternity of a country or
an economy
• Environmental variable
1. Political segment
2. Economic segment
3. Social segment
4. Technological segment
5. Legal segment
6. Ecological segment

• Variables are interlinked especially political, economic,

legal and social segments

• Environment may be highly turbulent and complex

which makes interpreting environment tough
[Levels adapted from Johnson, Scholes and Whittington (2014)]
Steps in Environment Analysis
Environment analysis in four steps
1. Scanning identifying early signals of environmental changes and trends
2. Monitoring ongoing observations of environmental changes to infer meanings
3. Forecasting developing projections of anticipated outcomes, based on monitored changes
4. Assessing determining probability and impact of specific environmental variable on organization
Tool for Analysis: PESTLE
• A framework for analyzing macro-environment to find out
opportunities and threats therein
• Factors affecting ALL businesses
– Political Factors Impact of factors

– Economic
– Socio-cultural (demographics)
– Technology
– Environmental factors
• Affect level of Profit
Political Environment Analysis
Analyzing political system of a country from following perspectives

Dimensions to analyze political segment

1. Political System
2. Stability of Government
3. Government’s Policies
1. Public Policies
2. Business Policies
1. for Whole business community
2. for a Specific Industry
4. Govt.’s Foreign Policies
5. Bureaucracy and its role in Government
6. Nepotism in government set up
Impact of Govt. Stability on Business Community

* Predictable Future & * Near to Accuracy

Govt. Policies will be Cash Flows * Attraction for
Successful Strategic
Stable Government Stable and impact can Foreign & Local
Planning by Business (no uncertainty in
be foreseen Investors
Owners environment)

More Businesses ‘More Demand’

More businesses,
• More Jobs means Businesses Better financing
More Public Spending more Competition
• Better SOL flourish, more opportunity, lower
means more Demand and ultimately more
opportunities to production cost
• More Public ‘innovation’
invest
Spending

Public Spending and

Better pricing, public
Corporate Income * Cost of production Overall economic
* Govt. spends on at ease, National
means More revenue for business persons growth & Cycle
public infrastructure Competitive
collection and gets lower continues
Advantage
spending by govt..
Impact of Govt. Instability on Business Community

* Policy changes,
Changing * Future becomes * Strategic Planning –
Unstable government resultantly Strategic
Government Policies Unpredictable tough task
Actions – start failing

Demand & Supply

Outflow of Capital – Unemployment –
* Business Losses SOL falls Gap results in
starts starts increasing
Inflation

Business failure – No * Uncertainty results

* High production
attraction for Local in High financing cost Inflation Cycle continues
costs
and Foreign Investors (High Financial Risks)
Govt. Policies for whole Business Community
Government Policies
1. Regularization and/or de-regularization
2. Nationalization and/or Privatization of national assets
3. Localization and Internationalization

Government Actions regarding these Policies

1. Regulate the de-regulated businesses and vice versa (strict/relaxed business policies)
2. Nationalization private businesses and vice versa (strict/relaxed business policies)
3. Discourage internationalization and vice versa (strict/relaxed business policies)
Impact of Govt. Business Policies on Business Community
1. Impact of Stringent Business Policies (Business Threats)
 Reduce profit margins and
 Owner starts loosing interest
 Management starts evaluating another business opportunity (local or international)
 Business risks that need to be scanned, monitored, assessed e.g.
 Regulatory and Compliance Risk
 Reputation Risks etc.
 Manage identified and assessed risks (risk management strategies from chapters 16 and 17)

2. Impact of Relaxed Business Policies (Business Opportunities)

 Increase profit margins
 Interest of business person will develop and there will be more investment
 More investments in economy and hence improved GDP
 More employments and better standard of living
 Foreign proposals to invest in country
 Business opportunity that need to be scanned, monitored, assessed
 Plan to seize opportunity by expanding business operations (use Ansoff. Matrix with SAF criteria by JSW)
Govt. Policies for an Industry
Government may encourage or discourage investment in a
specific industry through

1. Regulation or de-regulation e.g.

• Import and export regulations for an industry
• Relaxing or tightening tax laws for an industry
• Subsidy provision to certain industries (sugar)
• Provision of capital at lower or higher cost
• Technocrats services for an industry
• Government grants for capital expenditures
• Reducing or Increasing administrative procedures business risk for sugar mills and opportunity for other
companies to invest in imports of sugar

2. Nationalization or Privatization
3. Localization or Internationalization
Impact of Govt. Policies regarding an Industry
1. Impact of Stringent Business Policies (Business Threats)
 Refer to slide number 10
 Associated Business Risks e.g.
 Regulatory Risks  A good operations manager should be fully aware of all new
 Compliance Risk policies and procedures and will be able to change easily to
adapt to new regulatory requirements
 Reputation Risk
 Administrative delays
 Sustainability Risk
 Revenue forecast and shortfall risk
 Product and Market Risks
 Financial Risk

2. Impact of Relaxed Policies (Business Opportunities)

 Refer to slide number 10 of this chapter
 Plan to seize business opportunity (after considering
Ansoff Matrix and SAF by JSW)
Government’s Foreign Relations
In foreign relations a govt. decides on:
 Bilateral Trade
 Business Investments
 Quotas
 Administrative procedures
 Trade restrictions (e.g. customs and tariffs)

 Foreign Govt.’s Investments in public infrastructure I

– (e.g. infrastructure and industry: energy, fertilizer,
education etc.)

 Scientific Knowledge and Technology Sharing

 Bilateral Support for Public

 Free Education
 Visit and Employment Visas

 Legal support (e.g. China in UNO)

Impact of Govt. Foreign Policies on Business Community
1. Favorable Relations with Foreign Countries
– Favorable terms to export and import
– Less pressure on foreign currency  A good operations manager should be fully aware
– Inflow of foreign reserves of all new policies and procedures and will be able
to change easily to adapt to new regulatory
• More exports requirements
• Foreign remittances

2. Unfavorable Terms with Foreign Countries

 International restrictions to trade with a country
 Tough bilateral trade arrangements between countries
 Tensions at national boundaries and govt. spending on
national security rather public infrastructure
 Associated Business Risks
 Regulatory and Compliance Risk
 Currency and Financial Risk
 Country and Political Risk
 Contract Risk
 Shipping Risk
Bureaucracy and its impact on Business Fraternity
• A point of interaction between public and government

Role of Bureaucracy
• Administration
• Policy development (in best interest of public)

Problems with Bureaucracy

• Misuse of power
• Bribery and Corruption
• Support political nepotism and favoritism
• Deliberate communication gap (between top and lower
machinery)

Impact on business (infrastructural risks)

• Miscommunication to decision makers
• Impede project development
• Delay legal processes
• Kickbacks in investment deals
Concerns regarding Political Environment
1. Stability of current government ?
2. Probability of change of government ?
3. Proposed structure of new government and its stability ?
4. Government intentions towards business and society ?
5. Government intentions towards specific industry or market ?
6. Government appreciates previous govt.’s contribution or will change ?
7. Govt. relations with other countries and fruits for Pakistan ?
8. Impact of changes in corporate policies on ?
a. Firm’s financial condition and performance
b. Financial affairs of firm’s strategic partners
c. Competitors, substitutes and complimentary product
d. Timeline to adjust with new government
9. Role and power of bureaucracy ?
Economic Environment
Analyzing economic variables of a country to come up with • Economic variables are closely linked with other
direction of economic growth environmental variables like government policies

Economic Indicators • In global economy, nations (economies) are connected

Economic indicators reflect direction of an economy. with one another, so firms must scan, monitor, forecast and
assess economic health of other relative nations
These are:
• Interest Rate
• Different industries tend to show different behavior towards
• Exchange Rate economic conditions e.g.
• Inflation Rate – Oil market is more volatile than gold market
• Employment Rate – Export (Textile) industry is subject to global conditions
• GDP and GNP than local textile market
• Balance of Payment
• Current Account
• Commodity Pricing (e.g. Gold, Silver, Crude Oil Prices)
• Stock Market Volatility`
Economic Variables and Business
For example
• Historically increasing inflation rate reflects continuous increase in prices in future
• Employment ratio is picture of living standard and demand potential of an economy
• Fluctuating interest rate shows instability in government and its negative impacts in business community
• Low currency with high imports means economy has poor GDP and hence low SOL and growth potential for foreign
investors

Economic Variables for Business Decisions

• Pricing decisions (e.g. should company opt for Price Penetration or not ?)
• Financing decisions (e.g. Should organization issue callable bonds or not ?)
• Investment decisions e.g.
– Which industry is showing better performance with current economic indicators ?
– To expand operations, which country has strong GDP ?
Impact of Weak Economic Indicators on Business
Associated Business Risks
• Interest rate risk
• Exchange rate risk
• Inflation rate risk
• Commodity pricing risk
• Financial risk
• Credit risk
• Market risk
• Demand risk
Strategic Concerns regarding Economic Position
1. Organization fits within current economic environment?
2. Risk Assessment
1. Probability of future changes in economic factors?
2. Impact of change in economic factors?
3. Company will adjust with future expected changes?
4. Growth opportunities in upcoming economic changes?
Socio-Cultural Environment Analysis
• Analyzing social environment dimensions:
1. Demographics of Community
2. Geographical distribution of people and
3. Society’s attitudes and cultural values of people

• How change in demographics and change in society’s

attitudes and cultural values affect business operations

• (Business operations can be understood from concept of

value chain)
Dimensions of Socio-Cultural Segment (explained)
1. Demographics refer to
– Population size
– Age structure
– Income distribution
– Gender and Race
– Religion
– Profession and education
2. Geographic distribution of people
3. Social and cultural values people (regarding):
– Duty, Responsibility and Accountability
– Authority, Power and Control
– Dignity and Diligence
– Diversity (Race, Gender, Religion etc.)
– Fairness and Honesty
– Humanity and Human Rights
– Money and Wealth
– Respect for others
– Justice
– Relationship
– Education and
– Profession (business or job)
• Values shape behavior and attitudes (that affect business)
• Some social attitudes can be observed as:
– Leading change
– Inspirational for others
– Thinking strategically
– Leaning from experience
– Creative and Innovative behavior
– Building relationships
– Believing in professionalism
Impact of socio-cultural environment on business
• Business Opportunity • Financial Risks (e.g. more retirement benefits)
– Increasing population size means growth potential for
co. products
– Company products for 70+ years old people when
majority of population is aged
– Target market segment (income based) is increasing
– and so on
• Business Threats
– People are relocating [this may negatively affect firm’s
reserves (high freight costs and operations relocation
costs)]
– People are getting more aware of health concerns so
more environmental issues for firm
– and vice versa of every point mentioned above
– Risks
• Regulatory and Compliance Risk
• Competitive Risk
• Product Risk
• HSE Risks (regarding consumers health)
Strategic Concerns regarding Socio-Cultural Environment
• Is population size of country stagnant, increasing or decreasing ?
• Population size reflects target market size and demand of country
• Age composition of target segment ? Youngsters and baby bloomers ?
• Income distribution of target market ? Middle class ? Poor ? Elite ? Which one is more than other ?
• Religion of majority of community in a country ?
• Do people value their religious beliefs ? How much people value their religion ?
• Prevailing education system of country ? Overall education level of people ?
• Education level improving or deteriorating ? Literacy rate in country ?
• How people see a profession ? Number of professions in country ?
• How professional qualification improves individual thinking ?
• Are people relocating from one place to another ? Relocation directions (metropolitan to nonmetropolitan areas) ?
• Social values of people in country ? Do they give importance to their moral values ? How do people shape their believes ?
• Organization fits within current social and behavioral trends ?
• Emerging trends ? Reason behind change thereof ?
• Determine impact of change (Risk Identification and Assessment) (refer to chapter 16) ?
• Decide on appropriate Strategic Risk Management action (refer to chapter 17)
Technological Environment
Analyzing technological segment covers scrutiny of
• Creation of new scientific knowledge
• Institutions to foster new scientific knowledge

New Knowledge
• Technology available for people and business community

Technological
Technology Institutions
Environment
Impact of Technology on Business
Information and communication technologies have revolutionized business environment
• Transformed business operations e.g.
– Inventory management with technology Just in time systems, MRP to ERP
– Supplier relationship has changed resource planning system integrated with supplier
– Technologically managed warehousing e.g. Amazon
– Artificially intelligent production systems robotics and production management systems
– Relationship with customer has changed e-orders, e-payments, e-CRMs
– Marketing efforts revolutionized e-marketing, e-branding etc.
– Effective internal control systems e.g. eye scanning, emotion scanning etc.
– Coordinated business activities sophisticated ERPs (e.g. SAP)
– Changes in management structures flatter and virtual organizations
• Data collection for effective decision making e.g. EDGAR (an IS)
• Technologically advanced R&D activities and product development latest instruments saving time & cost
• Emergence of electronics markets olx, eBay, Amazon, Pakwheels etc.
• Effective communication within organization
• Impressive coordination among business processes
Strategic Concerns regarding Technological Segment
• Current technology firm is using ?
• Current technological developments ?
• What level of technology our competitor is using ?
• Future expected developments in technology ?
• Competitor’s moves in response to technological advancements ?
• Cost to acquire upcoming technology and projected corporate financial reserves ?
• Do we need incremental or transformational change ?
• How technology is changing industry structure (refer to chapter 10 for detail) ?
• Response from current and potential customers for e-commerce ?
• Response from strategic suppliers for e-business operations ?
• Government strategic thinking regarding use of technology?
• Stakeholders’ inclination towards technology ?
• Risks associated with technology and their impact (risk management) ?
• Associated Risks
– Technology risk
– Competitive risk
– Product Quality and Brand risk
– Information Security Risk
– Regulatory and Compliance Risk
Legal Environment
Variables to analyze are
• Legal authorities and
• Independence of legal institutions
• Laws and Regulations applicable to
– General public and
– Business World
company thinking of global
investment keenly analyze legal
structure of host country
Laws and regulations
• Tax laws
– income tax, sales tax, excise and custom laws etc.
• Labor laws defining
– minimum wage rate, retirement age, pension plans,
redundancy laws, child labor
• Human Rights Laws
• Anti money laundering laws
• Corporate Laws and SEC Rules and Regulations
• Customer protection laws
• Competition Commission Laws
• Environmental laws
• Health and Safety Regulations
• Data Privacy and Confidentiality Laws
• International laws (FATF etc.)
• Quality regulations
Impacts of legal environment on business
Business Opportunity
• Easy and relaxed laws
• Rebates for all companies for some period
• Relaxation for an industry

Business Threats
• Laws and regulations may get strict in future
• Associated Business Risks
– Regulatory and Compliance Risk
– Governance Risk
– Competitive Risk
– Product Risk
– Reputation Risk
– Financial Risk
– Product Quality Risk
Strategic Concerns regarding Legal Environment
• Current laws and regulations prevailing in country ?
• Corporate governance structure of company and its compliance ?
• Future changes in legal matters (relaxation or becoming stringent) ?
• Will organization capable to respond expected changes ?
• Strategic moves of competitors ?
• Growth opportunities in future legal system ?
• Impact on cash flows (Risk Identification and Assessment) ?
Ecological Footprints of Business Operations
• Extraction and utilization of natural resources at faster depletion rate
• Pollution in air, water and other natural resources through wastage

Impact on business
• Regulatory risks
• Compliance risk
• Reputation risk
Strategic concerns regarding ecological environment
• Nature of business operations and their impacts on eco system
• Government initiatives and policies regarding environment (current and future) ?
• Legal complications and requirements ? (e.g. CSR, Integrated Reporting)
• How company remedies these effects ?
• Impact of violation in green policies ?
• Competitors’ strategic actions towards environment ?
• Human right commission ? Their power and level of interest
• Legal consequences for firms encouraging child labor
• Violation of basic human rights (e.g. health & safety, minimum wage, no training & development etc.
Reason for Environmental Analysis
• Environment is changing
• Analyzing strategic position
• Strategic fit
• Identify, assess and grab opportunities
• Identify, assess and manage (risks)
– Keep eyes on changing nature of risks
– Determining risk management strategy
PESTLE Analysis and Risks Management
1. PESTLE identified opportunities and threats for business
2. PESTLE - a tool for Risk Identification
3. After Risk Identification, go for Risk Assessment
1. Probability of Risk Realization
2. Impact if risk realizes
1. Quantitative Analysis (Expected Value Calculation)
2. Qualitative Analysis (Risk Heat Map)
4. Risk Planning and Strategies
1. Define Risk Management Responsibilities
2. Embed Risk Management in Culture
3. Embed Risk Management in Systems
4. Risk Strategies
1. In case of downside risks (TARA or SARA)
2. In case of upside risks (Ansoff Matrix)
5. Risk Monitoring
1. Risk Audit or Internal Audit
INDUSTRY (COMPETITIVE FORCES) ANALYSIS
BUSINESS MANAGEMENT AND STRATEGY
CFAP-3 (ICAP)

prepared and delivered by

MUHAMMAD ADEEL
instructor for
CFAP-3 (ICAP), SBL (ACCA), SM-6 (ICMAP)
Environment Analysis
• means analyzing variable in environment affecting
1. all businesses in a country
• Factors called as macro-environment
• Analysis tool; (PESTLE and Porter’s Diamond Model)

2. businesses in a specific industry or market

• Factors called as micro-environment
• Analysis tool; (Porter’s Five Forces Model)

• Data is required & is collected for environmental analysis

• Sources of information
– Trade publications, newspapers, business publications, trade shows,
– public polls, academic research
– Suppliers and customers

• Boundary spanning positions can obtain great deal of this information

Micro Environment
• Composition of variables that influence firms within an
industry

• Variables (dimensions) clustered in 5 groups called five

forces of competition

• Variables are interlinked together

• It may be highly turbulent and complex which makes

interpreting industry environment a tough task
Steps in Environment Analysis
Environment analysis in four steps
1. Scanning identifying early signals of environmental changes and trends
2. Monitoring ongoing observations of environmental changes to infer meanings
3. Forecasting developing projections of anticipated outcomes, based on monitored changes
4. Assessing determining timings, extent & importance of changes for firm’s strategies
Porter’s Five Forces Framework
• A framework for analyzing micro-environment to come up with opportunities and threats therein

• Factors affecting a firm as per framework are

1. Bargaining Power of Customer (Customer Analysis)
2. Bargaining Power of Supplier (Supplier Analysis)
3. Intensity of Rivalry among Competitors (Competitor Analysis)
4. Threat of New Entrant
5. Threat of Substitutes Products Factors Impact of factors

• Additional forces of competition are

– Industry Exit Barrier
– Complementary Products

• Affect Profitability of an organization

Bargaining Power of Customers
• A dimension to assess attractiveness of an industry (current potential and future prosperity)

• Following factors determine customer position with respect to an entity

o Number of customers (as compared to organizations serving them) Customers > Producers = Less b. power of C
o Customer’s switching cost (High or Low) higher switching cost = less b. power of C
o Customer’s preferences (Cost or Quality) price preference = high b. power of C
o Customer’s preference for brand (brand conscious customers) more brand loyalty = less b. power of C
o Customer information level (informed or not) informed = high b. power of C
o Volume of purchase by a single customer (high or Low) high sales per customer = high b. power of C

Result of Analysis
• More bargaining power of Customer Low Profitability Unappealing Industry Threat
• Less bargaining power of Customer Higher Margins Appealing Industry Opportunity
Bargaining Power of Suppliers
• A dimension to assess attractiveness of an industry (current potential and future prosperity)

• Following factors determine Supplier’s position

o Number of Suppliers (as compared to organizations buying them) Suppliers > Buyers = Less b. power of S
o Supplier’s switching cost (High or Low) higher switching cost = less b. power of S
o Switching cost of firm to change supplier higher switching cost = more b. power of S
o Supplier producing specialized products (as per customer requirements) yes ? More b. power of S
o Supplier’s product is an important part of your product ? yes ? More b. power of S
o Substitutes of supplier’s products are available ? yes ? Less b. power of S
o Volume of purchase from supplier by firm (high or Low) high purchase = less b. power of S

Result of Analysis
• More bargaining power of Supplier Low Profitability Unappealing Industry Threat
• Less bargaining power of Supplier Higher Margins Appealing Industry Opportunity
Rivalry among firms
• A dimension to assess attractiveness of an industry (current potential and future prosperity)

• Following factors determine rivalry among firms within an industry

o Number of firms (competing for same target market)
o Size of firms (competing for same target market)
o Target market growth rate and growth opportunities
o Intensity of exit barriers (tight exit barriers, fight for new customers to stay safe and alive)
o Production capacity (idle capacity, fight for new customers to reduce fixed cost per unit)
o Fixed cost (high fixed cost, more fight for new customers to reduce cost per unit)

Result of Analysis
• More Competition Low Profitability Unappealing Industry Threat (Risk)
• Less Competition Higher Margins Appealing Industry Opportunity
Threat from Substitute Products
• A dimension to assess attractiveness of an industry (current potential and future prosperity)

• Following factors determine threat from substitutes and firm’s position comparative to its product’s substitutes
o Availability of substitutes easily available = firm would be in bad position
o Price of substitutes comparative to firm’s products substitute price < product price, firm in bad position
o Quality of substitutes compared to firm’s product substitute quality > product quality, firm’s bad position
o Features of substitutes compared to firm’s product substitute > product, firm’s bad position
o Technological advancements of substitutes substitute > product, firm’s bad position
o Performance of substitute product substitute > product, firm’s bad position
o Customer’s preferences (brand or need ?) just to fulfill need = firm would be in bad position

Result of Analysis
• Higher threat from Substitutes Low Profitability Unappealing Industry Threat (Risk)
• Less threat from Substitutes Higher Margins Appealing Industry Opportunity
Threat of New Entrants
• A dimension to assess attractiveness of an industry (current potential and future prosperity)
• Following factors determine threat from new entrants (these are also termed as Entry Barriers)

Easy entrance to industry Strong entry barriers

Legislative requirements Relaxed Stringent

Political interferences Minimum High

Political stability (global investment) Stable and foreseeable Unstable and fluctuating

Political inclination towards business Business friendly, privatization Nationalization and strict policies

Availability of factors of production Cheap Expensive

Skilled labor and professionals Available if at reasonable price Difficult to retain

Technologically vibrant Stable Dynamic

Capital investment requirement Less High

Access to distribution channel Easy and cheap Difficult or expensive

Threat from New Entrants

Easy entrance to industry Strong entry barriers

Rivalry among competitors Less to moderate High and sometimes Cartels

Customer’s switching cost High Less

High ecological risks and government
Ecological risks & costs to cover threats Minimum or even zero
intervention
Time to make people brand conscious Less time (Nicher, Follower) High pay back period

Target market reaction towards substitutes Less concern (brand loyalty) High concern (Price + Quality conscious)

Result of Analysis
• Stringent entry barriers for new entrants Good Profitability Possibility Appealing Industry Threat
• Relaxed entry barriers for new entrants Low Profitability Possibility Unappealing Industry Opportunity
Industry Exit Barriers

Easy exit from industry Strong exit barriers

Redundancy costs Minimum or no Very high

Penalties to breach contracts No or Not very high Drastic results

Any other lucrative business opportunity Available Not available

Use of special equipment in another industry Possible Not possible

Scrap value of fixed investment Lucrative Very low

Reason for Industry Analysis
1. To evaluate current position of business relative to industry elements (strong or weak)
2. To predict future performance of organization and factors affecting (positively or negatively) business
3. To evaluate current and future industry structure
4. To assess performance in comparison with rival firms in industry
5. To make Investment decisions
1. Expand operations or not ?
2. Expand in which direction ?
3. Invest or divest at which time ?
6. To see industry life cycle and take appropriate measure
Outcomes of Industry Analysis
Opportunities (O)
Organizations will find some favorable conditions to grow
and expand its business operations. Successful Firms exploit
these opportunities using strengths to create and sustain
competitive advantage

Threats (T)
Analyst may find some unfavorable circumstances that may
hinder organizations to grow and expand its operations.
Successful organizations predict these situations before
hand and invest to manage identified and assessed risks to
maintain its competitive position
INTERNAL (STRATEGIC CAPABILITY) ANALYSIS
BUSINESS MANAGEMENT AND STRATEGY
CFAP-3 (ICAP)

prepared and delivered by

MUHAMMAD ADEEL
Instructor for
CFAP-3 (ICAP), SBL (ACCA), SM-6 (ICMAP)
Value Chain
• A series of activities each of which adds value to firm’s final
product, the total value added is the sum of the value
created by each stage within chain
(Michael Porter)

• Value chain grouped in two activities

1. Primary activities: directly related with
• Production of goods
• Product’s sales and marketing
• Product distribution
• After sales services
2. Secondary activities: providing assistance to primary
activities like
• Financial management
• Human resource management
• IT management
• Research and development
• Management
3. Coordination among activities
Value Chain
Secondary activities adding value
1. Firm’s infrastructure 3. Technology
– Organizational structure – Cost saving with updated technology
– Span of control – Continuous research activities
– Centralization or decentralization – Product designing
– Corporate code of ethics – Process improvement
– Financial reporting & management – Innovation
– Legal & administrative competencies – Quality improvement
– Strategic planning & control – Ch. 10 and 15
– Strategic performance measurement
– Ch. 1-8 and 18-20 4. Procurement
– Collaboration with suppliers (sourcing strategies)
2. Human resource management – Ch. 09
– Recruiting suitable staff
– Employees Training
– Staff appraisal system
– HSE arrangements
– Reward system
– Leadership style
– Ch. 11-13
Strategic implications of Value Chain Analysis
• A template to analyze implementation of business strategy
– Cost Leadership strategy Don’t miss impact of information and
• Identify the firm’s primary and support activities communication technologies (ICTs) on value
• Identify cost drivers for each activity
chain activities

• Identify links between activities

• Contribution of each activity in the product cost value creating activities are strengths of a
• Identify opportunities for reducing costs firm. similarly non-value creating or loss
– Differentiation strategy making activities are weakness of an
organization
• Identify dimensions of product, valued by customer
• Identify value creating activity within value chain
• Invest to maintain and develop those activities

• Configure and reconfigure activities to create value e.g.

– Amazon.com is reconfigured its outbound logistics
– Toyota took initiative to modernize its purchasing (JIT)
– Southwest Airlines investment in Social Capital
VRIO framework
Valuable
• Customers buy products for certain reasons, certain activities
are adding value to firm’s products or services strategy formulation and
implementation are also activities
• How much value a capability creates for customers
• Help to exploit opportunities from external environment
• Assist to neutralize threats from external environment
• For example
– firm’s competence to handle diverse businesses urge to
go for merger & acquisition these ultimately create
value for customer
VRIO framework
Rare or Unique
• How many firms posses this valuable capability or resource?
• Rare if few or no rival firm posses
• Reasons for rarity or uniqueness
– Nature of resource e.g. specialized resource like air route permission etc.
– Legal restrictions e.g. contracts, copyrights, trademarks etc.
– Heavy resources are required
– Substitute can’t replace capability or resource

firms need to identify and exploit reasons that make resources or capability rare for competitor
VRIO framework
Costly to imitate
• Rival firms can copy firm’s capabilities or resources ?
• If competitors can’t copy firm’s capabilities or resources (would be source of competitive advantage)
• If competitors can easily copy firm’s capabilities or resources (would not create competitive advantage)
• Reasons for difficulty to imitate
– Ambiguous relationship between firm’s capability and competitive advantage e.g. Southwest Airlines
– Firm’s capabilities are product of social complex social phenomena e.g. ideal cooperation among employees
– Unique historical condition

firms need to identify and exploit reasons that make imitation hard for competitor
VRIO framework
Organization
• To invest on and exploit resources and/or capabilities, firm has
– organized management systems,
– processes,
– structures and
– culture

firms need to support utilization potentials of valuable, rare and inimitable resources and capabilities
Strategic implications of VRIO framework
Results of value chain analysis
Strengths
Resources and competencies that are valuable, rare, hard-to-
copy and organized are strengths of a firm. It should invest to
uncover and develop its strengths not only to gain competitive
advantage but also to maintain it for long run

Weakness
Resources and competencies that are neither valuable nor rare,
easy-to-imitate and not supported by firm become threat for a
firm. These weaknesses prevent an organization to gain and
maintain competitive advantage. Firms should manage these
risks
Value Network
Value network defined
• Set of inter-organizational links within a supply chain that are
So many organizations are there in supply
necessary to create a product
chain. Conduct Value Chain Analysis of each
firm in supply chain, uncover and then jointly
invest on value creating activities
SWOT Analysis

• Learning organizational culture • Little or no research activities

W
S • Flexible structure of organization • Poor record of converting research into developments
E
T • Skilled and professional employees • High labor turnover A
R
• Satisfied and motivated staff • Weak financial reserves K
E
N
N • Latest and extensive research knowledge • Poor borrowing capacity
E
G
• Huge investment in advanced equipment • Increasing customer base can’t be managed S
T
• Copyrights, trademarks and brand • Fast technology obsolescence S
H
E
S • High profit margins (heavy financial resources) S

O • Stable government • Political instability in future

P
• Favorable policy announcement for your industry • Strict tax policy for your industry
P T
O • Positive developments in bureaucratic structure • New monetary policy going to restrict money supply H
R • Financing option at reasonable interest rates • Increasing rates of interests R
T E
• Easy and supported foreign trade in near future • Ecological threats of your economic activity
U A
N • Increasing customer base • Demand risk in future T
I • Stable economic indicators • Recent merger of two major competitors S
T
• Risk of stricter regulation of new products
Y
COMPETITIVE STRATEGIES
BUSINESS MANAGEMENT AND STRATEGY
CFAP-3 (ICAP)

prepared and delivered by

MUHAMMAD ADEEL
instructor for
CFAP-3 (ICAP), SBL (ACCA), SM-6 (ICMAP)
Environmental Variables and Strategy
Why need strategy
1. To grab opportunities from external environment
2. To encounter threats from external environment
3. To compete with competitive forces
4. To bridge gap between its strategic position and its mission
5. To achieve and sustain competitive advantage
Competitive Advantage
Ultimate goal of an organization

Definition
1. Advantage over competitors gained by …….
2. Offering consumers greater value; either …….
3. By means of lower prices or …….
4. Providing more benefits that justify higher prices

Basis
1. Offering lower prices
2. Offering product different from competitor
Competitive Strategies
Michael E. Porter
• Presented three competitive strategies
1. Cost Leadership,
2. Differentiation and
3. Focus Strategies

• Porter called these as Generic Strategies

• Firm chooses one of theses competitive strategies
• Competitive strategies are named Business Strategies

Point to Note
• Firm opt competitive strategy to increase its market share
• Effective choice is after SAF criteria by JSW
• Department’s strategy must coincide with business strategy
Cost Leadership Strategy
Definition
• Competitive strategy that seeks to achieve competitive
advantage on basis of cost
• Firm aims to become low cost producer in industry
• Firm offer prices lower than competitors
• Organizations increase sales volume to increase profits
• Firm adopt strategy for overall market
Cost Leadership Strategy
How firm can minimize its costs ?
• Procurement
– Favorable access to sources of supply
– Collaborative relationship with suppliers
– Suppliers closer to factory premises
– Backward integration option (SAF)
• Inventory Store
– Use of JIT system to keep inventory minimum
– Automated physical inventory management
• Production
– Latest production facilities
– Cost effective labor
– Exploiting learning curve effect of labor
– KAN BAN system for effective resources mobilization
– Economies of Scale
– Economies of Scope
– Less labor turnover
• Distribution
– Forward integration vs. outsourced (SAF)
– Supplier closer to factory premises
– Collaborations relations with suppliers (sourcing strategies)
– Synergy effect
– Better routes management
• Warehousing
– Owned (capacity management)
– Leased warehouse (SAF)
• Warehouse close to factory premises
• Minimum rent of warehouse (than competitor’s)
• Reasonable number of people on supervision
• Sales and Marketing
– Marketing efforts coinciding with business strategy
– Automated system to communicate with customers
– Effective data mining and analytics
Cost Leadership Strategy
How firm can minimize its costs ?
• Finance when cost leadership strategy is suitable ?
when firm can effectively minimize its costs
– Skilled professionals
– Proper segregation of duties to minimize losses
– Financing at reduced rates
– Capital on favorable terms
– Better financial management using technology

• Human Resource Management

– Effective recruitment and selection process
– Proper training and development to increase productivity
– Motivational staff
– Low labor turnover ratio
– Appropriate incentive schemes
– Suitable working environment
– Learning organizational culture
– Use of technology to manage human resources
Cost Leadership Strategy
Why Cost Leadership? When and Why not Cost Leadership (Risks)?
Arguments in favor of strategy Risks associated with strategy
1. Financial cuts on expenses hence sustainable business 1. Financial cuts in critical areas may be harmful
2. Low prices attract more customer s (Larger market share) 2. Detrimental to Innovation due to cut on R&D activities
3. Low costs so better profits 3. Concern for pricing may compromise quality
4. More profits, more retained earning for growth 4. Large sales volume is difficult to achieve
5. Becomes industry entry barrier for new comers 5. Supplier can easily imitate cost reduction technique
6. Reduces competition in market, enjoys more customer 6. Larger global rivals may enter the market and destroy firm’s
7. Reduces power of substitutes position
Differentiation Strategy
Definition
• Competitive strategy that seeks to develop unique offerings
with more benefits to customer than competitor’s product
Differentiation Strategy
How to differentiate
1. Brand positioning 4. Create complementary products

2. Product features
1. Price (charging premium price)
2. Appearance and Features
3. Quality and Reliability
4. After sale services

3. Exploit Value Chain Activities

1. Exclusive infrastructure & culture
2. Location of factory or outlets
3. Collaborating with suppliers
4. Technically advanced production system
5. The way products are advertised & promoted
6. Extensive distribution channel
7. Remarkable customer services
Differentiation Strategy
Arguments in favor of differentiation
• brand increases customer loyalty
• Increasing brand equity becomes easy
• Better profits (high margins)
• Positive and strong image of firm lets it expand
• Creates entry barriers for new comers
• Differentiators easily pass cost increase to customer
• Reduces bargaining power of customers and suppliers
• Reduces bargaining power of suppliers
• Differentiation reduces rivalry among firms
Limitations
1. Heavy financial resources are needed to invest in research
2. Needs strong professionals to innovate constantly
3. Increase in revenue is not guaranteed
4. customer preferences change (too short PLC)
5. Business partners may be incompetent
6. Differentiated on basis of technology, easy imitation
7. Performs badly in recession
8. Usually sales volume is lower
Focus (or niche) Strategy
Definition
• Within a broad market, firm may choose to cater one or
more segments and

• firm gets advantaged position using

1. Cost Leadership within segment
2. Differentiation within segment

• Limited scope of activities

• Not whole market, only a specific segment

Segmentation Basis
1. Demographic
2. Geographic
3. Psychographic
4. Behavioral
5. Multivariate
Focus (or niche) Strategy
When suitable ?
• Firm can’t deliver whole market (small organizations)
• Less product range
• With new product firm does not want take risk at large
• Organization wants to insulate itself from competition
• Untapped market segment
• Suitable for new start ups
Strategy Evaluation
Criteria to choose a strategy, by JS&W
1. S Suitable for firm to carry out strategy
2. A Acceptable to stakeholders
3. F Feasible for firm to go ahead
Suitability: Strategy Evaluation Criterion
• Suitability of strategic option will be assessed from External
Environment perspective

External Environment Dimensions

• PESTLE point of view
– Responses from government ?
– Would be supported by economic circumstances ?
– What may be reactions of society ?
– Subject to technological changes ?
– Legislative requirements and our strengths ?

• Industry Competitive Forces

– Competitor’s action ?
– Position with respect to suppliers and customers ?
– Threat from substitutes and new comers ?
Acceptability: Strategy Evaluation Criterion
• Acceptable to stakeholders or not ? 2. Return calculations
• Decided on basis of Risk and Return relationship a) Acceptability depends on stakeholders expectations for
• Expectations and attitude of stakeholders matter return
b) Return can be financial or non-financial
1. Risk factor c) Return is calculated through:
a) Acceptability depends upon stakeholders’ attitude I. Financial Retune (e.g. NPV or Accounting Return)
towards risk and their risk appetite II. Non-financial Return (Impact on KPIs)
b) Risk can be calculated through
I. Financial ratios e.g.  Stakeholders
Don’t forget
• Profitability ratios • Shareholders Stakeholders’ Mapping
• Liquidity Ratios • Management here

• Asset Management Ratios • Staff

II. Sensitivity Analysis (what if analysis) • Suppliers (Creditors)
III. Other statistical techniques • Customers and Distributors
• Government
• Financiers
• Community
• Pressure groups
Feasibility: Strategy Evaluation Criterion
• Organization has enough resources and competencies
• Resource Audit and Capability Profile answer the question
• Practically speaking, this means whether organization has
– Enough financial resources (e.g. to conduct R&D)
– Right number of staff
– Staff has appropriate skills level
– Technology supports management’s choice
– Suitable culture for strategy implementation
– Strategic fit
 GROWTH STRATEGIES
BUSINESS MANAGEMENT AND STRATEGY
CFAP-3 (ICAP)

prepared and delivered by

MUHAMMAD ADEEL
instructor for
CFAP-3 (ICAP), SBL (ACCA), SM-6 (ICMAP)
Environmental Variables and Strategy
Why need strategy
1. To grab opportunities from external environment
2. To encounter threats from external environment
3. To compete with competitive forces
4. To bridge gap between its strategic position and its mission
Growth Strategies
1. Market Penetration Strategy
2. Market Development Strategy
3. Product Development Strategy
4. Diversification
Methods of Growth (Practical Options to Grow)
1. Organic Growth or Internal Development
2. Inorganic Growth
A. Licensing and Franchising
B. Strategic Alliances
C. Diversification
a) Conglomerations (unrelated diversification)
b) Integration (Related Diversification)
1. Horizontal Integration
2. Vertical Integration
1. Forward Integration
2. Backward Integration
Market Penetration Strategy
What is this ?
 Penetrating in existing market with existing products
 Selling existing products to existing market (segments)
 Aims to increase market share for present products
 Firms endeavor to drive competitors out of market
 Also named as ‘Protect and Build’ strategy

Example
• KFC started 900 branches in China in 2009
• Starbucks Coffee (exploring global market)

Methods to penetrate in market

1. Marketing efforts
2. Opening outlets or branch offices
3. Licensing and franchising
4. Business combinations
Market Penetration Strategy
How ? When Suitable ?
Increase use of company products 1. Required financial resources are available
1. Extensive advertisements 2. Management has capability to manage large business
2. Increase number of salespersons 3. Current market - unsaturated
3. Increase sales promotions activities 4. Competitors - declining but overall industry is growing
4. Increasing distribution channels 5. Positive correlation between sales and advertisement
5. Adjusting product price 6. Product usage can be increased significantly
6. Product is made more effective & innovative 7. Excess production capacity can be exploited effectively
8. Strategy is acceptable to stakeholders
9. Macro-environmental variables seems favorable
Market Development Strategy
What is this ?
 New market is developed for firm’s existing products
 Firm targets customers from another market segment
 Firm sells existing products
 Product is slightly modified to attract new market segment

Examples
 Honda Civic variants (Prosmatic, Manual, Oriel, 1.5, 1.8 etc.)
 PSO exporting oil to Afghanistan
 Sunsilk introducing Hijab Refresh
Market Development Strategy
When Suitable ?
1. Required financial resources are available
2. Management is able to handle large business
3. Firm is successful at what it does
4. Current market is maturing but overall Industry is growing
5. Untapped markets exist
6. Strategy is acceptable to stakeholders
7. Macro-environmental variables seems favorable
Product Development Strategy
What is this ?
 Strategy seeks to increase sale by significantly modifying product
 Market remains in existing market (segment)
 Risky Strategy

Example
 Honda Civic’s journey from 1972 – 2020
 iPhone 4 to 12
Product Development Strategy
When Suitable ?
1. Required financial resources are available
2. Management can handle large business
3. Organization is in industry characterized by rapid technological development
4. History of successful products (positive brand image)
5. When firm is well aware of its customers’ needs and can exploit them
6. Current product market - mature
7. Firm has strong R&D capabilities
8. Strategy is acceptable to stakeholders
9. Macro-environment variables seem favorable
Diversification Strategy
What is this ?
 Strategy involves selling new products in new markets
 Investment of company may be in
 Related Business Value Chain (related or concentric diversification)
 Unrelated Business Value Chain (unrelated diversification or conglomeration)

Example
1. Honda (Cars, Bikes, Generators and Airplanes)
2. 3M (Consumer Products, Healthcare, Industrial products, Electrical and Electronics)
3. Gourmet (Confectionary, Restaurants, Catering, Marriage Halls)
Diversification Strategy
When Suitable ?
1. Required financial resources are available
2. Management is capable to manage diverse business (corporate parenting skills)
3. Firm can exploit and benefit from ‘Economies of Scope’
4. Strategy is acceptable to stakeholders
5. Macro-environment variables seem favorable
Related Diversification Strategy
Horizontal Integration is suitable :
 Required financial resources are available
 Management is capable to manage diverse business
 Flattering companies related to industry
 Organization is in growing industry
 Strategy is acceptable to stakeholders
 Macro-environment variables seem favorable Related Diversification (Definition)
 Corporate development beyond current products and
 Also termed as Business Integration Strategy markets, but within current capabilities of the entity
 Business expands its activities into product lines that are
similar to those it currently offers
 Organization can grow either horizontally or vertically
Related Diversification Strategy
Vertical Integration is suitable :
 Current distributors are unreliable
 Current distributors are expensive
 Current suppliers are unreliable
 Current suppliers are charging higher prices
 Overall industry is growing
 Entity has financial resources
 Management is capable to manage diverse business
 Strategy is acceptable to stakeholders
 Macro-environment variables seem favorable

 Also termed as Business Integration Strategy

Unrelated Diversification Strategy
What is this ?
Development of products beyond the current capabilities and
value network. Also is termed as Conglomeration

Example
1. 3M
2. Dunya News Group
3. Nishat Group

When Suitable ?
1. Currently firm is in highly competitive market
2. Untapped new market opportunity
3. New product-market has counter cyclical sales pattern
4. Entity has financial resources
5. Management is capable to manage diverse business
6. Strategy is acceptable to stakeholders
7. Macro-environment variables seem favorable
Product-Market Growth Strategies (Ansoff Matrix)
• Ansoff summarized growth strategies with a 2 x 2 matrix
• Presented this matrix in 1957
• Matrix is termed as
– ‘Ansoff’s Growth Vector Matrix’ or
– ‘Product Mission Matrix’
Withdrawal Strategy
What is this ?
Strategy for withdrawing from a specific product-market area

When Suitable ?
1. Firm can’t compete
2. Firm can face industry exit barriers
3. Overall industry is declining
4. Strategy is acceptable to stakeholders
5. Management in intended to explore other product-market area

How ?
1. Firm reduces its product range
2. Reduces number of markets or market segments
3. No longer operates
Consolidation and Corrective Strategies
Consolidation Strategy
• Strategy for maintaining market share
• Entity doesn’t increase its market share

Consolidation Strategy - when Suitable ?

1. Firm can’t compete at larger scale
2. Management is not able to manage large business
3. Overall industry is declining
4. Strategy is acceptable to stakeholders
5. Organization is lack of financial resources

Corrective Strategy
• Strategy for making corrections and adjustments to current strategy
Organic Growth
What is this ?
• Organization utilizes its own resources to expand operations
• Firm increases branch network or establish its production unit

When and Why

1. Better control over resources
2. Ability to maintain corporate culture
3. Less risky strategy and easy to manage
4. Usually financed using retained earnings so less risk
5. Firms can benefit from economies of scale
6. Firms can benefit from economies of scope
7. Employees morale build over the period
8. Strategy is supported by stakeholders
9. Firm has enough financial resources to invest

Limitations ?
1. Slow in speed and can take a long time to grow
2. Competitor’s action may be fast and can grab opportunity
3. Growth demands change in style, which may be miscalculated
Joint Venture
What ?
• Business arrangement where two or more parties agree to
pool their resources to accomplish a specific task.
• JV appears a separate legal entity.

Examples:
• BMW and Toyota co-operate on research into hydrogen fuel
cells, vehicle electrification and ultra- lightweight materials
• Google and NASA developing Google Earth
• Virgin Rail – a joint venture of Virgin Group and Stage Coach
Joint Venture
Why
1. Risk sharing (Financial, Market, Technological etc.)
2. Costs sharing (e.g. R&D, Advertisement costs etc.)
3. Opportunity to grab synergy effects (strengths of partners)
4. Access to key technical know how
5. Industrial relations and networks

When
1. Firm has enough financial resources to invest in new venture
2. Management has capability to handle jointly managed venture
3. Strategy is supported by stakeholders
4. Macro-environmental seems favorable

Limitations ?
1. Requires strong coordination between parties to stake
2. Potential for conflicts among partners
3. Risk of imbalance of expertise, assets, and investment
4. Hard to exit joint venture
5. Unreliable partners
Mergers and Acquisitions
What ?
• Two entities of similar size amalgamate with each other and
come up with single entity (Merger)
• One entity is normally larger than other entity and acquires
ownership of smaller entity (Acquisition)

Examples:
• Mergers (GSK, P&G Gillette (Mergers)
• Acquisitions
– Mobilink acquired Warid Telecom
Motives behind Merger and Acquisition
– Meezan Bank acquired HSBC Pakistan
• To enter in new market
– M&P purchased OCS
• Increased market share
• Economies of scale (in result of more market share)
• Economies of scope (in result of more market share)
• Diversification results in new knowledge and expertise
• Allows greater investment in R&D (as of Higher Profits)
Outsourcing
What ?
• Outsourcing is the business practice of hiring a party
outside a company to perform services and create goods
that traditionally were performed in-house by the
company's own employees and staff.
Outsourcing
Motives behind Outsourcing
• Access to skilled expertise
• Things get done quickly
• Firm can focus on its core competencies
• Risk sharing
• Cost cutting (e.g. Operational and Recruitment Costs)
• Increase customer satisfaction

Arguments against Outsourcing

• Risk of exposing confidential data
• Vendor may not have time to service your firm properly
• Quality issues if offshore outsourced
• Dependency may rise if important functions outsources
• Tie to financial well being of outsourcing company
• Negative impact on employee morale
Strategy Evaluation
Criteria to choose a strategy, by JS&W
1. S Suitable for firm to carry out strategy
2. A Acceptable to stakeholders
3. F Feasible for firm to go ahead
Suitability: Strategy Evaluation Criterion
• Suitability of strategic option will be assessed from 2 2. Cultural Fit
perspectives – Whether organization needs to change ?
1. External Environment – Incremental or transformational change ?
2. Cultural Fit – Reactions to change from stakeholders ?

1. External Environment Dimensions

– PESTLE point of view
• Responses from government ?
• Would be supported by economic circumstances ?
• What may be reactions of society ?
• Subject to technological changes ?
• Legislative requirements and our strengths ?

– Industry Competitive Forces

• Competitor’s action ?
• Position with respect to suppliers and customers ?
• Threat from substitutes and new comers ?
Acceptability: Strategy Evaluation Criterion
• Acceptable to stakeholders or not ? 2. Return calculations
• Decided on basis of Risk and Return relationship a) Acceptability depends on stakeholders expectations for
• Expectations and attitude of stakeholders matter return
b) Return can be financial or non-financial
1. Risk factor c) Return is calculated through:
a) Acceptability depends upon stakeholders’ attitude I. Financial Retune (e.g. NPV or Accounting Return)
towards risk and their risk appetite II. Non-financial Return (Impact on KPIs)
b) Risk can be calculated through
I. Financial ratios e.g.  Stakeholders
Don’t forget
• Profitability ratios • Shareholders Stakeholders’ Mapping
• Liquidity Ratios • Management here

• Asset Management Ratios • Staff

II. Sensitivity Analysis (what if analysis) • Suppliers (Creditors)
III. Other statistical techniques • Customers and Distributors
• Government
• Financiers
• Community
• Pressure groups
Feasibility: Strategy Evaluation Criterion
• Organization has enough resources and competencies
• Resource Audit and Capability Profile answer the question
• Practically speaking, this means whether organization has
– Enough financial resources (e.g. to conduct R&D)
– Right number of staff
– Staff has appropriate skills level
– Technology supports management’s choice
– Suitable culture for strategy implementation
STRATEGY IMPLEMENTATION
BUSINESS MANAGEMENT AND STRATEGY
CFAP-3 (ICAP)

prepared and delivered by

MUHAMMAD ADEEL
instructor for
CFAP-3 (ICAP), SBL (ACCA), SM-6 (ICMAP)
TSB Education, Karachi
Chapter Learning Points
• Types of organization structures
• Span of control
• Decision making styles
• Appropriate organizational structure
1. Contingency Theory
2. Burns and Stalker organizational structure
3. Mintzberg contribution
• Strategy implementation and organization structure
Types of Organization Structure
• Common types of organizational structure are
1. Entrepreneurial structure
2. Functional Structure
3. Division Structure
4. Matrix Organization

• May be several different types of structure within single

entity
Entrepreneurial Organization
Suitability
• Early phase of life
• Entity size is small
• Operations and processes are simple
• Owner can handle all business operations
• Proprietor can take decisions
• Usually no delegation of authority

• Changes: as entity grows

Functional Organization Structure
Suitability
• Entity is in development phase
• Entity size is increasing
• Operations and processes are becoming complex
• Owner can’t handle all operations and take decisions

Functional Organization
• Departmentalization
• Delegation of responsibilities
• Distribution of authorities in formal arrangements
• Accountability
• Each function has its own management structure

• Changes: as entity grows

Divisional Organization Structure
Suitability
• Entity is invested in different product-market
• Entity size is increasing
• Operations and processes are becoming complex
• Owner can’t handle all operations and take decisions

Divisional Organization
• Division might be a SBU of entity
• Each division has its own functional structure
• Corporate parent retains overall control
• Corporate parent takes strategic decisions
• Authority is delegated to divisional management
• Corporate parent provides strategic support
Matrix Organization Structure
• Matrix rather traditional hierarchy
• Dual command structure
• Cross fertilization of ideas
• Cost effective
• Conflict of interest
• Ambiguous
• Accountability issues
Organization Structure
• A visual representation of how certain business activities
are arranged and directed to achieve organizational goals

• Structure determines how information will flow within

entity

• Its an aspect of strategy implementation

Spinal Cord of Organization: Span of Control
Definition
• Number of people who directly report to a manager in an
hierarchical management command structure
• Two extreme shapes
1. Tall-narrow shape
2. Wide-flat shape
Tall-Narrow Span of Control
Tall-Narrow Organization Structure
• Small number of people directly report
• Personal contact with employees
• Close supervision
• Many layers of management
• Vertical communication is slow
• Slower to respond change
Wide-Flat Organization Structure
• Large number of people directly report
• Less personal contact between management and employees
• Team work and cooperation is focused
• Small number of management layers
• Rapid vertical communication and decision making
• Flexible to respond change
• Reduced bureaucracy
Decision making styles
• Strategy is translated into actions
why study decision
making styles
• Actions are implemented

• Implementation needs:
– Coordination of people within entity (internal relationships)
– Coordination with people outside entity (external relationships; outsourcing)

• Coordination of activities within entity can directed in 2 ways

– Centralized decision making
– Decentralized decision making
Decision making styles
Centralization
• Senior management retains right to take most of all
important decisions

Decentralization
• Dissemination of powers by the top management to the
middle or low-level management

• Delegation of authority, at all the levels of management

Choice of decision making style

• Preferences of senior management
• Complexity of business operations
• Size of organization
Advantages and disadvantages of centralization
Advantages Disadvantages

1. Better informed decisions 1. Incompetent management may take wrong decision

2. It will be clear that who is to be reported 2. Inappropriate decision in case management doesn’t have
direct connection with issues or customer
3. Better coordination of activities
3. Low motivation in employees
4. Quick implementation of decision
4. Discourage initiatives
5. Uniformity in decisions
5. Overburdened top management
6. Vision will focused while taking decisions
6. So many pending work because of delayed decision making
7. In crisis, centralized decisions are suited

8. Better control over resources

9. Maintains confidentiality in better way

Advantages and disadvantages of decentralization
Advantages Disadvantages

1. Better able to respond local needs 1. Biased decision making

2. Quick decision making according to circumstances 2. Harder to ensure consistent practices at each location
3. Improves staff motivation and retention 3. Strategic goals may be compromised

4. Encourages initiatives 4. In crisis, decentralized decisions is not suitable

5. Management will concentrate on strategic matters 5. Confidentiality may be compromised

6. No pending tasks due to instant delegation of authority 6. Higher training needs like team management,
communication skills etc. so more expenses

7. Fight for power (office politics)

Appropriate organization structure
Contingency Theory
• Circumstances decide

• Depends on
– Environment (stable or dynamic)
– Geographical dispersion
– Qualification and ability of managers
– Ability and efficiency of employees
– Nature of operations
– Degree of centralization
– Communication channel

• Organizational Structures as per Contingency Theory

– Burns and Stalker: Mechanistic & Organic Organizations
– Mintzberg Five Building Blocks
Mechanistic and Organic Organizations
Mechanistic Organization
• Well defined hierarchy
• Departmentalization
• High formalized culture
• Centralization and Power is function of position
• Vertical communication is in practice
• Specialization is focused mechanistic structure
• Suitable for stable environment or where change is gradual
Mechanistic and Organic Organizations
Organic Organization
• Decentralization and power is function of knowledge
• Less formalization
• Problem solving is encouraged
• Free flow of information; more horizontal communication
• Wide span of control
• Unspecialized jobs, change according to situation
• Suitable for dynamic environment
organic structure
Mintzberg Contribution
• The way an entity’s activities are organized depend on five
building blocks
1. Strategic Apex
2. Middle Line
3. Operating Core
4. Supporting Staff
5. Technical Support Staff

• Dominant block will determine structure of organization Administrative

Technical
Support Staff Support Staff

• Henry Mintzberg identified 6 different configurations

1. Simple Structure
2. Machine bureaucracy
3. Professional bureaucracy
4. Divisional form
5. Adhocracy
6. Missionary organization
Building Blocks for Organizational Configurations

Building Blocks

Strategic Apex Top Management of an organization

Operating Core Operational Staff of an entity. These people perform actual tasks

Middle Line Management between strategic apex and operating core

Supporting Staff Administrative staff providing support services like IT staff, cleaning staff, secretarial staff etc.

These are responsible to standardize operations. These are equal to middle management but
Technical Support Staff
don’t have responsibilities like middle management. Set policies and procedures
Henry Mintzberg Organizational Contribution
Organizational Business Internal
Dominant Element
Configurations Environment Environment

Small Entity Simple

Simple Structure Simple but dynamic Strategic Apex
Tasks

Standardization of
Mechanistic Structure Simple static Techno structure
processes

Professional Standardization of Skills

Complex but static Operating Core
Bureaucracy

Divisionalised Form Diverse Activities Large, well established Middle Line

activities Management

Adhocracy (innovative Complex and Dynamic Project based teams Operating Core
environment)

Ideology based
Missionary Simple and static Strategic Apex
Standardization of norms
organization
Strategy Implementation
 IT STRATEGY
BUSINESS MANAGEMENT AND STRATEGY
CFAP-3 (ICAP)

prepared and delivered by

MUHAMMAD ADEEL
instructor for
CFAP-3 (ICAP), SBL (ACCA), SM-6 (ICMAP)
TSB Education, Karachi
Chapter Contents
1. e-business
2. e-procurement
3. inventory management and technology
4. production management with technology
5. e-marketing
6. e-branding
7. e-commerce
8. e-CRM
9. management information system
10. overall impact of technology on
1. business operations
2. industry
11. IT strategy
e-business
Defined
• Type of business where Intra and inter firm activities are
conducted over computer mediated network
• Normally termed as “automated business processes”

Activities in business
• Procurement, inventory and production management
• Warehousing
• Sales and marketing
• Human resource management
• Financial management
• Research and development
• Decision making
e-procurement
Defined
• Procurement process is performed using computer mediated network
• Any stage in procurement process may be supported through electronic means

• Three areas where IS or IT implementation can improve supply chain performance

– e-souring
• refers to use of electronic means to find out new potential suppliers

– e-purchasing
• Process of making purchase orders electronically.
• Process involves
– Call for quotations
– receiving quotations from suppliers
– placing purchase order

– e-payment
• Refers to use of electronic methods for payment. Process involves electronic invoicing and EFT
Benefits of e-procurement
• Cost efficiency
• Saves time of both firm and supplier
• Saves money that can be invested in other business opportunities
• Global suppliers can be approached benefit of e-sourcing
• More than one suppliers can be managed efficiently benefit of e-sourcing
• 24/7 accessibility
• Almost zero ordering cost benefit of e-purchasing
• Inventory system can be linked with supplier’s system benefit of e-purchasing
• Ability to track firm’s order
• Access to more information by firm about supplier and its inventory
• Better inventory management
• Funds can instantly been transferred to supplier benefits of e-payment
Inventory Management with Technology
JIT Production System - defined
• A production system which is driven by the demand for
finished goods. Each component on production line is
produced only when needed for the next stage
(CIMA)

JIT Purchase System - defined

• A purchase system in which purchases are contracted so
that receipt and usage of material coincide
(CIMA)

Terms used
• Just in time (JIT)
• Stockless production
• Fast throughput manufacturing
Pros and Cons of JIT System
Advantages
1. No excess inventory Purchases only on demand from production
2. Minimum inventory holding costs Lower COGS, better profits, healthy EPS
3. Quality material from supplier to avoid quality related production stoppage
4. Fast delivery of raw material – time saving Collaborative relationships
5. Reduced transportation (within factory) Factory layout is designed so to save time costs
6. Movements of people (within factory) Factory layout is designed so to save time costs
7. No over production Production as per demand only)
8. Managed and less cost of production per unit No quality hacks, wastage, scraps

Disadvantages
1. Some times hard to predict customer demand
2. System may fail to cater sudden increase in demand volume Loss of customer, negative business image
3. JIT system fails in case of weak organizational planning system
4. Supply interruptions - production delays – bad image JIT depends on coordination of all parties in S chain
5. Risk of running out of stock
Production Management System
Material Requirement Planning I
• Computer program (software)
• Schedules production in complex manufacturing
• Not only quantity but mentions time frame of production and purchase activities
• Prepares plans for purchase orders according to production requirements
• Reports prepared in MRP I
– Master production schedule (Order received + Estimation of future orders)
– Bill of Material (components + parts + material required for finished product)

Manufacturing Resource Planning II

• Extension of MRP I
• Production scheduling is central feature of MRP II
• Additional planning modules in MRP II
– Financial requirements planning
– Labor scheduling
– Equipment utilization scheduling
• Serve as planning and monitoring tool
• Coordination of above mentioned organizational activitiee
Production Management System
Optimized Production Technology (OPT)
• Approach to production planning and capacity management
• Based on Theory of Constraints
– Production is subject to certain limitations
– Production can be optimized by focusing on constraints
– One constraint is removed, another becomes the key one
– Management needs to continuously identify and remove these constraints
• OPT schedules production – optimize output – keeping limitations into account

Enterprise Resource Planning (ERP)

• Extension of MRP II
• Functions similar to MRP II but with additional features
• Integrates data from all operations within organization
• Focus is to improve coordination and planning among organizational activities
• Coordinate data from
– Purchase, manufacturing, finance & accounting
– Human resources, strategic reporting
– Sales and marketing, logistics, customer relationships
e-marketing
e-marketing defined
• Marketing using information and communication why study e-marketing
technology Internet development has put
significant impact on marketing efforts
• Communication technology: mobile phone, telephone, of a company. Companies should
e-mails, sound based and other video based technologies recognize this when developing
marketing strategies
e-marketing strategy
• 7Ps of marketing mix apply to e-marketing as well
• e-marketing strategy
– Combination of 7Ps of traditional marketing, and
– 6Is of e-marketing mix
• Interactivity
• Intelligence
• Individualism
• Integration
• Industry structure
• Independence of location
Product (element of e-marketing mix)
With internet,
• Firm can easily, cost effectively and widely target its intended customers
• Customers can order for customized products e.g. Nike.com
• No sales person interruptions or biasness to exploit product features
• Customers can directly give feedback about product
• Generally a product life cycle has reduced due to frequently changing customer preferences

A plan that describes

• Target customer (Market Needs)
• Firm’s target benefits over product life (Corporate Goals)
• How firm would exploit its product to achieve its target (Features and Innovation)
Price (element of e-marketing mix)
With internet,
• Price transparency for customers has increased
• Low industry entry barrier put negative pressures in product pricing
• Reduced operating and fixed costs on online businesses made pricing more stringent
• Competitive products’ prices can easily be checked
• Dynamic pricing (like in online bidding) depending on demand
Place (element of e-marketing mix)
• There is reduced the need for physical stores
• Easy access global market to show off product e.g. AliBaba working in Pakistan
• Products are 24/7 available
• Number of online options to buy from e.g. Amazon, AliBaba, eBay, Daraz etc.
• Product website can be localized easily taking socio-cultural impacts into account
• Supplier can use various cost effective websites to place its products
Promotion (element of e-marketing mix)
• Less interaction among salesperson and customer
• Buyer and seller may interact directly without intermediary e.g. PIA ticket booking system without ticket agents
• Effective data mining can help designing personalized marketing campaign
• Website is easy and cost effective way to deliver complete information about a product
• Its easy to deliver detailed information about augmented level of a product
• Product can be compared with competitor’s offerings and convinced easily
• No personal biasness
• Email can be used to develop personal relations
• Whatsapp and Youtube channel can be used to deliver press release to target audience
People and Physical Evidence (element of e-marketing mix)
People
ICTs have replaced human being with technological products
• Auto responders
• Automated email notifications e.g. to keep people updated about their orders
• Call back facility
• Frequently Asked Questions
• On-site search engine

Physical Evidence
• Customer’s experience of the company through
– Website
• Ease of use
• Navigation
• Availability
• Response to enquiries
– Support services
Traditional Media vs. Internet

Traditional Media Internet

Cost Expensive Cheap & virtually unlimited

Information Product image is focused Contents of product are highlighted

Communication One way Interactive

Strategy Push Pull

Customer persuasion Incentive Information about product

Push and Pull Strategy
Push Strategy
• Organization tries to persuade its customers to buy
• Firm invests on promotional activities to create demand
– Company showrooms
– Negotiation with retailers to sell product
– Negotiation with retailers to set up point of sale
display

Pull Strategy
• Idea behind strategy is to pull a customer towards product
• Organization invests on building brand loyalty
• Common tactics include
– Mass media promotions
– Words of mouth referrals
Designing Website
Strongly designed company website should have these characteristics
• easy navigation Exam Focused Point
• should deliver complete information about company and its products Examiner may ask you to identify
weakly designed website
• marketing information should be consistent with traditional marketing efforts Weakly designed website does not
• should be attractive have all of these features
• ability to enlarge pictures on webpage
• should give opportunity to customer to interact with company
• should be up to date
• must be minimum downtime
• website must be integrated with other transaction processing system
• assures user for its security
Benefits of e-Marketing
• Global reach
• Lower cost
• Ability to track and measure results
• 24 hours marketing
• Personalization and targeted marketing
• Better conversion cost
• Customer is at ease (no interference of any person)
• Customer has access to more information
• Direct interaction of seller with buyer
• Huge customer data base at lower cost
e-Branding
Brand image
• Collection of perceptions in minds of customers
• Perceptions can be positive or negative
Brand Identity
• Facts (factors) a customer uses to recognize a brand
• Logo, symbols, packaging, appearance etc.
How to promote a Brand ?
• Brand extension (with slight variations BBC to BBC Online)
• Partner with existing e-brand (hotel with airline’s e-ticketing)
• Create new brand for the web (separate from traditional brands)
• Market with old traditional brand on internet

Branding reasons
1. Product differentiation
2. Barriers to entry for new firm
3. Advertisement needs a specific product identity
4. Readily acceptable by wholesaler and retailers
5. Reduces importance of price differentials
6. Brand loyalty gives manufacturer more control over
marketing strategy
e-Commerce
• When commercial transaction takes place over electronic
network, primarily through internet, its termed as
e-commerce
• e-commerce is
– buying and selling of goods and services,
– transmitting funds over an electronic network, primarily
the internet
– Transaction type may be B2B, B2C, C2C and C2B
Customer Relationship Management (CRM)
Defined
• refers to activities which aim to …….
• help organization in …..
• developing, maintaining and optimizing …….
• long term relationship …….
• between organization and its customers

Importance of CRM
1. increase customer retention. its declining over time (because of access to more suppliers, information, price transparency)

2. improve customer service through data mining

3. To make customer more loyal to company. As existing loyal customers usually become early adopters of new product
4. to increase brand identity and recognition through customer advocacy
5. facilitate discovery of new customer through data mining (browsing patterns, purchase trends and predictions help)

6. increase profitability per customer

CRM Strategies
• Develop staff incentive schemes based on customer satisfaction and feedback
• Implement measures to reduce staff turnover familiarity with good staff increases customer loyalty
• Provide consistent standards of customer services
• Obtain detailed information about customer name. contact, habits, interest, income, life style
• Establish regular customer contact
• Assess customer satisfaction and loyalty
• Reason out loss of a customer
• Find out reasons to address future loss of customer
• Introduce loyalty programs reward points, free vouchers, repeat purchases discount
• Appoint dedicated account manager for key customers
• Implement system that supports CRM
e-CRM
e-CRM defined • Develop effective marketing strategy as per analyzed
• refers to use of database and ICTs* …… behavior

• to help organization ….. • Monitor performance indicators regarding customer

management
• developing, maintaining and optimizing …….
• long term relationship …….
Benefits of CRM with technology
• between organization and its customers
• Automated data management (e.g. personal information)
• Easy customer segmentation (like behavioral segmentation)
CRM software
• Time management
• Off-shelf application package
• Improved conversion rate
• Tailored solutions
• Boost up customer retention
• Consistent and coherent messages to customers
How CRM software works ?
• Collects information about customer
• Stores information for later use
• Controls access to information
• Analyzes customer behavior
• Categorize customers according to buying behavior
Management Information System
Transaction Processing System (TPS)
• Collects, stores, modifies and retrieves transactional data
• Process data regarding routine business transactions
• Structured format to input data
• Managers can monitor status of operations at any point in time
• Examples
– Daewoo bus seats reservation system installed for front desk officer to reserve seats,
– TCS courier booking system implemented on outlets
Management Information System
Management Information System (MIS)
• Generates reports on basis of data from TPS
• Reports contain structured information
• Reports provide control information
• Reports are less analytical in nature
• Examples
– Budgetary control system (BCS) is an MIS
– BCS tracks routine performance of an entity
Management Information System
Decision Support System (DSS)
• System use information from MIS and from external environment
• Prepares and provides structured (pre-defined reports) but more analytical reports
• Supports management to make non-routine decisions
– e.g. what will be impact on production schedule if December 2020 sales gets doubled
• Example:
– forecasting, statistical analysis and scenario planning software or systems
Management Information System
Decision Support System (DSS)
• Use internal data along with external data e.g. economic data, tax laws, competitor analysis
• Reports are highly analytical in nature
• Reports are used to take non-routine and complex decisions
• Produce reports for senior management
 Management and MISs

responsible for EIS

defining organizational long term goals, e.g. 5 year investment planning, product planning with
market and how organization will position
Strategic Management financial, non-financial and external information
itself

DSS
• Forecasting, statistical analysis and scenario planning.
Tactical or Middle Management e.g. sales forecasting and production planning with
• Setting short run goals and objective information from outside
• Forecasting and Budgeting
• Controlling and monitoring
• Performance evaluation
• Performance improvement practices MIS
• Functional budgeting on basis of information from
Operational Management TPS. Information from budgets is then used to
evaluate performance of business

Day-to-day transactions like receiving TPS

sales order, giving purchase orders,
receiving payments from receivables and
paying creditors off, bank transactions and
employee record keeping
• Sales order processing, Material movement control
Operational Staff system, Payroll, A/R & A/P, Employee record keeping
system
Information System
An information system can be defined as
• software that helps ……
• to organize and analyze data.
• the purpose of an information system is to transform ……..
• raw data into useful information …….
• that can be used for decision making
Benefits of MIS
• Data can be retrieved any where and at any time by authorized person
• Better time management
• Improved quality of decision
• Efficient operations connected sales and marketing operations & decision making
• Improved financial and operational control
• Promotes better communication within organization
• Effective scenario planning
• Facilitates organizational transformation effectively responds to change requirements
• Helps identifying new opportunities and warns environmental threats
• Effective tool to identify strategic capabilities
• Strengthens company’s competitive advantage

“information system should be a strategic support for an organization”

Impact of ICTs on business
1. Transformed business operations e.g.
– Inventory management with technology Just in time systems, MRP to ERP
– Supplier relationship has changed resource planning system integrated with supplier
– Technologically managed warehousing e.g. Amazon
– Artificially intelligent production systems robotics and production management systems
– Relationship with customer has changed e-orders, e-payments, e-CRMs
– Marketing efforts revolutionized e-marketing, e-branding etc.
– Effective internal control systems e.g. eye scanning, emotion scanning etc.
– Coordinated business activities sophisticated ERPs (e.g. SAP)
– Changes in management structures flatter and virtual organizations
2. Data collection for effective decision making e.g. EDGAR (an IS)
3. Technologically advanced R&D activities and product development latest instruments saving time & cost
4. Emergence of electronics markets olx, eBay, Amazon, Pakwheels etc.
5. Effective communication within organization
6. Impressive coordination among business processes
Value Chain and Business
• Think of value chain and its analysis Porter’s value chain analysis

• To analyze impact of IS or IT on value chain, ask yourself:

– Can IS or IT improve information flow through primary activities? e.g. from sales to marketing
– Can linkages between activities be improved with IT implementation? Between primary & secondary activities
– Can IS or IT decrease cost of any activity? e.g. through automation
– Can more effective links be formed with external entities? e.g. links with supplier & customer etc.

• Identify processes and linkages where IT implementation can be used to add value
Barriers to e-Business
• Customer usually don’t trust online business
• Not sure about product quality
• Customer preferences and traditions
• Impatience to receive products
• Security issues loss of personal data, viruses, hacker’s attack
• Weak cyber security laws
• Denial of services
• Heavy investment to keep technology up to date
• Huge licensing fee
• High internet costs to maintain bandwidth & data security
Impact of ICTs on Industry
• ICTs (especially internet) has reshaped many industries
• Impact can be analyzed using framework of Porter’s Five Forces model.

1. Bargaining Power of Customers INCREASED informed buyer, more suppliers and other factors
2. Bargaining Power of Suppliers DECREASED customer has now more options and other factors
3. Competitive Rivalry INCREASED Many suppliers providing same product, other factors
4. Threat of Substitutes INCREASED
5. Threat of New Entrants INCREASED low capital requirements, low entry barriers, other factors

KEEP IN MIND
Every industry tends to show
different response to usage of
ICTs. Above mentioned results
are general in nature
Michael Porter has argued that e-
business has made competition much
more PRICE-DRIVEN and to REDUCE
PROFITABILITY
IT Strategy
IT strategy defined
• plan of action to create ……
• information technology capability to create ……..
• maximum and sustainable value for …….
• an organization
 RECRUITMENT
BUSINESS MANAGEMENT AND STRATEGY
Chapter 11 from ICAP Study Text

prepared and delivered by

MUHAMMAD ADEEL
Instructor for
CFAP-3 (ICAP), SBL (ACCA), SM-6 (ICMAP)
TSB Education, Karachi
Stages in candidate hiring process
1. Recruitment stage
 Aims to encourage suitable candidates to apply
 Steps in process
1. Agreement to fill vacancy
2. Identification of skills required to perform job
3. Application designing and advertising

2. Selection stage
 Aims to choose best person among candidates
 Steps in process
1. Short listing
2. Conduct interviews
3. Screen out suitable resource
4. Offer employment
Importance of recruitment and selection
1. Business expansion
2. Existing employee leaves organization
3. Employee promoted to senior position
4. Employee job rotated to another department
5. Changes in working environment (new skill set required)
 RECRUITMENT
process of obtaining a suitable candidate to fill a vacancy
Recruitment plan (First step for effective recruitment)
 Recruitment process starts with recruitment plan

 Recruitment plan
 refers to prearranged strategy for hiring employees
 Acts as timeline for a firm to find qualified applicants
 Identifies goals for a particular position

 Components of recruitment plan

 List of positions within an organization
 Job analysis of each position
 Time frame to fill announced vacancy
 Vacancy advertisement plan
 Job application form and deadlines
 Interview dates
 Suitable interview methods according to position
Job analysis
Definition
 systematic approach to collect and analyze……..
 important and relevant information about ……
 nature and level of the work performed and ……
 skills required to perform a job

What is covered in Job Analysis ?

 Purpose of a position in organization
 Position in organization (line or senior manager, staff)
 Tasks to be performed by a job holder
 Responsibilities and authorities of job holder
 Skills required to perform job
 Accountability and performance criteria
 Authority (whom to report)
 Career development
 Environmental conditions
Job analysis
Practical approach to job analysis
1. Collect job documents and analyze them
2. Interview manager in charge (questionnaires can also be used)
3. Interview job holder (questionnaires can also be used)
4. Compare results of interviews of both persons
5. Observe job holder doing job
6. Analyze information collected during above mentioned steps
7. Prepare job analysis document

Authority doing job analysis

 Senior management
 External management consultant
Job description
Definition
Formal description of a job which details purpose and scope of
job

Formal (contents of) Job Description (JD) Purpose of job description

1. Title of job  A guide for job holder
2. Date of preparation  Used for Job evaluation
3. Name of department  Used for vacancy advertisement
4. Job is part of team ? Team size ?  Used in combination with person specification during
5. tasks to be performed by job holder recruitment and selection process
6. Responsibilities and associated authorities
7. Accountability
8. Salary range
9. Employment conditions
Person specification
Definition
 formal statement of
 personal qualities and characteristics of
 person expected to perform job
 based on job description

Contents of person specification

Specifications include
1. Qualification
2. Work experience
3. Age
4. Physical characteristics
5. Personality traits

Approaches to design person specification

1. Seven point plan of Alec Rodger
2. Five point plan of Munro Fraser
Rodger’s seven point plan
Rodger’s Seven Point Plan Seven Points
 presented a framework for collecting and analyzing ….. 1. Physical make up
 information about …… 2. Attainments
 individual’s strengths and weaknesses …. 3. General Intelligence
 at work 4. Interests
5. Special aptitude
Characteristics of framework 6. Disposition
 Grouped personal characteristics into 7 categories 7. Circumstances
 Framework assists in developing candidate’s personal
profile
 Interviewer should use framework in selection process
 Compare candidate’s assessed qualities with required one
Rodger’s seven point plan (1952)
1. Physical make up 3. Social activities
1. Personal appearance
2. Physical issues 5. Special aptitude
1. Mathematical abilities
2. Attainments 2. Analytical skills
1. Academics 3. Reasoning capabilities
2. Professional qualifications
3. Experience 6. Disposition
4. Professional certifications 1. Sensitive to relationships
2. Introvert
3. General Intelligence 3. Extrovert
1. Responsiveness
2. Aptitude 7. Circumstances
3. IQ level 1. Family structure
2. Financial health
4. Interests 3. Domestic circumstances
1. Intellectual (e.g. playing chess)
2. Physical activities
Munro’s five point plan (1958)
Munro’s five point plan
 Framework for grading candidates for ……
 job vacancy …….
 According to five personal qualities

Five Points (IQBAM)

1. Impact on other people
2. Qualifications
3. Brain and abilities
4. Adjustment
5. Motivation

 Compare candidate’s assessed qualities with required one

Vacancy Advertisement
Job vacancy might be advertised
1. Within organization (Internal recruitment)
2. Outside organization (external recruitment)

Internal recruitment – advantages External recruitment - advantages

Improves morale and motivation level Fresh blood

Way of career development of existing employees New minds, new ideas, better performance

Cost effective Existing staff not capable to fill vacancy

Employer is well aware of existing staff More vacancies than internally available candidates

Existing staff knows company policies and procedures Existing staff members are not willing to perform specific tasks

Existing staff have good adjustment within teams

Effective for managerial posts (staff has god understanding)

Methods of advertising job vacancy
1. recruitment agencies

2. media advertising
1. national newspaper
2. local newspaper
3. journals and magazines
4. radio and
5. television

3. social media
1. facebook
2. whatsapp groups
3. instagram and
4. twitter

4. company magazines
5. company websites
6. open-house
Job application form
1. Standard application form

2. Basic information about candidate

3. General contents
1. Personal details
2. Details about educational background
3. Details about current job
4. Previous work experiences
5. Social interests and activities
6. Reason to apply for the job
7. Expectations about future career

4. Purpose of job application form

1. Delivers basic details of applicant
2. Opportunity for applicant to sell himself
3. Used to screen out suitable candidates
4. Assist to prioritize candidates for interview call probable, possible, definitely not
References
1. Applicants may be required to submit one or two references
2. Preferred references are
1. Existing employer
2. Senior manager or supervisor from current job
3. Senior teacher (if applying for first job)
4. Eminent social personality
3. Normally in form of letter from referee
 SELECTION
process of identifying the best candidate to fill job vacancy
from among all those who have applied
Selection methods
1. Application forms
 First screening tool to select a person
 Written or electronically submitted
 Used to collect information at recruitment stage
 Used to discuss further during interviews
4. Group selection method
 No. of people from organization observe candidate in
predefined set of activities e.g. role plays
 Candidates are compared and selected the best one

2. Face-to-face interviews
1. One-on-one interview
2. Panel interview (more than 2 interviewers)
3. Sequential interviews (sequence by different person)
4. Stress interviews
5. Problem solving interviews

3. Tests
1. Intelligence tests (IQ level, responsiveness etc.)
2. Aptitude tests (analytical reasoning ability)
3. Competence test
4. Psychometric test (MCQs based personality test)
Selection authorities
1. Manager in charge
1. Lower level job
2. Less career development

2. HR Department
1. Long term prospects
2. High caliber job

3. Committee of individuals (External Consultants)

1. Hiring HODs or an expert
Offer of employment
1. Last stage in selection process
2. Depends on acceptance of offer by applicant
3. There Should be list of candidates to offer employment (in case one rejects, other should be there)
4. Acceptance should then be followed by Employment Contract
5. Unsuccessful applicants should be thanks for interest and application
Reasons for ineffective recruitment and selection
1. Recruitment stage - causes
1. Poor job analysis
2. No agreement on minimum acceptable requirements (e.g. KSAOs)
3. Unattractive job
4. Useless job advertisement

2. Selection stage – causes

1. Poorly designed application form
2. Inappropriate selection techniques
3. Untrained person selecting candidates
4. Effectiveness of selection process is not monitored and reviewed
Roles and responsibilities in recruitment and selection
1. Operational managers (line manager)
1. Participate in HR planning Head Hunters
2. Report any vacancy in their department Some times Head Hunters
3. Recommend suitable staff member to fill vacancy (internal hiring) (external agencies) are also hired
to recruit and select suitable
4. Identify tasks related to a job resource
5. Identify skills set required to perform a job
6. Involve in selecting suitable candidate for their department Recommended
Head Hunters should be hired for
recruitment process. Management
2. HR specialists (HR department) itself should conduct selection
process
1. Prepare HR plans
2. Estimate vacancies going to raise throughout organization in future
3. Involve in job advertisements
4. Involve in application designing
5. Involve in selection process
TRAINING AND DEVELOPMENT
BUSINESS MANAGEMENT AND STRATEGY
Chapter 12 from ICAP Study Text

prepared and delivered by

MUHAMMAD ADEEL
Instructor for
CFAP-3 (ICAP), SBL (ACCA), SM-6 (ICMAP)
TSB Education, Karachi
TRAINING
Planned and systematic approach
to modify behavior of people
Definition of training
1. planned and systematic modification of ……
2. behavior through …..
3. learning events, programs and instructions which enable individuals to …….
4. achieve level of knowledge, skills and competence needed to …..
5. carry out work effectively
6. for example
I. IFRS training,
II. training on Code of Corporate Governance
III. training on Corporate Secretarial Practices
Reasons of training
1. requirement to stay at a position in firm e.g. directors’ training program for corporate governance
2. requirement for promotion to senior position e.g. cpa certification required for senior post
3. to update employee knowledge and understanding e.g. how to operate SAP
4. to increase employee productivity e.g. through better time management, better tax management
5. to reduce operational losses e.g. better quality awareness, avoidance of legal penalties
6. to comply with legal requirement e.g. CIA certification for internal auditor appointment
7. to prepare an employee as back up of another person
8. to motivate employee an expectation to replace baby boomer, career develops

Training Gap
The training gap is the difference between the skills that the work force will
have if there is no training and the skills that the organisation expects that it
will need.
Benefits of training
1. to Employees
a. Skills improvement
b. Performance improvement
c. Less or no close supervision
d. Motivation level increases
e. Growth in career
f. Increase in monetary rewards

2. to Employers
a. Better understanding of organizational culture outcome of employee orientation
b. Directed orientation of employees outcome of employee orientation
c. Employee productivity increases due to mentoring and on job trainings
d. Lower cost of operations results of technical trainings
e. Supervision cost reduces refer to quality and technical trainings
f. Employees start welcoming team work because people now have less ambiguity to work
g. Organization becomes attractive for motivated people
h. There would be learning culture in organization that fosters innovation attitude
Approaches to identify training gap
1. Top Down Approach
a. Trainings decisions are made at the top
b. Department or corporate head identifies training needs
c. Head selects people to train, type and their level of training
d. e.g.
a. IFRS training program for financial controller
b. Financial modeling training for company CFO

2. Bottom Up Approach
1. Individual himself identifies training gap
2. Person applies for available training or
3. Applications are requested from employees for available training programs
4. Appraisal provides insight for training requirement
Types of training
1. Technical Training 3. Soft skills Training
 training to teach an employee technical aspects of job  training to develop personality traits of an employee
 both in-house and external training  Presentation skills
 examples  Personal habits management
 IFRS trainings for an accountant  Time management
 SAP CRM trainings for sales person  Stress management skills
 Corporate laws training to company secretary  Analytical skills for senior manager
 Taxation trainings for tax managers  Communication skills

2. Quality Training 4. Health and Safety Training

 training to increase knowledge of an employee about  training to develop understanding of employee
quality of product or services regarding health and safety measures at work
 for businesses where quality apart its from competitors  First aid training
 in-house, external, online  Disaster management training
 Examples  Food service safety
 ISO trainings  Construction safety
 Company policies regarding product quality
4 steps to train an employee
Step 1. Employee Orientation Step 2. In house training
• Process to welcome new employee into organization • Learning opportunities developed by organization
• First step in training • Second step in training
• Objectives • May be related to a specific job e.g. SAP training program
• to communicating company policies • May be general in nature
• to communicate importance of person’s job • Ethics training
• to reduce anxiety of working in a new situation • Sexual harassment training
• to set expectations and attitudes • Communication trainings
• to reduce start up costs • Customer service trainings
• to create interaction among staff • Time and stress management trainings

• Lecture
• Group discussions,
• Role plays,
• Training films,

• Case studies,
• Business games
4 steps to train an employee
Step 3. Mentoring
• Third step in training
• Process of assigning a mentor to an employee
• Mentor is usually supervisor or an experienced colleague
• Mentorship is usually for shorter period
• Reduces anxiety and ambiguity and increases productivity
• Examples
• IBM Integrated Supply Chain Division
• Starbucks (at time of opening new store)
Step 4. External training
• Any type of training that is not performed in-house
• Last step in to train an employee
• Practical forms
• Send employee to attend seminars
• Pay tuition fee of employee to attend practical course
• Examples
• Ford Motor Technician have to attend technical school
run by Ford Motors, its dealers and some technical
schools in USA

• Lecture
• Group discussions,
• Role plays,
• Training films,

• Case studies,
• Business games
DEVELOPMENT
Process of learning through experience and doing job
Method of developing people
Job Designing
 Process which involves looking at
 current jobs and considering
 whether this can be designed add more value
 Job designing methods are
 Job Enrichment
 Job Enlargement
1. Job Enrichment
 Additional responsibilities
 More autonomy
 Need higher level of knowledge
 Demand more skills
 To make job more lucrative
 Less supervision is required
 Vertical Expansion

2. Job Enlargement
 More tasks to do
 Additional tasks of same level
 Not much additional authority
 Reduces monotony
 Horizontal expansion
Job Design - Example

TASK 2 Managerial Role

(CONTROLLING)
Ordering Material,
Planning Workload

JOB ENLARGEMENT
TASK 1 Supervisory Role
(OPERATIONAL)
Drill Holes,
Assemble Parts and
TASK 1 TASK 2 TASK 3
Test Components
Drill Assemble Test
Supervisory Roles Holes Parts Components

JOB ENRICHMENT Operational Tasks

Practical forms to train and develop employees
1. On Job Coaching
 Manager or someone experienced shows employee
how to perform actual job
 Suitable for technical, quality, skills and HSE trainings

2. Brown Bag Lunch training method

 Training occurs during lunch time
 Way to train in informal but team environment
 Trainer from management or HR developing new skill

3. Web Based training method

 also known as e-learning, computer based learning etc.
 involves use of technology to facilitate training
 computer assisted learning technique are of 2 types
 synchronous learning (instructor led)
 asynchronous learning (self directed)
 advantage: available on demand, cost & time effective
 disadvantages: impersonal, wrongly interpreted
Practical forms to train and develop employees
4. Job Shadowing training Method
 an experienced employee is placed with inexperienced
 experienced person performs tasks, others look at him
 apprenticeships are example

5. Vestibule training method

 training is performed near worksite in conference
rooms, lecture halls, classrooms
 suitable for
 technical trainings
 HSE trainings

6. Deputizing
 boss is absent and junior is asked to perform tasks
assigned to boss

7. Delegation
 boss deliberately transfers some responsibilities and
authorities to subordinate
Practical forms to train and develop employees
8. International assignment training delivery
 employee is navigated in overseas operations of firm
 person is temporarily positioned in overseas operations
 objectives
 understanding cultural differences & similarities
 way of language skills training
 understanding social norms and etiquette

9. Job Rotation
 employee is moved from one job to another
 usually at regular intervals
 explores new things and eliminates boredom
 best placement identify
 back up of an employee
Training and development process

Audience
Need assessment Learning objectives Budget considerations
(learning styles)

Communication of Content Delivery mode and

Timeline
training development style

Measuring
effectiveness
LEARNING
Everyone has its own learning style
Trainer needs to identify this factor
 Learning styles (TRAP) by Honey and Mumford
3. ACTIVIST
 Learns through practice
 Enthusiastic about innovation
2. REFLECTOR  Listen lectures and explanations

 Keenly observes & listens others  Like to go for new experiences

 Welcome leadership role
 Avoids direct jumping in practice  Like team work
 Stay away from leadership role  Always want attention
 Avoid tight deadlines

1. THEORIST 4. PRAGMATIST
 Believes in theories  Set their role models
 Understands Theory first  Like to follow role models
 Learns with concepts and models  Look for feedback
 Down to earth in nature
 Think analytically
 Logically solves problems
 Perfectionists in nature Honey and Mumford
developed a questionnaire that
enables individuals to identify their
preferred learning style.
Learning curve
 Graphical presentation of relationship between learning
over time
 Learning curve theory
 Individuals learn through education, training and
development
Patterns of learning curve
Learning Curve Pattern depends on number of factors e.g.
 Nature of work,
 Learner,
 Trainer,
 Environment and so on

Barriers to learning may be

 Heavy work load
 Low morale of employee
 Lack of Interest
 Lack of support and encouragement
 Bad schooling
 Family commitments
 Organization itself
Organization as learning barrier
 Inadequate attention on employees training
 Company don’t invest on trainings
 Training doesn’t fulfill purpose
 Lack of interest from concerned manager
 No system of appraisal
 Heavy work loads
 Uncomfortable environment
 Poor quality of training material
 Inexperienced trainer
 Badly designed training programs
 Inappropriate training style
APPRAISAL AND WORKING ENVIRONMENT
BUSINESS MANAGEMENT AND STRATEGY (CFAP-3)
Chapter 13 from ICAP Study Text

prepared and delivered by

MUHAMMAD ADEEL
Instructor for
CFAP-3 (ICAP), SBL (ACCA), SM-6 (ICMAP)
TSB Education, Karachi
Chapter Contents
1. Performance Appraisal
2. Management of Health, Safety and Security (self study)
3. Conflict at work (self study)
4. Incentives and Rewards
Employee Appraisal
(targets to learn)

1. Performance Appraisal and Management

2. Difference between performance appraisal and management
3. Appraisal process
4. Components of appraisal interview
5. Appraisal interview approaches
6. Appraiser’s interviewing skills
7. Assessment criteria
8. Techniques to record assessment results
9. Benefits of staff appraisal
10. Barriers to effective appraisal process
Performance Assessment and Management
Performance Assessment
 regular review of ……
 an employee's job performance and
 overall contribution to an organization
 Also known as an "annual review," performance evaluation,"
or "employee appraisal,"

Performance Management
 It’s a corporate management tool which aims …..
 to create an environment where
 people can perform to the best of their abilities to ………..
 produce the high-quality work
Difference between Performance Appraisal and Management
1. Performance Appraisal
 Reviewing employee contribution
 Operational in nature
 Retrospective for corrections
 Often uses ratings or rankings
 Rigid system in organization
 Single person oriented
 Usually linked with compensation plans
 Normally housed in HR department
 Big-picture feedback on employee’s work
 Part of performance management
2. Performance Management
 All about action to increase employee performance
 Strategic in nature and related to planning
 Future oriented for growth
 Less likely to involve ratings
 Flexible process
 Collective
 Not usually linked with compensation
 Usually conducted by managers
Employee performance appraisal process
1. Interview Preparation
•Guidelines by organization
•Questionnaire for appraiser
•Related documents to study in
advance by appraise
•Job Description
•Previous Appraisal,
•HR Record
•Comments about employee
•Self assessment questionnaire
2. Interview Location
•Manager’s Office
•informed in advance
•Enough time for discussion
•Special Location
•To emphasize importance of
review system
•May be a conference room in a
local hotel
3. Interview 4. Record Assessment
•Interviewer will decide: •Assessment techniques
•Approach (mentioned ahead) •Ranking
•assessment criteria e.g. •Scoring
•volume of work, •Grading
•knowledge about work, •Critical incident Method
•quality of work,
•management skills, targets etc.
Components of staff appraisal
1. Performance Review
 Appraisal aims to review performance over specified time
Performance
 Both mutually set a target to achieve Review
 Target may either be general or specific
 Target achievement time is agreed
Potential
 Subsequently actual performance is compared with target Analysis

2. Reward Review
 In appraisal, staff incentives system is also reviewed
 Problem occurs when Reward
Review
 Appraisal is taken to discuss reward system only
 These should be focused in Annual Pay Review

3. Potential Review
 Employee is also assessed for future career development
 Interviewer may suggest or recommend
• Need for training and development
• Promotion of an employee
Interview approaches
Tell and Sell method
• Interviewer tells assessment process
• Appraiser tells employee his performance
• Briefs about employee’s weaknesses and strengths
• Constructive criticism and no confrontation,
• Motivates employee for better performance
• Approach suitable for higher management appraisal
Problem-solving approach
• Both agree in advance to discuss problems in interview
• Problems are discussed in detail
• Outcome is an agreed solution
• Problems are job related but may be of various types

Tell and Listen method

• Interviewer tells assessment process
• Employee is asked to participate in discussion
• Style leads to constructive discussion
• Interviewer listens interviewee problems and concerns
• Appraiser gives suggestions and tries to resolve issues
Interviewing skills
1. Skill to identify appropriate interview approach
2. Questioning ability open and close end questions
3. Ability to engage employee during interview like in problem solving and tell and listen approach
4. Expertise to remain within boundary remain focused on main target of interview
5. Handle sensitive issues effectively like harassment issues and avoid any biasness
6. Leadership skills
7. Time management skills
8. Stress management skills
9. Helicopter factor
Performance assessment criteria
1. Volume of work
2. Quality of work
3. Technical and theoretical knowledge about work
4. Meet deadlines
5. Attendance
6. Team work
7. Communication skills
8. Negotiation skills
9. Ability to lead people
Techniques to assess employee performance
1. Critical Incident Method
 Manager identifies critical incident occurred
 Incident after previous appraisal session
 Manager assesses how employee handled that incidence
 What employee learned from that issue or time

2. Performance Related Assessment

 Manager evaluates targets set in previous appraisal
 Comparison between actual performance and set targets

3. 360 degree approach

 Approach involves assessment of an employee
performance by no. of people related to him or her
 3-5 credible raters may be asked to complete a
questionnaire regarding a person performance
 Employee is also asked for self assessment
 Raters assessment & self assessment are compared and
become basis for staff appraisal
Techniques to record results
1. Ranking
 Manager ranks employees in order of competence
 Indicates which team member is better than others
 Can be used to take decision for employee promotion
 Ranking may be subject to biasness
 Suitable for small number of employees

2. Scoring
 Scoring system to assess employee performance
 A numeral scale is set against each competence
 In employee, each competence is assigned a value
 Add individual competence score to compute overall
result

3. Grading
 Grading system to assess employee performance
 A non numerical scale is set against each competence
 Scale excellent, very good, good, average, poor etc.
Benefits of Staff Appraisal
1. Benefits for Employer
 Firm can assess actual potential within an employee
 Firm can identify hindrances in employee performance
 Employer will identify ways to improve staff competence
 Reduces communication gaps b/w boss & subordinate
 Eliminates ambiguity and organizational depression
 Way to consider company reward system

2. Benefits for Employee

 Feedback about performance
 Assessment of person’s competencies
 Employee can identify need for training & development
 Employee can deliver his ambitions to line manager
 Employee can discuss company reward system
Barriers to Effective Staff Appraisal
1. No record Manager doesn’t keep proper records for subsequent discussion
2. Purposeless Employee perceives it’s a useless process and wastage of time
3. One sided appraisal Only appraiser speaks and does not let employee to participate
4. Confrontation Employee thinks of appraisal as an opportunity for manager to tell employee his weaknesses
5. Annual event Employee thinks that no appropriate action will be taken thereafter
6. Untrained appraiser ** Appraiser doesn’t have for example communication and management skills
7. Biased Interviewer
1. Halo Effect overly focused on one positive or negative aspect of an individual and ignoring other
2. Central Tendency Bias most employees are considered as average and little are ranked above average
3. Recency Bias biased towards most recent event
4. Personal Bias discriminations for personal reasons
Factors affecting Employee Performance
1. Organization’s structure (flat, tall structure, chain of command)
2. Management style (autocratic, democratic, participative, lassie fair)
3. Work environment (congested, suffocation, dim light, Google environment)
4. Work relationship (conflicts within department, team or group)
5. Job fit (personality traits e.g. extrovert appointed as accounts officer)
6. Role ambiguity
7. Motivation
8. Reward system of company
9. Opportunity for training and development
 Relationship between Motivation and Performance

MOTIVATION
Motivation is an internal phenomenon
which drives a person to behave and act in
certain ways. It is all about the factors that
encourage individuals to be continually
committed and interested in their jobs.
Motivation theories assist management
Theories of Motivation
Content Theories of Motivation
 What motivates employee?
 Need motivates employee
 Same thing motivates everyone: reward (assumption)
 Once a need is satisfied, it will shift up to above level
 Examples:
1. Maslow’s Hierarchy of needs
2. Herzberg 2 Factor Theory
3. McClelland Need Theory
Process Theories of Motivation
 How are people motivated ?
 Concentrate on the process by which individual is motivated
 Strength of motivation depends on needs and perceptions
about efforts & rewards
 Examples
 Vroom’s Expectancy Theory
 Adam’s Equity Theory
What manager can do to motivate staff ?
1. Basic rights at first Maslow e.g. fair pay structure, fair employment policies
2. Plant hygiene factors Herzberg e.g. working condition, relationship etc.
3. Incorporate motivators Herzberg e.g. job enrichment and enlargement
4. Leadership style McGregor e.g. Participative style of management
5. Recognition McClelland e.g. Recognize achievement
6. Strong expectancy Vroom
7. Fair reward system Adams Intrinsic and extrinsic rewards

Note
These have been derived from motivation theories
Reward System
(targets to learn)

1. Defining reward
2. Types of rewards
3. Objectives of reward system
4. Principles of a good reward system
5. Reward management model
6. Performance related reward system
7. Problem with reward system
Reward
Definition of reward :
1. monetary, non-monetary and psychological payments that ……
2. an organization provides to ……
3. its employees in exchange for ……
4. the work they perform

Types of rewards are Extrinsic and Intrinsic rewards

Types of reward
1. Extrinsic
– Rewards derived from Job Context e.g. material benefits like pay, working conditions, management style

2. Intrinsic
– Rewards derived from Job Content e.g. job enrichment ,enlargements and rotation, training & development
– Satisfy higher level needs e.g. self esteem, self actualization
Objectives of Reward
1. Retention foster loyalty and pride of being associated with company
2. Motivation employees
3. Attraction potential employees (skilled and beneficial for organization)
4. Recognition individual contribution towards corporate goals
5. Alignment create shareholder value and support achievement of business strategy
Principles of a Good Reward System
1. Competitive
1. Reflection of individual roles and responsibilities
2. Competitive with external market practices

2. Simple
1. Clear and easy to understand
2. No unnecessary complexity

3. Fair
1. Transparent policies
2. Equitable and consistently applied
3. Reward decisions are trusted
4. Properly governed

4. Sustainable
1. Reflection of and Alignment with business strategy
2. Affordable for company
3. Flexible to meet need for changes
Reward Management Model by John Bratton
Effective reward system should facilitate
1. Individual goals
2. Organization’s strategic goals

Strategic concerns regarding monetary reward

1. How much to pay ?
2. Pay on individual or group basis ?
3. How much emphasis to pay on monetary reward ?

“but there is no single rewards system (role model) that fits all organizations”

Reward Management Model by John Bratton based on five elements

1. The Strategic Perspective
2. Reward Objectives
3. Reward Options
4. Reward Techniques
5. Reward Competitiveness
 st element of reward management model)
Strategic Perspective (1
Business strategies: Cost Leadership and Differentiation
Firm’s reward system should be in line with business strategy to be effective to reap its benefits

Examples

Case 1 Case 2

Production process producing frozen food, work will be less

Company offering unique, customized and high tech tools to
technical and monotonous. Company needs to keep its costs low
heavy industry
to be competitive

Differentiation Strategy Cost Leadership Strategy

Professionals and Skilled labor Less technical and monotonous work

Company suits to follow cost leadership strategy. Company will

High incentives and lucrative salary packages will attract and
prefer to recruit daily wages and low demanding staff to compete
retain professionals to deliver quality services
efficiently in market
 nd element of reward management model)
Reward Objectives (2
Reward system should pursue 3 behavioral objectives. Which are
1. Support to recruitment and retention
2. Motivate employees to high performance levels
3. Promote compliance with workplace rules and regulations
 rd element of reward management model)
Methods of reward (3
Material rewards may be divided into 4 categories
1. Base pay part of reward for time spent in working
2. Performance pay e.g. performance bonus, commission, merit pay, profit sharing etc.
3. Indirect pay e.g. health insurance, child care, medications, annual travelling, pension plans etc.
4. Share options scheme offered to directors and managers to align interests of both parties

How much every category is to be incorporated in reward system depends on firm’s business strategy
 th element of reward management model)
Reward techniques (4
• Like External Equity, employees also look for Internal Equity
• Internal Injustice will affect psychological contract between employer and employee
• Reward system must also attempt to achieve Internal Equity
• Three techniques are used to establish Internal Equity
1. Job analysis
2. Job evaluation
3. Performance appraisal
 th element of reward management model)
Reward Competitiveness (5
• Organizational reward system will be subject to external factors as well
• Organization should focus on these factors at time of designing its reward system
• External factors
1. Labor market
2. Pressure for cost efficiency in relative industry
3. Legislation
Advantages of performance based reward system
Performance based system helps to
1. Remove role ambiguity because employees are well aware of firm’s expectations
2. Design suitable compensation design
3. Recognize employee contributions
4. Support employee motivation leading to increased performance
5. Understand employee about his weaknesses and strengths
6. Self-introspect and develop a learning culture within organization
7. Deal with poor performance
8. There may be less customer complains because employee will focus on critical aspects of performance

Note
Is this strategy suitable ? Parameter is here to
check : SAF by JS&W
Disadvantages of performance based reward system
• Employees will get demotivated if goals are too hard to achieve
• Employee will focus on meeting his budgets only, and nothing more
• Quality issues. employee may just to focus on numbers rather than quality
• Manager will be satisfied to use budgeted resources, no managed resource utilization
• Development of risk aversion attitude, reluctance to take unplanned initiatives
• Personal biasness of manager at quality checks

Note
Is this strategy suitable ? Parameter is here to
check : SAF by JS&W

so let’s start
BALANCED SCORE CARD
BUSINESS MANAGEMENT AND STRATEGY
CFAP-3 (ICAP)

prepared and delivered by

MUHAMMAD ADEEL
instructor for
CFAP-3 (ICAP), SBL (ACCA), SM-6 (ICMAP)
TSB Education, Karachi
Balanced Scorecard (BSC)
• An approach to measure performance in long run

• Approach developed by Kaplan and Norton (1990s)

• They identified 4 dimensions of business performance

1. Financial dimension
2. Customer dimension
3. Internal perspective
4. Innovation and learning perspective

• For each perspective, firm should identify key performance

measures and key performance targets

• Financial dimension is the most important one but for

improved financial performance in long run other
perspectives need to be managed and improved

• CSF are determined regarding each of 4 perspectives

 Balanced Scorecard (BSC)
Financial Perspectives Innovation Perspective
Identify how does firm create value for Identify how can an organization
its owners e.g. growth in share price or continuously improve and create value
return on investment etc. and then set to maintain its competitive position? Set
performance measures performance measures accordingly

Internal Perspective
Identify in which process firm must
outperform to satisfy its customers and
Customer Perspective achieve its financial goals? Then set
What do customers value? performance measures accordingly
(entity can then target its performance
e.g. cost, quality and delivery place, to (e.g. customer value quality, so firm should
satisfy its customers) invest in effectiveness of operational control
4 dimensions of organizational performance
 Balanced Scorecard (BSC)
Financial Measures Innovation Measures
• ROI • Employee productivity
• Revenue growth • Employee satisfaction
• Profitability growth • Learning curve
• Productivity • Revenue per employee
• Cost control • Employee turnover
• Cash flows • Sales of new products
• Financial ratios • New product development

Internal Processes Measures

• Collaboration with suppliers
• Collaboration with distributors
Customer Measures • Latest production equipment
• Market share and increase therein • Operational efficiency
• Customer base and increase therein • Operational controls
• Customer profitability • Defective products
• Customer retention • Labor turnover
• Customer satisfaction • Maintenance and repairs
Performance Measures of 4 dimensions of BSC • HSE issues
Balanced Scorecard (BSC)
Advantages (Reasons)
• Firm wouldn’t ignore non-financial performance areas
• CSF & KPIs from 4 performance dimensions
• Effective strategy formulation and development

Disadvantages
• Weak coordination can be detrimental to health
• Overwhelming framework
• Management may wrongly interpret cause and effect
Balanced Scorecard (BSC)
Implementation of BSC requires
• Leadership skills for strategic capability analysis
• Negotiation skills to manage conflicts among 4 performance dimensions
• Coordination among organizational units
• Research and development capabilities
CRITICAL SUCCESS FACTORS
BUSINESS MANAGEMENT AND STRATEGY
CFAP-3 (ICAP)

prepared and delivered by

MUHAMMAD ADEEL
instructor for
CFAP-3 (ICAP), SBL (ACCA), SM-6 (ICMAP)
TSB Education, Karachi
Critical Success Factors (CSF)
• Factors that are critical to success of an organization and
achievement of overall corporate objectives

• Those product features that are particularly valued by

customers, and where an organisation must excel to
outperform the competition
(JS&W)

• The limited number of areas in which results will decide

successful competitive performance of a business entity.
These areas should receive constant and careful attention
from management
(Rockart: MIT Sloan School of Management)
Critical Success Factors (CSF)
• Key business factors vital to organizational success

• CSFs are derived from

1. Environmental factors
2. Industrial factors
3. Organization’s competitive position
4. Challenges to business entity
5. Management position
• also termed as key result areas (KRAs)

• Limit CSFs to 5 or fewer to manage effectively (not a rule)

Sources of CSFs
1. General business environment Environmental CSFs
2. Industry in which organization operates Industry CSFs
3. Organizational peers Competitive position CSFs
4. Problems and challenges to business Temporal CSFs
5. Layers of management Management position CSFs
Sources and Types of CSFs
1. Environmental CSFs
– Factors that affect organization’s ability to achieve its
strategic goals e.g.
Just for understanding CSF
• Socio-political issues
• Industry specific regulations for airline industry

2. Industry CSFs
– Some success factors are determined by industry and
organization must do to stay competitive within chosen
industry e.g.
• On-time home delivery of pizza (food industry)

3. Competitive position CSFs

– Factors that are specific to unique position of an
organization relative to its peer e.g.
• Maintain and increase market share (CSF of leader)
• Reduce gap b/w leader and laggard (follower CSF)
Types of CSFs
4. Temporal CSFs
– These CSFs are related to short term situations , often
crisis. Following may result in temporal CSFs
Just for understanding CSF
• Threats from SWOT analysis
• High inventory level
• COVID-19
• Legal actions against company

5. Management Position CSFs

– Managers have different positions in organization
– Their priorities change with position
• Senior manager is inclined to risk management
• Operational manager is focused to increase
production
How to develop CSFs
1. Establish firm’s mission

2. Identify strategic goals

Just for understanding CSF
3. Identify your potential CSFs

4. List your answers to identify really important factors

5. Work out how one can be monitored and measured (KPIs)

6. Communicate CSFs to people responsible to manage them

7. Continuously monitor and assess identified CSFs

CSFs Example
Freshest Farm Produce
Mission "to become the No 1 produce store in Main Street, by
selling the highest quality, fresh farm produce to customers."
The company's strategic objectives are to:

1. Gain local market share of 25 percent;

2. Farm to customer in 24 hours for 75 percent of products;
3. Sustain a customer satisfaction rate of 98 percent;
4. Attract customers from similar but other market;
5. Have enough space to house the range of products that
customers want.

It’s a theoretical company

CSFs Example

Strategic goal Potential CSFs

1 Gain local market share of 25% 1. Increase competitiveness

2. Attract new local customers

2 Farm to customer in 24 hours for 75% of products 1. Develop and maintain collaborative relations with local suppliers

3 Sustain customer satisfaction rate of 98% 1. Invest on employees’ training and development
2. Retain employees
3. Keep in touch with regular customers

4 Increase product range to attract more customers 1. Expand its product range to attract more customers

5 Extend store space to manage new products 1. Secure financing for expansion
2. Build and manage capacity utilization
Common CSFs
Statistical research into CSF’s on organizations has shown there
to be 6 key elements: PRIMO-F

1 P People Consider KSAOs (consider chapter 11 - 13)

2 R Resources Consider threshold and unique resources (refer chapter 4)

3 I Innovation Ideas and development (refer chapter 8 also)

4 M Marketing Consider market variables, market segmentation and marketing mix

5 O Operations Consider threshold and core competence (like continuous improvement in processes and quality)

6 F Finance Finances and financial management

Don’t ignore to consider industry norms and general

environment variables as well
Common CSFs
• Sensitivity to changing market needs
• Understanding of how and why customers buy
• Innovative response to customer needs
• Consumer loyalty
• Linkage of technology to market demand
• Link marketing to production
• Investment in growth markets
• Knowing when to shift resources from old to new products
• Long-term view of market-development and resources
• Ability to target and reach segments of market
• Identify and exploit global market
• Product-line coverage
• Short time to market for new products
• Lack of product-line overlap
• Identification and positioning to fulfill customer needs
• Unique positioning advantage
• Strong brand image and awareness
• Understanding competitors’ capabilities and decision rules
• Sensitivity to cues for co-operation
• Prevention of price wars
• Aggressive commitment when required
• Willingness to form intercompany coalitions
• Maximizing payback from marketing response to resources
• Marketing research quality
• Develop human resources
• Attract the best personnel
• Managerial ability and experience
• Quick decision and action capability
• Organizational effectiveness
• Learning systematically from past strategies
Common CSFs
• Distribution coverage, delivery speed, and prominence
• Co-operative trade relations
• Advertising budget and copy effectiveness
• Promotion magnitude and impact
• Sales-force size and productivity
• Customer service and feedback
• High product quality
• Patent protection
• Low product cost
• Ability to deliver high value to user
• Large marketing resource budget
 PROJECT MANAGEMENT
BUSINESS MANAGEMENT AND STRATEGY (CFAP-3)
Chapter 15 from ICAP Study Text

prepared and delivered by

MUHAMMAD ADEEL
Instructor for
CFAP-3 (ICAP), SBL (ACCA), SM-6 (ICMAP)
TSB Education, Karachi
Project
 A project is a series of tasks that need to be completed in
order to reach a specific outcome
 Simple to complex one
 Time bound
 Managed by one person to number of persons
 Whole project is divided in small steps for productivity
 e.g. SDLC stages
1. Planning (initial meetings, approvals, feasibility etc.)
2. Analysis (understanding business needs)
3. Designing and Development
4. Testing
5. Implementation
6. Maintenance
Project (Example)
Activity Description Duration Immediate Predecessor

A Designing and Approval 7 days ----

B Architectural Services 15 days Activity A
C Procurement 25 days Activity B
D Site Preparation 28 days Activity B
E Grey Structure 95 days Activity C and D
F Interior designing 25 days Activity E
G Wood work 30 days Activity E
H Completion Certificate 5 days Activity F and G
I Clean up 7 days Activity H

Project Duration = 187 Days

Project Network Diagram or CPA Chart
A project network diagram represents:
1. All activities of a project in chronological order
2. Inter-dependence of all activities
3. Time to complete an individual task in a project
4. Estimated time to complete a project

47
4
50

7 22 170
0
7
1 2 3
15 days
175
0 7 days 7 22

50 140
5 6
50 90 days 145

175 180 187

8 9 10
175 5 days 180 7 days 187
Network Analysis Diagram Construction Rules
Arrowed Line in Network Diagram
 Arrowed line represents activity in a project
 The line can be drawn at any angle
 The line must be straight
 Always from left to right
 Duration of activity is written on arrowed line,
 Activity starts at an ‘event’ and finishes at another event.
Network Analysis Diagram Construction Rules
Event in Network Diagram
 Circle in project network diagram is called Event
 Event is simply a point in time from where one or more
activities start and one or more activities take an end
 Event is always Labeled
 Each event contains 2 numbers:
1. Earliest Event Time (EET)
2. Latest Event Time (LET)
• EET and LET of first event will be 0
• All activities will finish on a single event Some Rules to Note

1. LET can never be earlier than EET

2. EET and LET are same

• means activity is critical and must be
completed in time

3. Gap between EET and LET

• indicates that completion of the
previous activity or the start of the
next activity can be delayed without
affecting the completion time for the
project as a whole
Presentation cases in Project Network Diagram
Case 1 Case 2
Activity B starts after activity A Two activities (E and F) are to start at
same time but after accomplishment of
activity D
Case 3
Two activities C and J both end at same
time and new activity K is to start after
completion of activities C and J

Case 4
New activity (C) can’t be started until two activities (A and B), which
are starting from same event, are completed
Critical Path Analysis (CPA)
 Also termed as Project Network Analysis
 CPA pinpoints tasks or activities on critical path
 If EET and LET are same, activity is said to be on critical path
 Aims to ensure large projects are completed in time
 Technique guides management in resource allocation
A technique widely used to plan timing and
scheduling a project, by drawing the project
network and identifying the activities on the
critical path and the total duration of the
critical path
Float
 Time that a task in a project can be delayed without causing
a delay to subsequent tasks
 Float calculation Latest Completion Time where activity (or project ends) X
 There will be no float on critical path activities Minus: Earliest Start Time from where activity (or project) starts Y
 Float is calculated for a single task
Time available for activity Z = X-Y
 Combined float is calculated for complete project
Minus: Time required for Activity (or project) P

Equals Float for Activity (or Project) F = Z-P

Minimum Project Completion Time
1. Using Earliest Event Times
2. Using Latest Event Times
Gantt Chart
 A horizontal bar chart
 Each activity is shown as bar
 Length of bar represents time duration of activity
 The chart presents time scale of a project
 Guides management for resource allocation
 Its simple to construct
 Its easy to interpret
 Inter-dependence of activities is not much clear as in CPA
Project Monitoring and Control
 The project manager – Three aspects of project will be monitored:
 Responsibility for monitoring and control 1. Quality
 Accountable before project steering committee, project 2. Time
sponsor or system user
3. Cost
Every aspect will be planned before start of project,
 Appointment of Project Assurance Team (PAT) During development stage project manager will
compare, from time to time, actual results with
planned activities
 Project Assurance Team will
 carry out an independent monitoring role,
 discuss progress at regular intervals with the project
manager.
 Satisfies itself that each project milestone has successfully
been reached.
Project Planning Tools
A project network diagram represents:
1. Work Breakdown Structure (WBS)
2. The Project Budgeting
3. Network Analysis or Critical Path Analysis
4. Gantt Chart
5. Resource Histogram
 47

50

7 22 170
0
175
0 7 22

50 140

50 145

175 180 187

175 180 187

 RISK MANAGEMENT
STRATEGIC BUSINESS LEADER
ACCA

prepared and delivered by

MUHAMMAD ADEEL
Instructor for
CFAP-3 (ICAP), SBL (ACCA), SM-6 (ICMAP)
Risk Management
Process of Risk Management
1. Risk Identification: Categories and Risk Relationships
2. Risk Assessment: Risk Analysis and Evaluation
3. Risk Planning and Controlling
4. Risk Monitoring
Risk Management (detailed)
Process of Risk Management
1. Risk Identification
– Risk Awareness Culture
• Embed Risk Management in Culture
• Embed Risk Management in Systems

– Internal Audit or Risk Audit

2. Risk Assessment: Risk Analysis and Evaluation

1. Quantitative Assessment (Expected Value Calculation)
2. Qualitative Assessment (Risk Heat Map)

3. Risk Planning and Controlling

– Set Responsibilities
– TARA (or SARA) Strategies

4. Risk Monitoring
1. Internal Audit or
2. Risk Audit
Risk

 Uncertainty of an event that could have impact

on achievement of an objective
(IIA)

• Uncertainties associated with event

• Occurrence of event
• Outcome of an event

 Outcomes of an event;
 Positive (Opportunity)
 Negative (Threat) `
Risk Identification (Step No. 1 in Risk Management)
Categories of Risks
1. Strategic Risks
2. Operational Risks
Strategic Risk
Definition
• Uncertainties attached with strategic decisions of
management and competitive position of an organization

• Usually outcomes of decisions (events) are uncertain

• Outcomes (of these risks) range from positive to negative
• Affect mission or long term ability of an organization

• Identified at board or senior management level

• SWOT analysis is used to identify them

Other Names
• Speculative Risks
• Opportunity Risks
Strategic Decisions
• Decision to choose competitive position
– To compete on basis of cost minimization
– To combat competitors with differentiated products
– Follow focus strategy
– Choosing from Bowman‟s Strategic Clock

• Decision regarding growth strategies of organization like

– Penetrating in existing market with existing product
– Developing new market and penetrate with existing products
– Substantially modifying product
– Entering new market with new product
– Decision regarding institutional strategies

• Examples of strategic decisions (events) with strategic risk

– Opportunity to explore another market
– Opportunity to invest in new technology
– Step to squeeze investment form a country
– Moving to new location
– Diversifying business
Management of Strategic Risks
• Stakeholders‟ Attitude towards Risk
• Risk Appetite
• Risk-Return Relationship
• Planning to seize opportunities
• Risk management strategies to combat downside risks
Operational Risk

 Definition
 Uncertainty of occurrence of an event. If event occurs,
it‟s outcome would be negative
 Risk of losses resulting from inadequate or failure of
processes, people and systems or external events

 Other Names
 Hazard Risk
 Insurable Risks
 Pure Risk
 Downside Risks
 Internal Control Risks

 Reasons
 Inadequacy of internal processes
 Failure of internal processes
 People within organization
 Intense external events (fire, flood, earthquake etc.)

 Shield against Operational Risks

 Manageable by „Internal Control Systems‟
Operational Risk (Examples)
• Health and safety issues at work
• Human Error (e.g. tool left in air jet engine)
• Theft and employee fraud
• Damage to property
• Defective products
• Technical issues (e.g. retardation of online ticketing system)
• Incompetent internal processes (e.g. Banking system on Eid days)
• Process failure (e.g. sudden technical fault in oil refinery)
• External events (e.g. flood, fire, hacking, fraud)
Categories of operational disruptions
Management of Operational Risk
• Mitigate Operational Risks
– Define Tolerance Level
– Implement controls
• Policies and procedures
• Educate employees (Risks Related Trainings)
• Segregation of financial duties and authorizations
• Effective crisis management and business continuity plans
• Insurance
• Risk Management embedded in organizational culture
Business Risks (Practical forms of Strategic & Operational Risks)
Definition 13. Technology risk
• Business risks refers to classic risks of business world 14. Economic risk
• These risks vary as per firm, industry, economy etc. 15. Environmental risk
16. HSE risk
Typical Business Risks 17. Derivatives risk
1. Market risk 18. Entrepreneurial risk
2. Product risk
3. Product reputation risk
4. Commodity price risk
5. Credit risk You need to identify
6. Currency risk Strategic and Operational
7. Interest rate risk Risks from this list
8. Financial risk
i. Gearing risk
ii. Liquidity risk
9. Political risk
10. Litigation risk
11. Regulatory risk
12. Compliance risk
 (Explained)
Business Risks
Market Risk
• Risk derived from sector in which business is operating

Product Risk
• Risk that customers will not buy new product or product
demand will decline unexpectedly

Commodity Price Risk

• Unexpected increase (or fall) in price of key commodity
organization sells or use in its manufacturing

Product Reputation Risk

• Uncertainty that event could occur that may adversely
damage product image.
• Injurious to companies that heavily rely on branding

Currency Risk
• Possibility of loss due to fluctuation in currency
 (Explained)
Business Risks
Credit Risk
• Possibility of losses due to non-payment or late payment by
customers. Depends on
– Total credit sales of company
– Company credit policy
– Credit terms and conditions
– Quality of customer
– Credit vetting and assessment procedures

Liquidity Risk
• Possibility of firm‟s cash inflows not being sufficient to meet
its cash outflows

Interest Rate Risk

• Risk of unexpected gain or losses in result of unexpected rise
or fall in interest rates

Gearing Risk
• Risk arising from exposure to large amounts of financing
 (Explained)
Business Risks
Political Risk
• Risk of loss due to unexpected move of a government or
political environment variable

Litigation or Legal Risk

• Risk of loss due to possibility of legal action against an
organization

Regulatory Risk
• Unexpected change in regulatory environment may cause
losses of an organization

Compliance Risk
• Risks of losses due to non-compliance of laws and
regulations

Technology Risk
• Possibility of loss due to changes in technology
 (Explained)
Business Risks
Economic times than margins in transaction
• Possibility of losses due to unexpected changes in economic
conditions or economic variables

Environmental Risk
• Relates with environmental effects of business operations.

Health and Safety Risk

• Risks that hazardous activities may harm health and safety of
people working in organizations

Business Probity Risk

• Related with business ethics and governance
• Arise from unethical behavior by one or more participants in
a particular process
– failure to keep information confidential (sale agreement)
– lack of trust in business dealings

Derivative Risk
• Risk due to use of financial instruments. Risk may be many
Strategic Risks from Business Risks
• Risks
– Identified using PESTLE Analysis

– Identified during Industry Analysis

– Associated with Strategic Decisions of leadership

• Competitive Position
• Product-Market Decisions
• Institutional strategies
– Identified as of Strategic Capability Analysis that can harm organizational mission

– Ethical Threats that can negatively affect entity‟s going concern

Tactical Risks from Business Risks
• Risks associated with decisions of divisional or departmental • Staffing
head • Employee job designing
• Repairs and maintenance
• Tactical Decisions in • Location and layout
– Procurement Department • Capacity decisions
• Vendor development
• Sourcing strategy – Warehouse
• Quality decisions – Logistics
• EOQs – Sales and Marketing
• Credit terms from supplier – Customer Relationship
• Other terms with supplier – Finance
• Green procurement – Human Resource
• Recruitment and selection decisions
– Raw Material Store • Training and development decisions
• Location • Appraisal system
• Inventory methods • Working conditions and staff turnover
– Information Technology
– Production
Operational Risks are also from Business Risks and have been
• Production scheduling mentioned before
Risks „ Relationships
Related Risk
• Risk which is related to another risk
• When two risks have common cause
• Risk relationship is either positive or negative

Positively Correlated Risk

• Risk A increases resultantly Risk B also increases
• Risk A decreases resultantly Risk B also decreases
• For Example
– Environmental risk also pushes up Reputation Risk
– Poor performance of director leads to financial risk and
reputational risk

Negatively Correlated Risk

• Risk A increases resultantly Risk B also decreases
• Risk A decreases resultantly Risk B also increases
• For Example
– Company spends cash to disburse environment‟s
negative impact, company may experience liquidity risk
in future
Risk Awareness Culture (how to identify risks)
• “Culture (capability of organization) to recognize risks
before they threaten” “Embedding risk management
• Needs continuous monitoring of risks to stay updated means „to that risk management
is part of routine business‟

• Monitor risks at
1. Board level using SWOT analysis
2. Department level using value chain analysis
3. Operational level

• How to create risk awareness culture?

– Embed risk management in
1. Organizational Culture
2. Organizational Systems
Embed Risk Management in Culture
Organizational Culture
• “Set of common values, beliefs, preferences, code of ethics, •
unwritten rules and principles that guide employees of
acceptable behavior” e.g.
– Preference for innovation (shapes a culture)
– People or task orientation (develops a culture)
• Embedding risk in culture means to be part of leaders‟
shared values
• Employees need to learn organizational culture
• Employees learn corporate culture through ceremonies,
rituals, stories, education and employee trainings
How to embed risk management in culture
Drive employees‟ behavior towards risk management
through
– Aligning individual goals with organizational goals
– Including risk management responsibilities in their JDs
– Education i.e. short courses on risk management
– Employee trainings on risk management
– Discouraging Blame Culture
– Introduce reward system that direct employee behavior
– Publishing corporate success it imparts to risk
management culture
just embedding risk management in culture is
insufficient, make it part of organizational policies
and procedures (organizational systems)
Embed Risk Management in Systems
• Risk management process becomes integral part of
organizational systems
• System refers to MISs and Policies and Procedures

Systems within an organization

• Enterprise Management System
• Financial Management System
• Facilities Management System
• Equipment Management System
• Employee Management System
• Information Management System
• Customer Development System
• Product Development System
• Supplier Development System
• Operations Management System
• Service Management System
• Improvement Management System
Success of Risk Awareness Culture
• Support from leadership
• Risk Management Committee supports too
• Recommended by experts in risk management
• Proper communication of risk policy to employees at all levels
• Incorporated in whole organization rather than in individual section
• Senior management regularly considers risk reports
Sources of information on risk
• External Sources
• Internal Sources
– Director‟s own observations
– Internal and external audit reports
– Reports by departmental managers
– Whistleblowers
– Customer feedback
– Performance monitoring systems
– Reports on key projects
Risk Assessment (Step No. 2 in Risk Management)
• Measuring strength of identified risk is risk assessment

• Risk is assessed:
1. Quantitatively (using Expected Value) and
2. Qualitatively (using Risk Map)

• Measured against two variables:

– Likelihood (Probability) of risk realization
– Impact or hazard if risk realizes
Expected Value (Quantitative Assessment of Identified Risks)
• Risk is quantified using two variables:
– Likelihood (Probability) of risk realization
– Impact or hazard if risk realizes

• Calculating „Expected Value‟ management quantifies identified risk

• For example (An event with different probabilities)

– Probability of 55% with $100,000 loss
– Probability of 30% with $150,000 loss
– Probability of 15% with $250,000 loss

• Expected Value = (0.55X100,000)+(0.30X150,000)+(0.15X250,000)

= $ 137,500
Risk Map (Qualitative Assessment of Identified Risk)

• Risk Map is a common qualitative way of assessing an

identified risk

• Management uses two variables to create probability/impact

grid

• Variables:
– Likelihood of risk realization
– Impact or hazard if risk realizes

• Management then plots identified risk on Risk Map according

to its probability and impact
Risk Map
• Place on risk map reflects significance of risk

• This approach provides a framework to prioritize

identified risks

• Significance of a risk will depend on organization

Likelihood and Magnitude explained

Definitions of Magnitude of Impact

Definitions of Likelihood
Coloring in Risk Map
• Different colors are used on risk map to highlight significance
of a risk

• Colors in Risk Map

– Combination of three colors (Red, Amber and Green)
– More colors as complexity increases

• Translating Risk Dashboard

 Red color (Highly significant, needs more attention)
 Amber color (Risk needs to be kept under review)
 Green color (Risk is under control)

• Used to identify need for further risk management measures

(usually control measures)
Risk Heat Map
• Represents qualitative and quantitative evaluations of risk

• Critical elements for an effective risk heat map

– Risk Appetite
– Materiality Level

• Organizations usually map risks on a heat map using residual

risk basis
Attitude to Risk
• Different organizations have different responses to risks

• Attitudes
1. Risk averse
2. Risk aggressive

• Attitude depends on
– Nature of organization
– Nature of industry
– Size and complexity of business
– Maturity stage (firm and industry)
– Stakeholders factors

• Risk Capacity defined Attitude towards Risk (Risk

Approach)

• Closely related with Risk Appetite (helps to determine

‘Risk Appetite’)
Risk Appetite
Definitions
• Willingness to accept risk
Risk Capacity
• “Total value of corporate resources that board of an
organization is willing to put at risk”
(Paul Hopkins)

• “The amount and type of risk that an organization is willing Risk Attitude
to pursue or retain”
(ISO)
Risk Appetite
• Agreeing on risk appetite means management doesn‟t
expose too much (or too little) value at risk

• A measure of general attitude to accept risk

Determinants of Risk Appetite
• Risk capacity (strategic capability)

• Risk attitude (subject issue)

• Nature of company product

– Product Failure Risk is High Risk Appetite will be Low
– Product Failure Risk is Low Risk Appetite will be High

• The need for Higher Sales Management will be ready to take higher risks (High Risk Appetite)

• Nature of Board Members

• Amount of Change in Market

– Transformational change in market Management will be ready for higher risk appetite to stay in market

• Company Reputation Management generally has lower risk appetite to keep its good fame
Risk Appetite and Business Strategy
• Board decides the business strategy Business Strategy explains
Product(s)
• Risk Appetite is set keeping business strategy in view
Market(s)
– For some business strategies, higher risk appetite is
required
• like market development

– For some business strategies, lower risk appetite is

required
• like market penetration or
• ensuring product quality

• Risk approach (attitude towards risk) is then implemented

through risk strategy
– By reducing likelihood of occurrence or
– Minimizing impact
Residual Risk
Gross Risk (Inherent Risk):
• Risk without any risk response (risk strategy)

Residual Risk (Current Risk):

• Risk that remains once management takes all necessary
actions to control it

• Gross and residual risk are compared to assess effectiveness

of management action (risk response)
Interpreting Risk Heat Map

Risk Section Meanings

Risk Appetite & Residual Risk Red or Green High or Low

Risk appetite & Residual Risk Same section Risk management practices are appropriate

Residual Risk in upper section than Risk management practices are insufficient. Controls
Different sections
Risk appetite should be strengthen

Residual Risk in Lower section than Risk management practices are good. Consider to reduce
Different sections
Risk appetite controls to save money
Risk Planning and Controlling (Step No. 3 in Risk Management)
1. Setting Roles and Responsibilities
2. Risk Strategies
– TARA (or SARA)
Setting Roles and Responsibilities (first way to control risks)
1. Set responsibilities at BODs level
2. Create a Risk Committee
3. Appoint a Risk Manager
Roles of BODs
• Set approach towards risk(s)
• Compute risk capacity of company
• Decides risk appetite for organization as a whole
• Defines risk appetite for a particular business strategy
• Determines risk tolerance level
• Develop risk policy
• Ensures
– Risk management is embedded in culture

– Risk management is embedded In organizational systems

– Risk management practices support organization‟s objectives

– Integration of risk management with all other business activities

– Proper communication of risk policy

• Decides on risk management strategy

• Organize risk management committee
Risk Committee
• Sometimes referred to as „Risk Management Committee‟
• Set up by BODs
• Composed of
– Executive directors
– Non-executive directors
• Majority consists of non-executive directors
• In absence of risk committee, audit committee assumes these responsibilities
Roles of Risk Committee
• Raises risk awareness culture
• Reviews risk management policies
• Assesses risks associated with strategic initiatives e.g. new ventures
• Assesses risk management process in accordance with change in operating environment
• Reviews individual risk (e.g. credit risk, liquidity risk, gearing risk) with respect to risk appetite
• Ensure proper risk reporting
• Make sure that risk reporting is according to statutory requirements
• Make recommendations on risk profile and risk appetite of the company
• Liaison with external consultant to get advice on appropriateness of risk management practices

• Responsibilities normally depend on

– Organization and
– Complexity of its operations
– Size of organization
– Industry
Roles of Risk Manager
• Member of Risk Committee
• Reports directly to Risk Management Committee and the Board
• Role is more operational than strategic
• Major role is to Implement risk management policies
– Leads risk management team
– Identifies and evaluates risks from business operations (policies and procedures)
– Implements risk mitigation strategies (e.g. Internal controls)
– Finds new ways to improve risk management methodologies
– Reviews internal and external audit reports
– Ensures implementations on risk committee recommendations
– Establish risk awareness programs in organization
– Ensures compliance with laws and regulations
– Implements set of risk indicators
– Reports risk exposures or losses from uncertain events
– Liaison with insurance companies
Risk Strategies
Risk Management Strategies: TARA (or SARA)
1. T Transference (Sharing)
2. A Avoidance
3. R Reduction
4. A Acceptance

• Strategy is chosen after considering

– Risk Capacity
– Risk Attitude
– Risk Appetite
Risk Strategies and Risk Heat Map
Risk Management Strategies: TARA (or SARA)
1. T Transference (Sharing)
2. A Avoidance
3. R Reduction
4. A Acceptance
Risk Strategy: Transference and Avoidance
1. T: Transference (Sharing)
– Risks are transferred completely or in part
– When: Low Probability with High Impact
– Practical methods:
• Insurance,
• joint venture, franchising

2. A: Avoidance
– Companies completely avoid risks
– Reflects low risk appetite of company
– When: High Probability with High Impact
– Methods:
• Firm avoids investing
• Firm divests from product-market area
– Used when other risk strategy doesn‟t work effectively
Risk Planning and Formulating Strategies (Third Step in Risk Management)
3. R: Reduction
– Firms try to reduce risks
– Methods:
1. Limit probability of occurrence
1. Embedding risk management in systems
2. Embedding risk management in culture

2. Reduce impact of risks

1. Risk Minimization
2. Risk Pooling (Diversification)
3. Hedging techniques (to reduce impact of financial risks)
• Futures, Forwards, Options and Swapping

4. A: Acceptance
– Entity accepts or retains the risks
– Uses this strategy because
1. risk is lower than risk appetite
2. Other strategies are expensive
Diversification of Risk
• Company diversifies its operations
• Aim is to reduce risk
• Works better where negatively correlated risks in portfolio
• Effective when total risk reduces with increase of portfolio
•
Risk Monitoring (Step No. 4 in Risk Management)
• Systematic approach to monitor risks an organization faces

• A statutory requirement for some organizations

• Methods
– Risk Audit or
– Internal Audit by
• Company employees or
• External consultants

• Risks (nature and type) changes with

– Over time
– Size of organization
– Industry (and product) life cycle of entity
– Complexity of operations
Stages of Risk Audit
• Identify risk and construct risk register
• Conduct Risk Assessment
• Review controls over risks
• Report to those charged with governance regarding
– Excess control measures and/or
– Inadequately controlled risks
Internal vs. External Risk Audit
Company Employees (Internal Specialist)
Familiar with company systems, policies and procedures
Can conduct highly focused risk assessment
Internal teams are flexible as controlled by management
Report structured according to organization‟s norms
Use less technical jargons
Follow corporate codes of ethics
More familiarity threat
Familiarity with routine work may lead to overlook a threat
Limited scope to add value added improvements
External Consultants
Takes a long time to understand business environment
Management has less control over human power
More objective than internal teams of entity
Usually reports follow legally set standard (Sarbanes Oxley)
Report contains a lot of technical jargons
Follow IFAC‟s and ACCA‟s codes of ethics
Are least concerned with anyone in organization
Brings a fresh eye to identify and assess a risk
Injects new & fresh ideas to risk management practices
Risk Strategies
RISK AVOIDANCE
means not having any exposure to a
risk. A business risk can only be
avoided by not investing in the
business. Risk avoidance therefore
means staying out of a business, or
leaving a business and pulling out of
the market.
RISK RETENTION
means accepting the risk, RISK TRANSFER
in the expectation of Risk transfer involves passing
making a return. When some or all of a risk on to
risks are retained, they someone else, so that the other
should be managed, to person has the exposure to the
ensure that unnecessary risk. A Common example of risk
risks are not taken transfer is insurance
DIVERSIFICATION
Risks can be reduced through
diversification. Diversification is
also called „spreading risks. The
purpose of diversification in
business is to invest in a range of
different business activities, and
build up a portfolio of different
business activities
RISK SHARING
Risk sharing involves collaborating
with another person and sharing the
risks Jointly. Common methods of
risk sharing in business are
partnerships and joint ventures
ALARP
• Introduced by health and safety practitioners
• To establish target level of risk, ALARP is used Practically ALARP is
• ALARP does not demand risk to be completely eliminated (i.e. Target Risk = 0) considered while designing
risk management standards
• ALARP demands to keep Residual Risk “As Low As Reasonably Practicable”
• Reasonably practicable ?
– Do cost benefit analysis (in terms of money, time and other resources)
• ALARP expresses a point where „Cost of additional risk reduction becomes disproportionate to benefits achieved‟
Risk Management
Extreme
• A process of reducing ……
– Managing the possibility of ……
TRANSFER AVOID
– of adverse consequences either by ……. High
– reducing the likelihood of an event or …….

Potential Impact
– its impact, or
– taking advantage of the upside risk
Medium

Low
ACCEPT REDUCE

Negligible

Remote Unlikely Possible Likely Probable

0% - 10% 10% - 25% 25% - 50% 50% - 90% 90% - 100%

Likelihood (Probability)
 Extreme

Risk 3
High Risk 1
Risk 6
Potential Impact

Risk 2
Medium

Risk 4
Low

Risk 5
Negligible

Remote Unlikely Possible Likely Probable

0% - 10% 10% - 25% 25% - 50% 50% - 90% 90% - 100%

Likelihood (Probability)
 Extreme

Risk 3
High Risk 1
Potential Impact

Risk 2
Medium
Risk 6

Risk 4
Low

Risk 5
Negligible

Remote Unlikely Possible Likely Probable

0% - 10% 10% - 25% 25% - 50% 50% - 90% 90% - 100%

Likelihood (Probability)
Sources of information on risk
• External Sources
• Internal Sources
– Director‟s own observations
– Internal and external audit reports
– Reports by departmental managers
– Whistleblowers
– Customer feedback
– Performance monitoring systems
– Reports on key projects
ETHICS AND CONFLICT OF
INTEREST RESOLUTION
Chapter 18 19
Professionalism, Ethical Codes and Public Interest
Business Management and Strategy (CFAP-3)
Notes prepared by Muhammad Adeel

Public interacting with an Accountant

 Employer
 Employees of a company
 Client
 Investor
 Potential investors
 Government
 Financiers
 Community

These groups make „Public‟ of Accountant

Professional roles of an Accountant

 Accountant (Financial, Management, Cost and Tax)

 Finance Manager
 Auditor (Internal and External)
 Consultant (Financial, Management, Risk, Tax)Employer

Duty of an Accountant

Act professionally in favor of public interest (Professionalism)

Public Interest: Expectations of Public from an Accountant

Employer and Client Interests (or expectations)

 The professional has appropriate knowledge and skills to resolve technical issues
 Confidentiality of sensitive information
 Only necessary and lawful information is disclosed
 Always prefer client‟s or employer‟s interest over personal interests
 An unbiased opinion on project

Public and investor Interests

 Fair and appropriate decisions

 Auditor will give an unbiased opinion on financial affairs of company

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Professionalism, Ethical Codes and Public Interest
Business Management and Strategy (CFAP-3)
Notes prepared by Muhammad Adeel

 Management accountant shall reasonable pricing decisions

 Finance manager doesn‟t exaggerate earnings to affect share prices
 All necessary information is disclosed
 Accountant ensures fair distribution of power

Financier‟s Interests

 True and fair view of financial affairs by auditor

 Rational decisions by an accountant to ensure timely payments

Government‟s Interests

 True and fair view of financial affairs by auditor

 Correct calculation of revenue, earnings and tax computations
 Nothing is misleading and covered
 Accountant ensures fair distribution of wealth
 Follows laws and regulations
 Advises government on equitable tax system
 Advises authorities on Companies Act

How does an Accountant perform duties in favor of Public Interest?

By acting professionally

Means

 Follows professional codes of ethics

o Acts with integrity
o Puts best of his/her expertise to resolve client‟s issues
o Provides objective and unbiased opinions and advice
o Ensures confidentiality of information provided by client
o Abreast with updated knowledge and skills
o Limits his/her practice to his field of expertise and knowledge
 Complies with applicable laws and regulations
 Safeguard reputation of profession

Problem an Accountant faces

Interests of an accountant collide with other parties‟ interests (public interests)

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Professionalism, Ethical Codes and Public Interest
Business Management and Strategy (CFAP-3)
Notes prepared by Muhammad Adeel

Conflict of Interest or Ethical Dilemma

A situation whereby a person or an organization is tempted not to follow code of ethics

is termed as Ethical Dilemma

Conflict of interest negatively affects „independence of a professional‟

Categories of Conflict of Interest or Ethical Dilemma

1. Self-interest Threat
2. Self-review Threat
3. Advocacy Threat
4. Familiarity Threat
5. Intimidation Threat

Examples of Ethical Dilemmas

 Conflict between requirements of employer and the fundamental principle(s)

 Accountant may be pressurize to provide misleading information
 Accountant may commit to perform tasks where he/she is not proficient
 Client intimidates to dishonestly advocate its matter before tax department
 Third party threatens finance manager for nondisclosure of project information
 Client demands extra services from auditor otherwise it would not pay fee
 Close family member of accountant has financial interest in employing company
 Supplier induces procurement manager with gifts

Safeguards against Conflict of Interest

 Safeguards seek to reduce or eliminate threats

 Categorized in 4 groups
1. Profession safeguards
2. Safety net from work environment
3. Legislations by government provides protection
4. Personal actions of an individual

Safeguards from Profession

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Professionalism, Ethical Codes and Public Interest
Business Management and Strategy (CFAP-3)
Notes prepared by Muhammad Adeel

 Professional education and training

 Continuing professional development (CPD)
 Professional Codes of Ethics (by IFAC, ICAP, ACCA)
 Disciplinary proceedings against professional

Safeguards: Work Environment

 Corporate Code of Ethics

 Internal control systems
 Review procedures
 Segregation of duties
 Disciplinary procedures

Safeguards from legislative authorities

 Codes of Corporate Governance

 Other Laws and regulations e.g.
o Companies Act 2017
o Health and Safety Laws
o Environment Protection Laws
o Laws on Human Rights
o Anti-money laundering laws
o Anticorruption laws

Safeguards: Individual

 Compliance with professional standards (e.g. ISAs, IFRSs, COSO etc.)

 Compliance with applicable laws and regulations (e.g. Corporate Laws)
 Gets proper mentoring from senior professionals
 Contacts with professional bodies for assistance

Professional Codes of Ethics

 Issued by a Professional Body

 Contents

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Professionalism, Ethical Codes and Public Interest
Business Management and Strategy (CFAP-3)
Notes prepared by Muhammad Adeel

a. Background of the code

b. How code will be enforced
c. Fundamental Principles (to be followed by professional)
d. Conceptual Framework (guidance on how to apply the codes)
e. Examples on how to apply fundamental principles
f. Disciplinary actions (in case of breach)

Fundamental Ethical Principles behind Professional Codes of Ethics

1. Integrity
2. Objectivity
3. Professional Competence
4. Confidentiality
5. Professional Behavior

These are also assumed responsibilities of a professional

Pneumonic: CCPO-I
Integrity Member should be honest in business relationships
Objectivity No biasness and conflict of interest in professional judgments
Competence Responsible to maintain professional knowledge and skills
Confidentiality Responsible to maintain confidentiality of corporate information
Disclosure will be necessary if
 Required by Law
 Disclosure is professional duty
 Client authorizes
 Necessary to comply with ethical requirement
Professional behavior See above

There is always a threat that fundamental principles (from code of ethics) may be
compromised in a situation. Such a compromise is called Ethical Threat or Ethical
Dilemma

Conceptual Framework in Professional Codes of Ethics

 Provides guidance on how to apply codes

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Professionalism, Ethical Codes and Public Interest
Business Management and Strategy (CFAP-3)
Notes prepared by Muhammad Adeel

 Highlights conflict of interests and ethical dilemmas

 Guides on how to resolve conflicts of interests

Approaches to Codes of Ethics

1. Rule Based Approach

2. Principles Based Approach along with fundamental principles

Rule Based Approach Principles Based Approach

Ethical rules are established Fundamental ethical principles are framed

Requires members correctly understand principle
Ensure members comply with rules
and its application

Corporate Code of Ethics

A series of statements setting out organization‟s core values and explaining how its sees
its responsibilities towards its stakeholders

Gives a complete guideline regarding acceptable and unacceptable behavior

Areas covered in Corporate Code of Ethics

1. The purpose and values of business

2. Employees
3. Relationships with Customer and Suppliers
4. Shareholders
5. Society
6. Implementation

Components Key Areas

Purpose and business values 1. Vision and Mission Statement
2. Products and Market
3. Financial objectives of company
4. How does firm see its role in society

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Professionalism, Ethical Codes and Public Interest
Business Management and Strategy (CFAP-3)
Notes prepared by Muhammad Adeel

Employees 1. Relationship between company and employees

2. Acceptable standards of behavior (policies) e.g.
a. Recruitment and selection policies
b. Training and development policies
c. Staff appraisal policies
d. Reward system

Customers Acceptable standards guiding on how to develop and

maintain customers‟ faith in company and its products.
Key areas include
1. Product quality
2. Pricing decisions
3. After sales services

Suppliers Acceptable standards guiding on how to develop and

maintain relations with suppliers. Key areas include:
1. Supplier‟s identification and selection process
2. Input quality
3. Payment settlement
4. Gifting from suppliers

Society Standards to direct company on CSR

Implementation 1. Process of issuance of corporate code of ethics

2. How these codes will be implemented
3. When corporate codes will be reviewed

Factors limiting effectiveness of Corporate Codes of Ethics

1. Decided without participation from major stakeholders

2. Implementation without proper communication
3. Once written then forgot to implement
4. Once written and then never reviewed
5. Senior management doesn‟t regard codes of ethics
6. Non serious disciplinary actions for breach

How to resolve Conflict of Interest?

1. Collect all relevant facts and figures

2. Establish ethical issues involved

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Professionalism, Ethical Codes and Public Interest
Business Management and Strategy (CFAP-3)
Notes prepared by Muhammad Adeel

3. Refer to relevant fundamental principles.

4. Follow established internal procedures.
5. Investigate alternative courses of action.
6. Consult with appropriate persons within the firm.
7. Obtain advice from professional institute.
8. If the matter is still unresolved, consider withdrawing from the assignment or role

Highlighting Conflict of Interest: Whistle-blowing

1. Collect all facts and figures regarding ethical issues

2. Check authenticity of information
3. Check validity of source of information
4. Cross check information, if possible
5. Inform those charged with governance but before this;
a. Discuss matter with immediate senior
b. Discuss issues with department head
c. Convey information to audit department
6. Establish consequences of wrong information

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Professionalism, Ethical Codes and Public Interest
Business Management and Strategy (CFAP-3)
Notes prepared by Muhammad Adeel

DEFINITIONS
Professional

Member of a group of individuals having specific knowledge and skills set e.g. doctor,
engineer, lawyer, accountant and actuary etc.

Professional Body

Each professional group is organized and regulated by an authority called „Professional

Body‟ for example ICAP, ACCA, ICAEW, PMDC, PEC, CPSP etc.

Authorities:

 Sets membership criteria

 Authority to award membership
 Authority to cancel membership
 Defines professional code of ethics
 Protects rights of its members

Profession

Profession refers to a specific body of theory and knowledge that is used to support the
public interest

Characteristics of a Profession

1. Has body of technical knowledge and professional skills

2. A code of conduct and adherence to it
3. Accepts duty to act in favor of public interest

Public Interest

“Wellbeing of public as a whole rather as opposed to interest of individual member or a

specific section of society”

Page | 9
CORPORATE SOCIAL RESPONSIBILITY
BUSINESS MANAGEMENT AND STRATEGY
CFAP-3 (ICAP)

prepared and delivered by

MUHAMMAD ADEEL
instructor for
CFAP-3 (ICAP), SBL (ACCA), SM-6 (ICMAP)
TSB Education, Karachi
Ecological Footprints of Economic Activity
Business operations affect, positively or negatively, their community.
It can be said that an economic activity has „environmental footprints‟
and „social footprints‟. Economic activity is result of company
policies, procedures and management practices. CSR practices
enforces to manage social and environmental footprints
Social Footprints of Economic Activity
• Social footprint is the effect of economic activity on society.

• Social impact of business can be viewed from 2 aspects:

1. Company policies, procedures and practices affect
people (management and employees) within entity
e.g.
• Equal opportunities,
• Diversity management
• Training and development opportunities
• HSE policies
• Compliance of labor laws

2. Business activities affect people outside entity

• By affecting environment (ecological footprints)
• By promoting businesses that value society e.g.
– Company should ensure that its business
partners value business ethics
Ecological Footprints of Business Operations
• Extraction and utilization of natural resources at faster depletion rate
• Pollution in air, water and other natural resources through wastage

Impact on business
• Regulatory risks
• Compliance risk
• Reputation risk
Manage Social Footprints
Manage Social Footprints with
1. Effective diversity management
2. Proper policies about social harassment and discrimination
3. Health and safety policies are in practice
4. Policies regarding social media outbursts
5. Planting ethics in accounting practices
6. Compliance of legislative requirements
7. Concern for human rights
8. Policies regarding bribery and corruption
9. Discouraging suppliers found with negative social footprints
10. Charitable giving
11. Socially and environmentally conscious investments
Manage Ecological Footprints
Reduce Ecological Footprints
1. Strategize to use of renewable resources
2. Green procurement
3. Waste management
4. Carbon neutrality
Corporate Social Responsibility (CSR)
Definition
• Corporate Social Responsibility is a management concept
whereby companies integrate social and environmental
concerns in their business operations and interactions with
their stakeholders

Surgery of definition
• CSR is a management concept
• Management integrates social and environmental concerns
– in its business operations
– in its interactions with stakeholders
Formulation of CSR Policy
1. Develop Corporate Codes of Ethics
2. Identify Gap (where company is and wants to be)
3. Identify key stakeholders that can influence company
4. Set realistic targets regarding ethical values
5. Develop CSR strategies and implement in organization
6. Communicate CSR achievements (CSR Reporting)
7. Compare CSR achievements with:
1. Set CSR targets

2. CSR achievements of similar companies

CSR Reporting
• In some countries firms voluntarily published CSR reports
• CSR reports separate from annual financial reports

• CSR reports names:

– CSR reports
– Social and Environmental Reports
– Sustainability Reports (if focus environmental issues)

• Purpose of CSR reporting

– Communicate CSR policy and its objectives
– Benchmarking performance
– Improvement in operations
– Tracking progress and
– Evaluating processes

• Problem with CSR reporting was „lack of common structure‟

Global Reporting Initiative (GRI)
• US based NGO took an initiative named GRI

• GRI encourages Sustainability Reporting and presented a

common framework for CSR reporting

• Three areas are reported in Sustainability Report‟

1. Financial performance
2. Social benefits and costs of business operations
3. Impact of economic activity on environment and
natural resources

• GRI encourages quantifiable measurements rather

qualitative statements

• GRI emphasizes to specifically report adverse impacts and

costs of social and environmental aspects of business

• GRI presented „technical protocols‟ to measure above point

Global Reporting Initiative (GRI) Terminologies
• GRI defined Sustainability Reporting as
– „Practice of measuring, disclosing and being
accountable to internal and external stakeholders for
performance towards the goal of sustainable
development‟

• Sustainable Development
– GRI used term „Sustainable Development‟ to describe
economic, environmental and social impacts of
business activities
Indicators to measure Social Footprints
Indicators used to assess contribution of economic activities
towards society in terms of:
1. Employment generated
2. Diversity in Workplace
3. Health and Safety Issues
4. Contribution for Education
5. Housing/living conditions
6. Social Security
Indicators to measure Environmental Footprints
Few common indicators to measure environmental footprints
1. Global Warming Potential
2. Acidification Potential
3. Ozone Depletion Potential
4. Aerosol Optical Depth (AOD)
5. Ionization Radiation Potential
6. Photochemical Ozone Potential
7. Waste Treatment
8. Freshwater Use
9. Energy Resources Use
Disclosing impact of Economic Activity
• „Economic Model‟ of Society
– Continue to invest on economic activity if one is to
increase its wealth. Model don‟t consider
environmental and social impacts of business

• IASs and IFRSs focus on financial results of economic

activity. Don‟t report environmental and social
consequences of a business activity
• Investment decisions are taken on IFRSs based reports
rather considering sustainable developments
• Result of „Economic Model‟ of Society: Companies practices
regarding natural resources: limitless and free
Disclosing impact of Economic Activity
• Organizations are becoming aware of importance of
environmental and social impacts of business operations
• Current IFRSs don‟t completely report on sustainable
developments
• Alternative reporting for sustainable development are
– Triple Bottom Line Reporting
– Sustainability Balanced Scorecard
– Sustainability Assessment Model (SAM) with Full-Cost
Accounting Approach (FCA)
Triple Bottom Line Reporting
• Invented in 1994 by J. Elkington

• GRI also encourages this reporting method

• Method encourages entities to recognize social and

environmental issues in business models and reporting
system

• Using this system, companies report performance on:

– Financial perspectives
– Environmental aspects
– Social impacts

• Weaknesses:
1. No standard to measure social and environmental
impacts of economic activity
2. No independent audit of these reports
Balanced Scorecard (BSC)
• An approach to measure performance in long run

• Approach developed by Kaplan and Norton (1990s)

• They identified 4 dimensions of business performance

1. Financial dimension
2. Customer dimension
3. Internal perspective
4. Innovation and learning perspective

• For each performance dimensions, managers should set

targets and respective KPIs

• CSF are determined regarding each of 4 perspectives

• Financial dimension is the most important one but for

improved financial performance in long run other
perspectives need to be managed and improved
 BALANCED SCORECARD
Financial Perspectives Innovation Perspective
Identify how does firm create value for Identify how can an organization
its owners e.g. growth in share price or continuously improve and create value
return on investment etc. and then set to maintain its competitive position? Set
performance measures performance measures accordingly

Internal Perspective
Identify in which process firm must
outperform to satisfy its customers and
Customer Perspective achieve its financial goals? Then set
What do customers value? performance measures accordingly
(entity can then target its performance
e.g. cost, quality and delivery place, to (e.g. customer value quality, so firm should
satisfy its customers) invest in effectiveness of operational control
4 dimensions of organizational performance
 Balanced Scorecard (BSC)
Financial Measures Innovation Measures
• ROI • Employee productivity
• Revenue growth • Employee satisfaction
• Profitability growth • Learning curve
• Productivity • Revenue per employee
• Cost control • Employee turnover
• Cash flows • Sales of new products
• Financial ratios • New product development

Internal Processes Measures

• Collaboration with suppliers
• Collaboration with distributors
Customer Measures • Latest production equipment
• Market share and increase therein • Operational efficiency
• Customer base and increase therein • Operational controls
• Customer profitability • Defective products
• Customer retention • Labor turnover
• Customer satisfaction • Maintenance and repairs
Performance Measures of 4 dimensions of BSC • HSE issues
Sustainability Balanced Scorecard
• Moller and Scheltegger developed „Sustainability Balanced
Scorecard‟

• Sustainability Balanced Scorecard adds additional

performance dimension: „Non-Market Perspective‟

• „Non-Market Perspective‟ measures social and

environmental impacts of
– Business operations and
– Individual manger‟s decisions
Sustainability Assessment Model (SAM) and Full Cost Accounting (FCA)
• SAM measures impacts, on sustainability, of a product or
project over its full life cycle

• Full life cycle means from raw material extraction through

product‟s final consumption or project‟s completion

• Impacts
– Direct Costs
– Environmental costs and benefits
– Social costs and benefits

• Total impact is measured as Costs termed as „Full Cost‟

• Measurement system supporting SAM is termed as FCA

(Full Cost Accounting Approach)
Integrated Reporting
• Traditional Financial Reporting doesn‟t report
– company strategy,
– link between historical performance and strategy
– Company strategy and its future impacts

• Integrated Reporting filled this Gap

• Integrated Reporting
– A concise communication about how an organization‟s
strategy, governance, performance and prospects, in
the context of its external environment, lead to the
creation of value in the short, medium and long term

• Some countries have mandated „Sustainability Reporting‟

along Financial Reporting
International Integrated Reporting Council (IIRC)
• IIRC: a global coalition of
– Investors
– Companies
– NGOs
– Standard setters and
– Regulators

• IIRC aims to improve communication about corporate‟s

value creation through corporate reporting

• IIRC presented a framework for Integrated Reporting

“<IR>”
IIRC Framework
1. Should be designated and identifiable report

2. <IR> shall communicate information identified in IIRC framework unless

1. Reliable information is unavailable
2. Legal restrictions to disclose information
3. Disclosure may harm competitive position of entity

3. In case of 2.1 and 2.2 <IR> shall disclose

1. Nature of omitted information
2. Reason to omit information
3. In case of 2.1, steps taken to make information available

4. <IR> shall include a „statement from those charged with governance‟

1. Acknowledgement regarding report integrity
2. Acknowledgement that they have applied their collective mind to prepare an present <IR>
3. Conclusion whether <IR> is according to IIRC framework or not

5. <IR> without above mentioned statement shall explain

1. Role of those charged with governance played in <IR> preparation and presentation
2. steps being taken to include such a statement in future reports
3. time frame for doing so, which should be no later than the organization's third integrated report that references this
Framework