SPM CFAP 3 by Sir Atif Abidi-1

Chapter 1: Foundation of Strategy Page 1
DEFINITION OF STRATEGY AND LEVELS OF STRATEGY
Definition of Strategy
By Chandler: ‘the determination of basic long-term goals and the objectives of an enterprise,
and adoption of courses of action and allocation of resources necessary for carrying out these
goals.’
By Drucker: ‘a pattern of activities that seek to achieve the objectives of organisation and adapt
its scope, resources and operations to environmental changes in the long term.’
By Johnson, Scholes and Whittington: ‘the direction and scope of an organisation over long
term, which achieves advantage in a changing environment through its configuration of
resources and competencies with the aim of fulfilling stakeholder expectations.
From above definitions it can be summarized that strategy is about:

§ Direction Where is the business trying to get to in the long-term
§ Scope Which markets should a business compete in and what kind of
activities are involved in such markets
§ Advantage How can the business perform better than the competition in those
markets
§ Resources What resources (skills, assets, finance, relationships, technical
competence, facilities) are required in order to be able to compete
§ Environment What external, environmental factors affect ability to compete
§ Stakeholders What are values and expectations of the Stakeholders of business
Levels of strategy
Level of strategy Scope

Corporate strategy What businesses should we be in?
Business strategy How should we compete in each selected business?
Functional strategy How can that function contribute to competitive advantage of entity?
Consistency of strategies
§ Corporate strategy should seek to achieve the overall objective or objectives of the entity.
§ Each business strategy should have its own objective, and achieving the objective for a
business strategy should contribute towards achievement of the corporate strategy and
overall objective.
§ Each functional strategy should have its own objective, and achieving the objective for a
functional strategy should contribute towards achievement of relevant business strategy
Corporate strategy
The elements of corporate strategy are as follows:
§ Deciding the purpose of the entity.

- Why is the entity in existence?
- What is its mission and what is it trying to achieve?
§ Deciding the scope of the activities of the entity.
- What businesses the entity should be in, including the range of businesses.
§ Matching chosen business activities to external environment and to available resources.
- For example, a company should choose to sell products or services that customers
want to buy and for which we have (or we can obtain) resources
§ Matching the purpose and activities of the organisation to the expectations of its owners.
- These might expect investment income over time or growth in their wealth.
- Corporate strategy might therefore aim towards maximisation of shareholders’ wealth.
§ Matching purpose and activities of organisation to the expectations of other stakeholders.
- For example the expectations of employees, customers, government, suppliers, lenders.
Business strategy (also called competitive strategy)
§ A large group of companies might consist of many subsidiaries.

§ Subsidiaries might be organised into strategic business units (SBUs)/operational divisions.
§ Each SBU is a different business, and should have its own business strategy.
§ In a commercial entity, business strategy focuses how to compete successfully
§ Concerned more with how a business competes successfully in a particular market.
§ According to Porter, a successful competitive strategy must be based on either:
- Cost leadership, or
- Differentiation (explained later in Ch # 5)
Functional strategy (also known as operational strategy)
§ Relates to particular functions within an organisation, such as manufacturing, distribution,

marketing and selling, research and development, accounting, IT and so on.
§ Concerned with how each part of the business is organised to deliver the corporate and
business-unit level strategic direction.
§ Focuses on issues of resources, processes, people etc.
Levels of planning (approximately same as levels of strategy)
§ Strategic planning. Identifying objectives of entity, and plans for achieving those
§ Tactical planning. Shorter-term plans for achieving medium-term objectives.
(An example of tactical planning is the annual budget)
§ Operational planning. Detailed planning of activities, often at a supervisor level
For the achievement of short-term goals and targets.
(e.g. dividing workload between several employees)
ELEMENTS OF STRATEGIC MANAGEMENT AND BUSINESS ANALYSIS
Elements of strategic management by Johnson, Scholes and Whittington

Strategic position (Strategic Analysis)
Johnson, Scholes and Whittington suggest that there are 3 aspects to strategic position:
§ Expectations and purposes (Owners and Other Stakeholders)
§ The environment (Threats and Opportunities)
§ Strategic capability of the entity (Strengths and Weaknesses)
Strategic choices
There are 3 aspects to identifying alternative strategies and making strategic choices:
§ Corporate level and international (what should we be doing and shall we go international)
§ Business level strategies (e.g. cost leadership vs differentiation)
§ Development directions and methods (e.g. market development or diversification)
Strategy into action (Strategic Implementation)
There are 3 aspects to strategy implementation:

§ Organising
- Putting into place a management structure and delegating authority
- Organisation structure must be established that help entity to implement its strategies
- Individuals should be made responsible for different aspects of chosen strategies.
§ Enabling
- Enabling the entity to achieve success through the effective use of its resources.
- Each resource must be used to support the achievement of strategic objectives.
§ Managing change.
- Implementing strategy always means having to make changes
- Entities need to adapt and change in order to survive and succeed.
- Managing change successfully is an important aspect of strategic management.
The scope of business analysis
§ Strategy is implemented through normal day-to-day work processes and through co-
ordinating the efforts of many different individuals and groups.
§ Improvements in processes are often significant aspect of strategy implementation.
§ Changing processes can be necessary to improve operational effectiveness. (Ch # 7)
§ Strategies might be implemented as new projects and investments.
§ Project management is another aspect of successful strategy implementation. (Ch # 15)
§ Strategic management also requires support of management information systems (Ch#10)
§ Relevant financial analysis is also an essential part of strategic management.
O RGANISATIONAL PURPOSE AND STRATEGY
A hierarchy of objectives and plans
Overall Purpose • Mission

General Overall aims • Goals
Specific overall aims • Objectives
Detailed longer-term targets • Strategies and strategic aims
Implementation targets and • Tactical Plans & aims
Budgets
Action plans and targets • Operational plans & aims
Mission and mission statement
§ Mission is the purpose of an organsation and reason for its existence.

§ A mission describes the organisation’s basic function in society, in terms of the products
and services it produces for its customers.
§ Entities give formal expression to their mission in mission statement
Drucker suggested that it should answer the following fundamental questions:

§ What is our business?
§ What is our value to the customer?
§ What will our business be?
§ What should our business be?
Relevance of the mission statement (Purposes)

§ Provide a basis for consistent strategic planning decisions
§ Assist with translating broad intentions into corporate objectives
§ Provide a common purpose for all groups and individuals
§ Inspire employees
§ Improve understanding and support from external stakeholder groups and the public.
Vision
§ A vision statement represents a desired optimal future state of what the organization
wants to achieve over time.
§ For example the Vision of Microsoft is “Empower people through great software anytime,
anyplace, and on any device”
Elements of mission statement:

§ Purpose (e.g creating wealth, satisfy shareholders)
§ Strategy (e.g logic for business, product, service)
§ Scope (e.g. market, business method,)
§ Politics & behaviors
§ Values & culture (e.g commitment)
Functions/Importance of mission
§ Employee motivation
§ Contributes to profitability
§ Focus for strategic decision making
§ Communicates nature of organization to insiders and outsiders
Problems with mission statement:
§ Ignorance in practice
§ Sometimes only for public show and not for internal decision making
§ Only rationalising existence of organisation
§ Wish list; Full of generalisations
Components of an effective business vision?

§ Provides future direction
§ Expresses a consumer benefit
§ Is realistic
§ Is motivating
§ Must be fully communicated
§ Consistently followed and measured
Advantages of vision:
§ Gives general directions to organisation
§ Gives hope and motivation
§ Establishes scope and boundaries
§ Enables flexibility in choice
Problems with vision
§ It ignores real, practical problems
§ It can degenerate into wishful thinking
Goals and objectives
Goals are aims for the entity to achieve, expressed in narrative terms.
(e.g. maximising the wealth of company’s shareholders)
Objectives are derived from goals of an entity, and are expressed in a form that follows
“SMART” criteria
S Specific
M Measurable
A Agreed
R Realistic
T Time-bound
S TAKEHOLDERS AND STAKEHOLDER EXPECTATIONS (REVISION OF CAF)
Person who has an interest (stake) in what organisation does, and who might therefore try to
influence decisions and actions of the organisation.
Stakeholder Stake (Interest in Organisation)
1) Internal stakeholders
Shareholders / Owners - Ownership

- Long term growth
- Executive Directors - Remuneration
(full time employees) - Career Prospects
- Managers - Job Security
- Employees - Quality of Life
2) Connected stakeholders
Not a decision-maker or part of organisation, but are very influential in shaping the future of
the organisation and the decisions of its leaders.
Lenders - Repayment of their debt + interest on time

Suppliers - Timely Payments by customer (No bad debts)
- Customer retention
Customers - Quality goods and services
3) External stakeholders
Government -
Company profitability (For good taxes)
-
Strong economy (encourage business investments )
-
Decreasing unemployment
Local communities -
If organisation is a major employer in the area and business
activity that organisation brings to the area
General public, special - Public health (e.g. manufacturers of food and drugs &
interest groups and medicines)
pressure groups - Environment protection
- No exploitation of consumer through misleading
Non-executive They are not full-time employees, and they are usually appointed
directors. (NED) because they bring experience & knowledge from outside world
- Interests are different from executive directors: they are not
affected by concerns about remuneration, power & job security
Examples of common interests:

§ Shareholders and employees have a common interest in the success of the organisation.
§ High profits which not only lead to high dividends but also job security.
§ Suppliers have an interest in the growth and prosperity of the firm.
Examples of conflicting interests

§ Wage rises might be at the expense of dividend.
§ Managers have an interest in organisational growth but this might mitigate current profits
§ Growth of organisation might be at the expense of the local community and environment.
Source of power: Examples
- Power comes from an External Source

Legal rights - Shareholders have some voting rights under company law.
- Lenders have contractual legal rights
Publicity, and ability to - Environmental protection groups
influence customers or - Human rights protection groups
legislators - Animal welfare activists.
Control over key resources - A major supplier could exert influence by controlling supply
of a key resource
Buying power - Customers can exert influence collectively.
- They can switch to buying from competitors
- Power comes from an Internal Source

Position power - Individual employees due to special expertise that they
possess. (e.g. Top consultants and investment analysts)
Claim on resources - Power of trade union representatives might come from their
ability to withhold labour in case of dispute with entity.
Personal charisma or - Some individuals might exercise influence through their
influence personal qualities and charisma.
Stakeholder Mapping: Mendelow’s power / interest matrix
Group Strategy
A Minimal effort is needed trying to keep stakeholder informed or satisfied
B Keep them informed: about what is happening and why
C Keep them satisfied: Essential to avoid any situation that will increase
stakeholder’s interest, and persuade stakeholder to exercise its power.
D Key players and it is essential to obtain and keep their support.
INTENDED AND EMERGENT STRATEGIES
Intended strategy
§ A strategy that is planned in advance through a formal planning process. (Pro-active)

§ It is necessary for managers to understand that:
- It is a formally-approved choice about strategic direction that entity should be taking
- This choice was considered valid and appropriate at the time that it was approved.
- However, strategy should be flexible.
Emergent strategy
§ It is new strategy that develops or ‘emerges’ without formal approval given in advance.
§ It is result of reaction to changes in the environment (Re-active)
§ E.g. developing e-business for selling on the internet in response to dynamic environment.
§ These may be developed at different levels within an entity, in response to different events
§ When environmental change or ‘turbulence’ is high, responsibility for emergent strategy
might have to be decentralised and intended strategy becomes irrelevant
§ Ability of individuals of entity to innovate and be entrepreneurial is extremely important
Strategic intent
§ It is a high level statement of how an organisation achieves its vision. (overall direction)
§ It embraces the concept of ‘stretch’ meaning that current resources and capabilities would
not be sufficient to achieve the vision without some form of change.
§ Strategy development should be a mixture of intended strategy and emergent strategy.
§ An intended strategy is also a statement of strategic intent.
§ Although detailed strategies might change, strategic intent should be consistent.
§ When emergent strategies are adopted, these should also be consistent with the entity’s
strategic intent. (should not continually change its mind about what it is trying to achieve)
Enforced choice
§ Sometimes management might take the view that they have no real choice of strategy
§ They are ‘forced’ to adopt a particular strategy. Reasons might be:
- A key stakeholder, such as a major shareholder, is insisting on a particular strategy, or
- Every competitor is doing the same thing.
§ It is probably a sign of weak management that a strategy is considered unavoidable.
§ We should be looking for strategies that are most likely to achieve the corporate objectives.
FUTURE-BASING
§ It is a relatively new and alternative methodology that can be used to create a vision for
implementing strategy at any level within an organisation.
§ It is highly adaptable and simple to use.
Future-basing involves 3 phases:
1) The vision
§ A compelling vision needs to be established whilst ‘based in the future’.

§ It involves picking a date by which time success needs to be achieved.
§ ‘Success’ needs defining (i.e. what you want to achieve)
§ Describe the vision in a detailed and structured fashion as if it is already real.
§ It is achieved by pretending the future is in fact today and ‘telling a story’ in present tense.
§ Should be driven by what someone wants and not restricted to what they think is possible.
§ Creating a series of success headings or categories and listing specific achievements under
each one can assist with establishing the vision
2) Milestones
§ Milestone events and dates need to be identified by ‘remembering back’ what you must
have done to get to the future-based vision
§ It is sufficient to know that something happened rather than knowing how it happened.
§ For example:
Achievement Milestone events or actions Date

We successfully launched our We subcontracted technical development to 12 months ago
new website a specialist developer.
It is highly satisfying that the We involved a customer focus group in 11 months ago
Website received great feedback designing the new interface which
with a 97% excellent rating comprised a mix of existing and potential
customers.
We are pleased that over 85% of We ran highly successful sales and 5 months ago
our new-customer sales are now marketing campaign that focused on unique
generated through the Website customer benefits of the new website.
3) Reality check
§ It involves planning how to achieve milestones through scheduling and assessing resources
§ This is achieved by returning to ‘real time’ and asking questions about the vision created:
- Would we accept the vision without reservation exactly as it has been described?
- What resources would we need an how would we obtain them?
- What could prevent us realising the vision?
- What action could we take right now to make it happen?
- How would we ‘sell’ the vision to all impacted stakeholders?
Chapter 2: Business Environment Page 15
MODELS FOR ENVIRONMENTAL ANALYSIS
The purpose of environmental analysis
To make strategic choices about future, management of an entity need to understand the:
§ Factors in the environment that have a significant effect on the entity and what it does
§ Key drivers of change
§ Difference in impact that key drivers will have on different industries or different markets
§ Future impact of these key drivers in the environment
The purpose of the analysis is to

§ Assess the environment;
§ Analyse the position of entity in relation to its environment; and
§ Judge how strategies should be developed to take advantage of opportunities
§ Judge how strategies should be developed to deal with any potential threats.
Two models for environmental analysis
§ PESTEL model is used to identify significant factors in the macro-environment of an entity.

- P – Political environment
- E – Economic environment
- S – Social and cultural environment
- T – Technological environment
- E – Ecological influences (or Environmental issues)
- L – Legal environment
Sometimes the words SLEPT (without Ecological) and PEST (without Legal as well) are also used
§ Porter’s Diamond model is used to analyse reasons why entities in particular countries,
or regions within a country, appear to have a significant competitive advantage over
similar entities in the same industry, but operating in other countries or other regions.
PESTEL ANALYSIS
Limitations of PESTEL analysis
§ It is not so easy to identify environmental influences that will have the biggest influence in
the future.
§ It is used for qualitative analysis, but not for quantification.
§ A manager using PESTEL analysis might need to use his (subjective) judgement to decide
which environmental factors are more important than others.
PORTER’S DIAMOND
National competitive advantage
Business entities in some countries appear to enjoy a competitive advantage over businesses
in other countries in particular industries.
Clusters
§ A cluster is a concentration of inter-connected companies in the same geographical region.
§ It consists of companies in the same industry, and also specialised suppliers and service
providers to the industry.
§ It may also contain associated institutions that promote innovation and improvements in
the industry (e.g. universities with research departments and trade associations)
§ Many of the firms within a geographical cluster compete, but in many respects they also co-
operate with each other to develop their industry.
The reasons for national competitive advantage and the Porter’s Diamond
§ Traditional economic theory states that a country ‘inherits’ a comparative advantage over
other countries in particular industries because of the natural resources that it enjoys.
(e.g. land and mineral deposits, labour force and size of the population etc)
§ Michael Porter put forward a different theory of national competitive advantage
§ He argued that national domestic market plays an important role in creating competitive
advantage for companies on a global scale.
The four elements in Porter’s Diamond

Porter argued that a country could create factors that give its firms (business entities) a
comparative competitive advantage over firms in the same industry in other countries.
§ Porter’s Diamond model provides an analysis of the factors that give a country or region a
comparative competitive advantage.
§ Porter argued that firms and industries must innovate to remain successful
§ He used a diamond shape to present factors that create comparative competitive advantage
Favourable factor conditions
§ Basic Factors (exists naturally in a country)

- Physical resources (e.g. land and minerals)
- Natural conditions (e.g. climate in location)
§ Advanced Factors (that are ‘created’ and developed over time)
- Human resources (e.g. skilled labour, motivation levels and labour cost etc)
- Knowledge (when used successfully)
- Technological resources
- The infrastructure and logistics systems (e.g. excellent transport networks)
Related and supporting industries
§ When supporting industries are highly competitive, costs are reduced and innovation
occurs continually
§ Porter argued that competitive benefits of an innovative supporting industry are greater
when firms in supporting industry are themselves strong competitors in global markets.
Demand conditions in the home market
§ When local demand is strong, local firms will give more attention than their foreign
competitors to the needs of the local customers.
§ This will help to make local firms more innovative and competitive.
§ That innovation and competitiveness will help them to succeed internationally as well.
Firm strategy, structure and rivalry
§ Strategy: => What type of Strategy best suits in that industry.

§ Structure: => What is the best management structure in that industry
§ Rivalry: => Competition in that industry
The role of government in creating competitive advantage
§ Can create an education and training system that develops appropriate labour skills etc.
§ Can help companies to raise their performance levels by enforcing strict product standards.
§ Can create early demand for new products by purchasing products themselves
§ Can stimulate rivalry between local firms by enforcing strict anti-trust legislation.
Criticisms of Porter’s Diamond
§ It is more relevant to companies in advanced economies than to companies in countries

with developing economies.
§ The diamond model does not consider the role of the multinational company, which locates
production operations in different countries across the world.
Chapter 3: Competitive Environment Page 21
COMPETITION AND MARKETS
Customers and markets

§ A market is a place where buying and selling takes place.
§ A market can be defined by the:
- Products or services that are sold (e.g. clothes market, banking market, air travel)
- Customers or potential customers (e.g. consumer market, ‘youth market’)
- Geographical area (e.g. North American market or European market)
Industries and sectors

§ An industry consists of suppliers who produce similar goods and services.
(e.g. aerospace industry, automobile manufacturing industry, a construction industry etc)
§ Within an industry, there may be different segments.
§ An industry segment is a separately-identifiable part of a larger industry.
(e.g. insurance industry has several sectors, including general insurance and life assurance)
§ Management need to recognise which industries and segments they operate in
Generic types of industry (by Porter)

Fragmented - Businesses are small and each sells to a small portion of the total market
industries - Examples are dry cleaning services, hairdressing services, and shoe repairs
Emerging - That have only just started to develop, and likely to become much bigger
industries - Examples are space travel industry and telecommunication industry in
Africa
Mature - Where products have reached the mature phase of their life cycle.
industries - Examples are automobile manufacture and soft drinks manufacture.
Declining - Total sales are falling and number of competitors in market is also falling.
industries - An example in landline telephone services
Global - Operate on a global scale
industries - Examples are microprocessor industry and the professional football
industry
Convergence
§ Sometimes, 2 or more industries or segments converge, and become part of same industry
§ This can have a major impact on business strategy.
§ Convergence can be either:
- Demand-led convergence; where the pressure for convergence comes from customers.
Customers begin to think of two or more products as interchangeable.
(e.g. consumers reading newspaper online free of cost)
- Supply-led convergence; where suppliers see a link between different industries and
decide to bridge the gap between industries.
(e.g. Convergence of entertainment, voice and data communication industries)
STRATEGIC GROUPS AND MARKET SEGMENTATION
Strategic groups
§ It is a number of entities that operate in the same industry and that have similar strategies
§ All entities in same strategic group can then be treated as if they are a single competitor.
§ Instead of analysing each competitor individually, they can be analysed in groups
§ When there are only a few competitors in the same industry, the concept of strategic
groups has no practical value
Strategic space
§ When all companies in an industry are put into strategic groups, and these groupings are
analysed, a strategic space might become apparent.
§ It is a gap in the market that is not currently filled by any strategic group.
§ Existence of strategic space might provide an opportunity for a company to fill the space.
Product differentiation
Explained in Ch # 6
Market segmentation
§ A market segment is a section of the total market in which the potential customers have
certain unique and identifiable characteristics and needs.
§ Market segmentation is the process of dividing the market into separate segments, for the
purpose of developing differing products for each segment.
§ A business entity might try to sell its products to all customers in the market.
§ However, a business might instead choose to target its products to a particular segment
There are various ways of segmenting the market such as:

§ Geographical area
§ Quality and performance
§ Function (e.g. running shoes, football boots, hiking boots, riding boots, snow boots etc)
§ Type of customer: for example, consumers and commercial customers
§ Social status or social group
§ Age (e.g. adults, teenagers and younger children)
§ Life style.
Benefits of Segmentation
Better matching of customer needs
§ Customer needs differ.
§ Creating offers for each segment makes sense & provides customers with better
solution
Enhanced profits for business
§ Customers have different disposable income.
§ They are, therefore, different in how sensitive they are to price.
§ By segmenting, businesses can raise average prices and subsequently enhance profits
Better opportunities for growth
§ Market segmentation can build sales.
Retain more customers
§ Customer circumstances change, for example they grow older, form families, change
jobs or get promoted, change their buying patterns.
§ By marketing products that appeal to customers at different stages of life, a business
can retain customers who might otherwise switch to competing products and brands
Target marketing communications
§ Businesses need to deliver their marketing message to a relevant customer audience.
§ If the target market is too broad, there is a strong risk that the key customers are
missed and the cost of communicating to customers becomes too high / unprofitable.
§ By segmenting markets, target customer can be reached more often and at lower cost
Gain share of the market segment
§ Through careful segmentation, businesses can often achieve competitive production
and marketing costs and become the preferred choice of customers and distributors.
§ Segmentation offers the opportunity for smaller firms to compete with bigger ones.
Market segmentation and strategic space

FIVE FORCES MODEL BY PORTER
§ Five Forces model provides a framework for analysing strength of competition in a market.
§ It can also be used to explain why some industries are more profitable than others
§ Porter argued that two factors affect the profitability of a company:
- Industry structure and competition in the industry; and
- Sustainable competitive advantage
BOSTON CONSULTING G ROUP MATRIX (BCG MATRIX)
Stars
§ High growth businesses or products which are relatively strong as regards competition.
§ Often they need heavy investment to sustain their growth
§ Eventually their growth will slow and will become cash cows(if maintain its market share)
Cash Cows
§ Cash cows are low-growth businesses or products with a relatively high market share.
§ These are mature, successful businesses with relatively little need for investment.
§ They need to be managed for continued profit
Question marks
§ Businesses or products with low market share but operate in higher growth markets.
§ They have potential, but may require significant investment to grow market share
§ Management have to think hard about "question marks"
§ (which ones should they invest in and which ones should they allow to fail or reduce)
Dogs
§ Businesses or products that have low relative share in unattractive, low-growth markets.
§ May generate enough cash to break-even, but they are rarely worth investing in.
§ A strategic decision for entity may be to choose between immediate withdrawal from the
market or enjoying the cash flows for a few more years before eventually withdrawing.
§ It would be an unwise decision to invest more capital in ‘dogs’, in hope of increasing share
Using the BCG matrix
§ Build Share Company can invest to increase market share

(e.g. turning a "question mark" into a star)
§ Hold: Company invests just enough to keep the SBU in its present position
§ Harvest: Company reduces the investment in order to maximize short-term
cash flows & profits from SBU (May be turning Stars into Cash Cows)
§ Divest: Company can divest the SBU by phasing it out or selling it
(e.g. investing in the more promising "question marks").
Weaknesses in BCG model analysis
§ A product can have a strong competitive position in market, even with a low market share.
§ Competitive strength can be provided by factors such as product quality, brand name or
brand reputation, or even low costs.
§ A company might benefit from investing in market where sales growth is low.
§ It might be difficult to define the market.
- There might be problems with defining the geographical area of the market.
- It might also be difficult to identify which products are competing with each other.
§ BCG matrix might be better for analysing performance of strategic business units (SBUs)
and market segments but It is not so useful for analysing entire markets
§ It might be difficult to define what is meant by ‘high rate’ and ‘low rate’ of growth
§ It might be difficult to define what is meant by ‘high’ market share and ‘low’ market share.
§ Care is therefore needed interpreting a BCG analysis.
Chapter 4: Capability analysis of Business Page 32
S TRATEGIC CAPABILITY
‘Strategic capability reflects the ability of an entity to use and exploit resources available to it,
through competences developed in activities and processes it performs, the ways in which these
activities are linked internally & externally, and overall balance of core competences across entity
§ It can also be described as the ability of an organisation to use its core competences to
create competitive advantage.
§ Competitive advantage comes from successful management of resources, competences and
capabilities.
Achieving strategic capability
[
VALUE CHAIN
Definition of value
§ Value relates to the benefit that a customer obtains from a product or service.
§ Customers are willing to pay money because of the benefits they receive.
§ Business entities create added value when they make goods and provide services.
(e.g buying leather at Rs 1,000 and selling leather belt at Rs 5,000 creates a value of 4,000)
§ Most successful business entities are those that are most successful in creating value.
§ Customer should be willing to pay a higher price if he sees additional value in that product
- This extra value might be real or perceived.
(e.g. presumption of a good quality in a well-known brand name)
- The extra value might relate to the quality or design features of the product.
- Sometimes extra value can come from convenience of getting that immediately
The concept of the value chain by Porter
A value chain refers to inter-connected activities that create value. Activities within an
organisation can be analysed into different categories. The total value added by the entity is
the sum of the value created by each stage along the chain
§ Value can be created by any of these activities.

§ Company should analyse these activities to identify where they were most effective at
creating value, and where they were least effective.
§ Management can also identify which activities give them a competitive advantage
Primary Activities
1) Inbound logistics - All activities concerned with receiving and storing materials
2) Operations - The way in which inputs are converted to outputs
3) Outbound logistics - Activities associated with getting goods & services to buyer
4) Marketing and sales - Informing buyers and consumers about products & services
5) Service - Maintaining product performance after product has been sold
Support Activities
1) Procurement - How resources are acquired (e.g. negotiating with suppliers)
2) HRM - Recruiting, developing, motivating and rewarding the workforce
3) Technology Development
4) Infrastructure - Support systems and functions (e.g. finance, quality control etc)
Adding value
§ Management should look for ways of adding value at each stage in primary value chain.
§ Management should also consider ways in which support activities can add more value.
Methods of adding value

§ Alter a product design, and include features that might meet the needs more better
§ Making it easier for the customer to buy a product (e.g.providing a website for orders)
§ Promoting a brand name. (giving a sense of better quality)
§ Delivering a service or product more quickly.
§ Providing a reliable service at the promised time
Value creation and strategic management
§ By adding value, a firm will improve its profitability, by reducing costs or improving sales.
§ Customer would also get a better-quality product or a lower selling price.
§ The benefits can be re-invested to create more competitive advantage in the future.
RESOURCES AND COMPETENCES
Resources
§ A resource is any asset, process, skill or item of knowledge that is controlled by the entity.
§ Resources can be grouped into categories:
- Human resources [Leaders, managers and other employees of an entity]
- Physical resources. [Tangible assets of an entity]
- Financial resources. [Financial assets and ability to acquire additional finance]
- Intellectual capital. [Patents, trademarks, brand names acquired knowledge etc]
Threshold resources
§ Resources that an entity needs in order to participate in industry and compete in market.
§ Without threshold resources, an entity cannot survive in its industry and markets.
Unique resources
§ Controlled by entity that competitors do not have and would have difficulty in acquiring.
§ It might be obtained from:
- Ownership of scarce raw materials (e.g. ownership of exploration rights or mines)
- Location (e.g. a hydroelectric power generating company located near large waterfall)
- A special privilege (e.g. ownership of patents or a unique franchise)
§ Unique resources can be a source of competitive advantage, but can change over time e.g.:
- Exceptionally talented employees might be approached by competitors
- Competitors might find an alternative method of making a similar product
Competences
§ Competences are activities or processes in which an entity uses its resources.

§ They are created by bringing resources together and using them effectively.
§ A competence can be defined as an ability to do something well.
Threshold competencies
§ Activities, processes and abilities that provide an entity with the capability to provide a
product or service with features that are sufficient to meet customer needs
§ These are minimum capabilities needed to compete in a given market
- The areas where the entity has the same level of competence as its competitors, or
- These are easy to imitate (copy).
Core competencies
§ Activities, processes and abilities that give the entity a capability of meeting CSF, and
achieving competitive advantage.
§ These are ways in which an entity uses its resources effectively, better than its competitors,
and in ways that competitors cannot imitate or obtain.
§ A competence which is not exceptional in some way is not considered as core competence
Sustainable core competences
§ Competitive advantage is provided by sustainable core competences.

§ These are core competences that can be sustained over a fairly long period of time
§ Sustainable competences should be durable and/or difficult to imitate.
Core competences and the selection of markets
§ A core competence gives a business entity a competitive advantage in a particular market.

§ Core competence can be extended to other markets and other industries as well
§ An entity should look for opportunities to expand into other markets where it sees an
opportunity to exploit its core competences.
C APABILITIES AND COMPETITIVE ADVANTAGE
Competitive advantage is any advantage that an entity gains over its competitors, that
enables it to deliver more value to customers than its competitors. It is essential for sustained
strategic success
Capabilities
§ Capabilities are the ability to do something.

§ An entity should have capabilities for gaining competitive advantage.
§ These come from using and co-ordinating the resources and competences of the entity
§ Each business entity should have capabilities that rivals cannot copy exactly.
Dynamic capabilities
§ Business entities operate in a continually-changing environment.

§ Dynamic capabilities is term used to describe ability of an entity to create new capabilities
by adapting to its changing business environment, and:
- Renewing its resource base
- Developing new and improved core competences.
§ Dynamic capabilities are abilities to create, extend and modify ways in which an entity
operates and uses its resources in response to changes in the business environment.
§ Dynamic capabilities refer to the ability of an entity to recognise the need for change and
the opportunities for innovation, through new products, processes and services.
Cost efficiency and strategic capability
§ Cost efficiency (for an accountant) means minimising costs through control over spending
and the efficient use of resources.
§ Company must achieve a certain level of cost efficiency to be able to compete and survive
§ In strategic management, cost efficiency refers to the ability not only to minimise costs in
current conditions, but to continually reduce costs over time.
§ Cost efficiency has been described as a ‘threshold strategic capability’.
§ A cost efficiency capability is the result of both:
- Making better use of resources or obtaining lower-cost resources, and
- Improving competencies and capabilities
Ways of achieving cost efficiency
§ Economies of scale
- Ways in which average costs of production can be reduced by producing or operating
at a higher volume of output.
- Fixed costs is spreaded over a larger volume of output units
- Large entities can make use of economies of scale.
- Therefore businesses are very keen on continuous growth
§ Economies of scope
- In some industries, cost reductions might be achieved by making 2 or more products
- Entity achieves lower costs per unit than competitors who produce only 1 product
Cost efficiency can become a strategic capability, which will give the organisation competitive
advantage, for example by achieving ‘cost leadership’
Corporate knowledge and strategic capability
§ Corporate knowledge is knowledge and ‘know-how’ that is acquired by entity as a whole.

§ It is created through the interaction between technologies, techniques and people.
§ Knowledge gives a company a competitive advantage.
§ It cannot be easily replicated by a competitor (i.e. something unique)
§ A capability in knowledge management comes from a combination of unique resources and
core competences:
- Experience in an industry or market, and acquiring knowledge through experience
- Knowledge that employees have or acquire through training
- Management of people, and success in encouraging creativity and new ideas
- Technology, which makes it possible to store and communicate knowledge
- Management of IS/IT systems.
- Information analysis techniques.
ANALYSING STRENGTHS AND WEAKNESSES
There are several techniques that might be used to assess resources and competences:
§ Value chain analysis.
§ Capability profile of the entity
§ Resource audit.
§ SWOT analysis.
Resource audit
A resource audit should identify all the significant resources that are used by an entity. These
will vary according to the nature of the entity.
Human resources § Size and composition of the workforce

(Part-time and full- § Efficiency of the workforce
time employees, § Flexibility of the workforce
consultants, sub- § Rate of labour wastage/turnover
contractors etc.) § Labour relations between management and workers
§ Skills, experience, qualifications
Management § Size of the management team
§ Skills of the managers
§ Nature of management structure and division of authority
Raw materials § Costs as a percentage of total costs
§ Sources, suppliers
§ Availability
§ Future provision. Scarcity?
§ Alternative materials and alternative sources of supply
Non-current § What are they?
assets § How old are they? What is their expected useful life?
§ What is their current value?
§ What condition are they in?
§ What is the utilisation rate for each group of non-current assets?
Intangible § Are there any intellectual rights, e.g. patent rights & copyrights?
resources § Are there valuable brand names?
§ Does the organisation have any identifiable goodwill?
§ What is the reputation of the entity with its customers?
Financial § What is the capital of the entity?
resources § What are its sources of new capital?
§ What are the cash flows of the entity?
§ What are its sources of liquidity?
Internal controls § How well does the entity control the use of its resources?
and organisation § How effective are its controls over efficient use of assets?
§ How effective are its controls over accounting and reporting?
§ How effective are its controls over compliance with regulations?
Evaluating resources (VIRO Framework)
§ Value Does the resource provide competitive advantage?

§ Imitability Would it be costly for competitors to imitate the resource or acquire it?
§ Rarity Do competitors own similar resources, or are the resources unique?
§ Organisation Is the entity organised to exploit its resources to best advantage?
SWOT analysis
§ SWOT is an abbreviation for Strengths, Weaknesses, Opportunities and Threats

§ SWOT analysis is an important tool for auditing the overall strategic position of a business
and its environment.
§ SWOT analysis can be used in conjunction with other tools for position analysis
§ To identify strengths and weaknesses, you should consider the following:
- Resources
- Competences
- Capabilities
§ To identify opportunities and threats, you should consider the following:
- Changes, or possible changes, in the business environment
- PESTEL analysis
- Competitive environment.
§ A SWOT analysis might be presented as four lists, in a cruciform chart, as follows.
Illustrative examples for a small company producing pharmaceuticals.

Positive Negative
Internal Strengths Weaknesses
- Extensive research knowledge - Slow progress with research
- Highly-skilled scientists in workforce - Poor record of converting research
- High investment in equipment projects into product development
- Patents on six products - Recent increase in labour turnover
- High profit margins
External Opportunities Threats
- Strong growth in total market demand - Recent merger of major
- New scientific discoveries have not yet competitors
been fully exploited - Risk of stricter regulation of new
products
Interpretation of a SWOT analysis

§ The significance or potential value/cost of each item is not considered in initial analysis
§ Next step is to interpret it.
§ Interpretation involves identifying those SWOTs that might be significant
§ It involves ranking the SWOTs in some order of priority or importance.
§ Strategic management should then consider how:
- Major strengths & opportunities might be exploited to obtain competitive advantage
- Major weaknesses and threats should be dealt with, in order to reduce the risks.
Chapter 5: Competitive Strategies Page 43
C OMPETITIVE ADVANTAGE
Porter argued that 2 factors affect the profitability of companies:

§ Industry structure and competition within the industry (as explained in 5 Forces model)
§ Achieving a sustainable competitive advantage (at the level of the individual company).
Sustainable competitive advantage is achieved by creating value for customers.
Value and competitive advantage
§ Competitive advantage means doing something better than competitors

§ Having some competitive advantage over rival firms is essential.
§ A competitive advantage arises from the customers’ perception of value for money.
§ The key point to understand is that value comes from:
- A low price, or
- Features of the product that make the customer willing to pay a higher price, or
- A combination of price and product features that gives ‘best value’
§ Value is determined by the perception or opinion of customers.
Selecting business strategies for competitive advantage
§ Companies decide their corporate strategy, and the combination or portfolio of businesses
(‘product-markets’) they want to be in.
§ They must then select 1 or more business strategies that will enable them to succeed.
§ There are several approaches to identifying and choosing business strategies. Some of
these are explained in the remainder of this chapter.
THE STRATEGIC CLOCK
Purpose of the strategic clock - by Bowman (1996)
§ The 2 key factors in providing value to customers are the price and the perceived benefit
§ Companies should consider which combination of the two they should try to offer
§ Companies can also use the strategic clock to assess the business strategies of competitors,
and the combination of price and benefits that they are offering.
Using a strategic clock
The five broad groups of business strategy that might succeed are:
No Frills - To offer a product/service at a low price and with low perceived benefits.
Strategy - Should attract customers who are price-conscious
(Position 1) - Customers understand that they are buying a product/service that gives
them fewer benefits than rival products or services in the market.
Low Price - Customers perceive that product/service gives normal benefits.
Strategy - It is not regarded as a low-quality product.
(Position 2) - Only the lowest-cost producer in the market can implement this strategy.
- A ‘low price’ strategy can be applied in segments or sections of market.
Differentiation - Making a product/service appear to offer more benefits than rivals
Strategy - Companies might also promote the perception that their products or
(Position 4) services are much better in quality.
- It involves charging average prices for the product/service, or prices that
are perhaps only slightly higher than average.
Hybrid - Higher-than average benefits, and a below-average selling price.
Strategy - To be successful, it requires low-cost production and also the ability to
(Position 3) provide larger benefits.
Focused - To sell a product that offers above-average benefits for a higher price.
Differentiation - Products in this category are often branded as premium products
Strategy - Bon vivant by Gourmet restaurants and Ferrari sports cars are examples
(Position 5)
Business - Strategies in the area that could be described as ‘3 o’clock’ to ‘6 o’clock’
strategies that - Customers will not pay more for products that give them nothing extra.
will fail - Customers can pay similar prices for products offering more benefits
C OST LEADERSHIP , DIFFERENTIATION AND LOCK- IN STRATEGIES
Porter’s generic strategies for competitive advantage
Porter has suggested 3 strategies for sustaining

competitive advantage over rival firms:
§ Cost leadership strategy

(Operational effectiveness)
§ Differentiation strategy
(Strategic positioning)
§ Focus strategy
Cost leadership strategy
§ Being the lowest-cost producer in the market.

§ The least-cost producer is able to compete effectively on price
§ Companies must have excellent systems of cost control and should continually plan for it
§ Large companies can normally benefit from economies of scale rather that smaller one
Differentiation strategy
§ Making a product different from rival products in a way that customers can recognise.
§ This strategy is usually associated with charging a premium price for the product - often to
reflect higher production costs and extra value-added features provided for consumer
§ Companies need to offer products and services that are perceived as better
§ It usually requires investment and innovation.
§ Examples are Mercedes cars, Marriot hotels, Nesvita Milk (perceived for strong bones).
Focus strategy
§ Cost leadership & differentiation strategy can be pursued in market that is not segmented
§ Many consumer markets are segmented, and companies might select 1 or more particular
segments as target markets for their product.
§ Focus strategy concentrate on selling the product to a particular segment of the market.
§ Within a market segment, a business entity might seek competitive advantage through:
- Cost leadership within the market segment (cost focus), or
(e.g. offering crash courses for CA Final students at nominal prices)
- Product differentiation within the market segment (differentiation focus).
(e.g. Pocket Notes for different subjects of CA by CA Notes Publication)
Porter: 6 principles of strategic positioning
1) Strategic goal should be to achieve a superior long-term return on investment.

(should not select any other objective e.g. maximising sales volume or market share)
2) The strategy must offer a unique value proposition for the customer.
(combination of price and benefits that competitors do not offer)
3) There should also be a distinctive value chain.
(Should perform similar activities in a different way that offers customers more value)
4) The selected strategy will involve some trade-offs.
(By selecting a set of strategic options, company chooses not to select alternative options)
5) All different elements in strategy and value chain should link and reinforce each other.
6) There should be continuity of strategic direction (should apply the strategy consistently)
Target markets
An entity must decide which markets or market segments it should target. It must:
§ Identify the total market for the products or services that it sells
§ Recognise the ways in which the market is or might be segmented
§ Decide whether to sell its products to all customers in the market
§ Decide whether to try to be market leader, or whether to pursue a differentiation strategy
§ If it chooses a segmentation strategy (focus strategy), select the segments that it will target
§ Within the targeted market segment (or segments), decide whether to try to be the market
leader or whether to pursue a differentiation strategy.
Market niche
It is a small segment of a market. An entity might target a market niche, and expect to achieve its
corporate objectives by selling its products or services to the fairly small number of potential
customers.
Leaders, followers, challengers and nichers
Market Leader
§ Develops strategies to expand the total size of the market
§ Pursues strategies to expand its own current market share
§ Defends its own market share vigorously
§ Is customer driven and innovative
§ It tends to be on the cutting edge of new technologies and new production processes.
§ It sometimes has some market power in determining either price or output
Market Challenger
§ Retains a substantial portion of the market share
§ Launches direct and indirect attacks on the Market Leader in areas in which there are
apparent signs of weakness of the Market Leader
§ Attacks firms other than the Market Leader to increase its own share of the market
§ Offers price discounts and reduces own cost.
Market Follower
§ Imitates and attempts to adopt the policies of the Market Leader
§ Adopts a secondary or runner-up position as it lacks resources to challenge Market Leader
§ Follows its particular strengths and skills to maintain its market share and profitability as
it considers that pursuing any other strategy would result in a less favourable outcome.
§ No expensive R&D failures as best practices are already established.
Niche Marketer
§ Is a relatively small or a medium-sized firm
§ Specializes in a narrow segment of the market according to customer size
§ Meets the requirements of a particular geographical area.
§ Tend to market high end products or services
§ Normally able to use a premium pricing strategy
Product positioning
§ Product positioning is defined as the concept of the product in the mind of the customer.
§ Advertising is an important factor in creating product position.
§ Best product position to achieve in the mind of consumers is the position of number 1.
§ Market leader dominates the market for many products and services
Being the number 1
§ When an entity is the market leader, it should want to maintain its market leadership.
§ Most effective way of becoming number 1 is to be first into the market at the beginning of
the product’s life cycle.
§ If it is not possible, an entity needs to create a new image for its product that will enable it
to take over as the perceived number 1.
Being the number 2
§ Unless the entity wants to challenge for the position of number 1, it must do what it can to
win customers from its position as number 2.
§ Advertising can help (e.g. We try harder.’ As we are at number 2)
Product positioning for followers and nichers
§ Entities should try to find a way of being number 1 in a particular way.

§ It is much better to be seen as the number 1 in a market segment than number 5 in market.
§ To create a product position, entities might devise various marketing strategies.
§ For example:
- A newspaper or magazine might claim to be number 1 choice for investment bankers
- A local radio station might claim to be the number 1 for a particular type of music
- Apple Mac PCs were not the number 1 make of personal computer, but it was marketed
as the number 1 PC for graphic designers.
Lock-in strategy
§ A lock-in strategy is another approach to gaining and keeping competitive advantage.

§ The idea of ‘lock-in’ is that when a customer has made an initial decision to purchase a
company’s product, it is committed to making more purchases from the same company
§ Lock-in strategies are fairly common in the IT industry.
- Microsoft has successfully locked in many customers to its software products.
- Apple adopted a lock-in strategy for digital downloading of music from internet.
§ A successful lock-in strategy often depends on becoming the industry ‘leader’ or provider
of the standard product to the industry (e.g. Microsoft operating systems for PCs).
§ After that it is very difficult for other suppliers to break into the market.
§ Lock-in tends to be achieved early in a product’s life cycle
Strategies that might be pursued in a hypercompetitive market are as follows:
§ Shorter product life cycles.

- Seek to introduce new improved products quickly
- Introducing a ‘better’ product might allow a company to gain market share soon
§ Copy competitors.
(Might remove the competitive advantage that the competitors currently enjoy)
§ Prevent a competitor gaining a strong initial position by responding quickly.
§ Concentrate on small market segments that might be overlooked by competitors.
§ Unpredictability.
(Should continually strive for radical solutions)
§ In some situations, it might be possible to compete by building alliances with some smaller
competitors to compete with larger competitors
Chapter 6: Alternative Strategies Page 53
STRATEGIC DIRECTION : INTRODUCTION
Product-based and Resource-based strategies
§ With a product-based strategy, a firm should identify the products that it wants to sell
and the markets or market segments in which it should sell them.
§ With a resource based strategy, a firm look at the strengths and competencies in its
internal resources.
Four key areas for successful strategy development
1) Entity should make clear the product-market areas in which it expects to operate.
2) Entity should identify areas that will give the entity a strong competitive advantage
3) Growth vector/direction - might be a new product area, a new market, or both.
4) Entity should also indicate how it might expect to benefit from synergy by doing this.
Product based strategies and strategic direction
Strategic choices must be made about the direction that the entity should take. For companies,
strategic direction is often expressed in terms of:
§ Products or services that the company wants to sell
§ Markets or market segments it wants to sell them in, and
§ How to move into these product areas and market areas, if the entity is not there already.
To achieve growth in the business, an entity must:

§ Sell more in its existing markets (try to make its existing markets bigger)
§ Sell new products in its existing markets
§ Sell existing products in new markets or new market segments
§ Sell new products in new markets.
These are strategic directions that Ansoff described in a growth sector matrix
STRATEGIC DIRECTION : ANSOFF’S GROWTH MATRIX
Product
Existing New
Market Penetration Product Development
Existing
(protect & build) (or innovation strategy)
Market
Market Development Diversification

New - Related (concentric)
- Unrelated (conglomerate)
Market penetration strategy
§ An entity seeks to sell more of its current products in its existing markets.
§ This strategy is a sensible choice in a market that is growing fast.
§ It is more difficult to implement when market has reached maturity, or is growing slowly
§ A market penetration strategy require least amount of new investment.
§ Kotler suggested that market penetration calls for aggressive marketing in 3 ways:
- Persuading existing customers to use more of product or service (secure dominance)
- Persuading potential customers (who have not bought product in past) to start buying
(tactics might include advertising or special promotional offers)
- Persuade individuals to switch from buying the products of competitors.
§ Some risks with this strategy can be:
- If company fails to increase sales, its business will have no strategic direction
- Competitors may be much more innovative and competitive.
- The strategies selected by major competitors might be a threat
Market development strategy
§ Involves opening up new markets for existing products.

§ It also requires less investment
§ Kotler suggested that there are some ways of pursuing this strategy:
- Entering new geographical markets (regional, national or international expansion)
- Offering slightly differentiated versions of its existing products
- Making products available through different distribution channels.
Product development strategy
There are several reasons for choosing this strategy.

§ Strong brand name for its products can extend the goodwill to new products.
§ Entity might have a strong R&D department or a strong product design team.
§ Entity has to react to new technological developments by producing new range of products
§ Competitor might also have developed a new product.
§ Changing taste and needs of the customers
Disadvantages of a product development strategy are that:

§ Developing new products can be expensive
§ A large proportion of new products are unsuccessful.
Diversification strategy
Concentric diversification
§ New product-market area is related in some way to entity’s existing products and markets
§ Product is new but still within broad confines of industry. For exmples:
- PEPSI started selling Lays
- Manufacturer of vacuum cleaners might diversify into washing machines
- An airline company might acquire an international chain of hotels.
Conglomerate diversification
§ New product-market area is not related in any way to entity’s existing products & markets.
(e.g. Gormet Bakers started Business of furniture or Kawasaki selling musical instruments)
§ Aim is to build a portfolio of different businesses.
§ Riskier than concentric diversification, because in concentric diversification, entity is
moving into related product-market areas, where it might be able to use its experience etc
§ The reasoning behind this strategy might be as follows.
- Some businesses might perform badly, but others will perform well (it reduces risk).
- Diversification will save costs and generate ‘synergy’ (e.g. by economies of scale)
- Can exploit different business opportunities whenever and wherever they arise.
This concept is rejected by some business analysts, who argue that shareholders can themselves
reduce risk if they want to by spreading investments in different companies in different industries
Diversification and integration
Integration means extending a business. There are two main types of integration:
Horizontal integration
§ Obtaining a larger share of its existing product markets.

§ Typically, an entity might acquire one or more of its competitors.
Vertical integration.
§ Acquiring (or merging with) another entity at a different stage in the supply chain.
§ A strategy of vertical integration is usually a form of concentric diversification.
§ Vertical integration might be forward, or backward.
Forward and backward integration
Forward integration
An entity enters the product markets of its customers. For example:
§ A manufacturer of tyres might go into the production of motor cars or motor cycles
§ A wholesaler (selling goods for resale to retailers) might go into business of retailing itself
Backward integration
An entity enters the product markets of its suppliers. For example:
§ An entity operating a chain of cinemas might go into the market for film production
§ A shoe manufacturer might enter the market for leather production.
Arguments for vertical integration

§ Backward integration gives an entity control over its source of supply.
§ Forward integration can give an entity control over its channels of distribution.
§ Vertical integration allows entity to extend its expertise into related product markets.
§ Vertical integration makes it easier to find ways of reducing costs in supply chain
§ Vertical integration can help to differentiate the product.
Arguments against vertical integration

§ A relaxed relationship is likely to grow between an in-house manufacturer and seller.
§ In house manufacturer knows that group company will almost certainly buy components
(hence there is little pressure for cost efficiency and innovation)
§ If manufacturer takes over distribution chain, skills needed to manage it will be different
§ Company should examine its value chain and should focus on its core competences.
Gap analysis
§ GAP is difference between position a business entity wants to be in by end of the planning
period, and the position entity is likely to be in if it does not have any new strategy.
§ Strategies selected for the planning period should be sufficient to close this strategic gap.
§ The forecast is normally a forecast of annual profit (sort of factor).
§ The strategic gap might be closed by a combination of product-market strategies.
(Rs)
Withdrawal strategy
Strategy for withdrawing from a particular product-market area. Might be appropriate when:
§ Entity can no longer compete effectively, or
§ Entity wishes to use its limited funds and resources in a different product-market.
A withdrawal strategy might be adopted as a deliberate policy by deciding to:

§ Reduce the range of products offered to the market
§ Reduce the number of markets or market segments
§ Withdrawing entirely from the market, and no longer operating in the market.
The reasons leading to a withdrawal might be any of the following:

§ A decline in the size of the market or market segment
§ More effective and successful competition from rival firms.
§ Poor financial results; for example, the product might be loss-making.
§ A decision by entity that the product is no longer a ‘core product’
Consolidation and corrective strategies
Consolidation strategy
§ A business entity might decide that it does not need to grow.

§ A consolidation strategy is a strategy for maintaining market share, but not increasing it.
§ There are several reasons why an entity might choose a non-growth strategy.
- Entity might be managed by their owner, who does not want business to get larger.
- Management may be reluctant to manage the a bigger and enlarged entity.
§ Business entities must continue to innovate even to ‘stand still
Corrective strategies
§ A strategy for making corrections and adjustments to current strategy

§ To counter threats from competitors or to respond to changes in customer needs.
§ Corrective strategies might be necessary as a part of a consolidation strategy.
METHODS OF STRATEGIC DEVELOPMENT
There are three main approaches to developing a product-market strategy for growth:
§ Internal growth (also known as organic growth)
§ Growth through acquisitions or mergers
§ Joint ventures and strategic alliances.
Growth through internal development (Organic growth)
Organic / internal growth Acquisition Strategies

Description Achieve growth by expansion in Involve expansion by purchase of
own line of products and market controlling interest in another
portfolio. It relates to increasing existing companies.
market share in existing market
Expansion Steady and planned manner Acquisition of existing assets of
through extending over a schedule another company
Success Management ability to formulate Achievement of corporate, business
through and implement sound plans & operational level synergies
Competition Can become more intense, if there May be reduced by acquiring a rival
Level are relatively few strong players competitor
Advantages of growth through internal development:
§ Management can control the rate of growth more easily, and ensure that the entity has
sufficient resources to grow successfully.
§ Entity should be able to focus on its core competencies
§ Human Resources can be utilized more effectively
§ Organisational learning
Disadvantages of growth through internal development.
§ There is a limit to the rate of growth a business entity can achieve

§ Expansion of business beyond limits of its current capacity can become much difficult
§ Achieving diversification can also be difficult
§ Change management seems impossible
Greiner’s growth model
§ With the increasing age of an organization, it grows in size through a series of changes
§ Each change occurs in response to a ‘crisis’, when existing organisation and management
structure is no longer capable of handling a business.
§ There are five phases in the life of an entity.
§ Each phase has 2 characteristics i.e. Growth and Crises
§ Phase 1: Period of growth through creativity

- Entity is probably managed in an entrepreneurial way
- With growth organisation needs planning and control systems.
- Management must become more ‘professional’.
- Entity therefore introduces professional management, and enters next phase of growth
§ Phase 2: Period of growth through direction
- As entity grows, the hierarchical management structure becomes inefficient.
- Management control from the top is not as effective as it used to be.
- The ‘tensions’ between senior management and local management grow.
- Until local managers are given more authority, entity will be managed inefficiently.
§ Phase 3: Period of growth through delegation
- Entity is reorganised, with much more authority delegated to ‘local’ managers.
- Central management concentrate much more on strategy and business expansion.
- As business grow, central management realise that they are losing their authority
- Local managers are becoming perhaps too powerful and unaccountable.
§ Phase 4: Period of growth through co-ordination
- Central management monitor their local managers carefully, using reporting systems.
- The focus is now on co-ordinating the activities of all the different local operating
divisions within the entity and consolidating the business.
- As entity continues to grow, reporting systems start to create a bureaucratic culture
- Local managers become angry at having to provide so many reports to head office
§ Phase 5: Period of growth through collaboration
- Now head office and local managers find ways to collaborate more constructively.
- There is a greater emphasis on teamwork and problem-solving
- Participation in decision-making by more individuals is encouraged.
- If entities continue to grow, they will have to go through the phases of transformation.
Mergers and acquisitions
§ In merger, the two entities that come together are approximately the same size.
§ In acquisition, one entity is usually larger than the other and acquires ownership (control)
by purchasing a majority of the equity shares.
Advantages of acquisitions and mergers
§ Much faster than growth through internal development.

§ Can give immediate ownership of new products, new markets and new customers
§ Enables to enter new market where the barriers to entry are high
§ An acquisition prevents a competitor from making the acquisition instead.
§ It might result in cost savings and higher profits (‘synergy’).
- Surplus assets can be sold off.
- Often results in redundancies for large numbers of employees.
- Two Research and Development departments can be combined into just one
Disadvantages of acquisitions and mergers
§ An acquisition might be expensive.

§ Return on investment for the entity making the acquisition might therefore be very low.
§ Can result in a loss of proportional ownership of the entity by investor.
(e.g. shareholder holding 10% of 1 company might only own 5% of merged company)
§ The 2 entities will have different organisation structures, different management styles,
different cultures, different systems of salaries and wages etc.
§ There will probably be ‘clash of cultures’, and it may be difficult for them to work together.
§ There is often a high risk of a loss in efficiency and higher operating costs.
Acquisitions: the need for financial strength
A company needs one or more of the following.

§ A large amount of cash that is available for long-term investment.
§ Access to additional funding, in form of new equity (from new share issues) or borrowing.
§ Highly-regarded shares of investor company (if it’s a share-for-share exchange)
METHODS OF BUSINESS FORECASTING
Intuitive (qualitative) forecasting
Intuitive (qualitative) forecasting is forecasting based, not on mathematical techniques, but on

intuition and opinion of experts – i.e. qualitative factors. These techniques include following:
Think tank
§ A think tank is a group of experts who meet to discuss what might happen in the future,
and possibly to recommend a course of action or strategy for the future.
§ A firm might establish a think tank.
§ This will then meet occasionally and produce reports for senior management
The Delphi method of forecasting

§ Several different experts are each asked – individually – to provide forecast.
§ The experts do not meet and do not share their ideas.
§ Management obtains their opinions separately, and then compare the views
§ Management prepares a summary that incorporates the suggestions of all the experts
§ Same document is circulated to the experts again in one or more further rounds.
§ Experts are encouraged to revise their earlier suggestions in light of suggestions of others
§ During this process of 2 or more rounds the range of the suggestions will decrease
§ Group will automatically converge towards the best suggestion incorporating all opinions
Sales force opinions

§ Liaising with sales force to gather their perspectives and forecasts on sales and market.
§ A common approach is to add together forecasts provided by each individual sales team
§ This is called a ‘bottom-up’ approach.
Market research
§ Involves interacting with the market, perhaps through surveys, questionnaires and
feedback forms, to establish the market’s view in order to gauge potential demand.
Scenario planning
§ A method based on the analysis of different possible ‘scenarios’ that might occur in future.
§ Each realistic scenario should consider different situation & combination of circumstances
§ When circumstances in scenario are fairly extreme, the analysis is called ‘stress testing’.
§ By studying probable outcome, management can identify a suitable strategy in response.
Statistical forecasting techniques
§ These are methods of forecasting with mathematical models.

§ In some cases, forecasts might be prepared by projecting historical trends on same trends
§ Other forecasting models are much more complex and sophisticated.
§ These are based on an analysis of key factors in organisation and its environment.
§ Models that simulate relationships between these key factors can be used for forecasting.
High-low method
§ Provides an estimate of fixed and variable costs for an activity based on 2 historical costs
- Total costs for the highest recorded volume of the activity, and
- Total costs for the lowest recorded volume of the activity.
§ Where appropriate, one or both cost figures is adjusted to allow for price inflation
§ It is a simple method of separating mixed costs into fixed and variable cost elements.
§ It is based on assumption that 2 historical records are reliable indicators of cost behaviour.
Linear regression analysis
§ A technique for estimating a ‘line of best fit’ from historical data.

§ It can be used for analysing historical data for costs to estimate fixed and variable costs.
§ It can also be used to analyse a historical trend to prepare a forecast on assumptions that
- The trend is upward or downward in a ‘straight line’ (i.e. y = a + bx ), and
- The historical trend will continue in a straight line in the future.
§ Linear regression analysis is a more accurate forecasting method than the high-low method
§ It assumes that total costs vary with changes in the selected activity.
§ This assumption might be incorrect. (total costs may change in response to other factors)
§ Reliability of estimates can be tested by calculating a correlation coefficient.
The nature of a time series
§ A time series is a record of data over a period of time.

§ In budgeting, an important time series is amount of annual sales revenue over time.
§ Historical data about sales might be used to predict what sales will be in the future
§ Trends might be identified over time for other aspects of a business, such as the number of
people employed by the entity or the number of customer orders handled.
§ With these techniques, it is assumed that:
- There is an underlying trend, which is either an upward trend or downward trend.
- There may be seasonal variations around the trend line.
§ Time series can then be used to make estimates for a future time period, by calculating a
trend line value and then either adding or subtracting appropriate seasonal variation
ASSESSMENT OF BUSINESS STRATEGIES
Before deciding whether or not to choose a particular business strategy, an assessment should
be carried out to judge whether the strategy is acceptable. Strategy should be evaluated for its:
§ Suitability: Does it address the strategic requirements, given the circumstances
and the situation?
§ Acceptability: Does it address the strategic requirements in a way that will be
acceptable to significant stakeholders?
§ Feasibility: is it practical?
Suitability of a strategy
A strategy is suitable if it would achieve the strategic objective for which it is intended.
§ If the purpose of the strategy is to gain competitive advantage, it is necessary to assess how
the strategy might do this, and how effective the strategy might be.
§ How suitable are chosen strategies for market development, product development or
diversification?
§ Is the business risk in the strategy acceptable, or might the risk be too high?
Several techniques might be used to assess the suitability of a strategy. These include:
§ Assessment of resources and competencies
(Should not be considered suitable unless it’s expected to make use of core competences)
§ Business profile analysis.
§ Life cycle analysis and the life cycle portfolio matrix
Acceptability of a strategy
Whether it will be acceptable to key stakeholders.

§ Management will not regard a strategy as acceptable if the expected returns on investment
are too low, or if the risk is too high.
§ Investors might regard a strategy as unacceptable if they will be expected to provide a
large amount of additional investment finance.
§ Employees and investors might consider a strategy unacceptable if they regard it unethical.
Feasibility of a strategy
§ Is there sufficient finance for the strategy? Can we afford it?

§ Can we achieve the necessary level of quality that the strategy will require?
§ Do we have marketing skills to reach the market position that the strategy will expect us ?
§ Do we have enough employees with necessary skills to implement strategy successfully?
§ Can we obtain the raw materials that will be needed to implement this strategy?
§ Will our technology be sufficient to implement the strategy successfully?
An important aspect of strategy evaluation is the financial assessment:

§ Will the strategy provide a satisfactory return on investment?
§ Is the risk acceptable for the level of expected return?
§ What will be the expected costs and benefits of the strategy?
§ How will it affect profitability?
§ What effect is the strategy likely to have on the share price?
Selecting individual investments: strategic fit
§ When an entity has decided its business strategies, it might make new investments
§ In principle, all new investment decisions should be:
- Expected to provide a minimum acceptable financial return
- Consistent with the chosen strategies, and there should be a ‘strategic fit’
§ Investment providing high returns (not being a good strategic fit) may be undertaken.
§ Investment making strategic fit (but not providing high returns) may also be undertaken.
Chapter 7: Management of Change Page 72
O RGANISING FOR SUCCESS
Strategy implementation
§ After a strategic position analysis has been undertaken, available strategies have been
evaluated and the preferred strategies have been selected, the selected strategies must be
implemented.
§ Achieving strategic objectives requires successful strategy implementation.
§ It takes the form of day-to-day actions and relationships.
§ Three key aspects of strategy implementation are:
- Organisational structure, including the organisation of processes and relationships
- Managing strategic change
- Implementing strategy through a combination of intended and emergent strategies.
Organisation structure
§ Organisation structures differ between entities.

§ The organisation structure for an entity should be appropriate for the size of the entity, the
nature of its operations, and what it is trying to achieve.
§ Organisation structure must enable the entity to develop and implement plans effectively.
§ There are several different types of organisation structure like:
- Entrepreneurial organisation structure
- Functional structure
- Divisional structure
- Matrix organisation
Different type of organizational structures
1) Entrepreneurial organisation
Entity that is managed by its entrepreneur (owner).

§ Owner takes all main decisions, and does not delegate to anyone else
§ Entity is organised around entrepreneur and no formal management.
§ Operations and processes are likely to be simple, and the entity will probably sell just a
small number of products or services.
An entrepreneurial structure is appropriate when an entity is in the early phase of its life. As it
grows larger, however, an entrepreneurial structure will become inefficient, and a formal
management structure is needed.
2) Functional organisation structure

§ Responsibilities are divided between managers of different functions (departments).
§ Each function has its own management structure and its own staff.
Board of
Directors
Human
Production Marketing Accounts
Resource
3) Divisional organisation structure

A division is an area of operations, defined by:
§ Different geographical areas (e.g. Lahore, Karachi, Faisalabad).
§ Different products (e.g. TV, Mobile, ACs, Refrigerators).
§ Different customers (e.g. industrial products and consumer products).
Board of
Directors
Lahore Karachi
Division Division
Production Marketing Accounts Production Marketing Accounts
4) Matrix organisation structure
Dept Production Finance Marketing HR

Division Mr. A Mr. B Mr. C Mr. D
Lahore Mr. X
Karachi Mr. Y
Faisalabad Mr. Z
§ Responsibilities are divided into two type of managers

§ Division managers (Mr. X, Mr. Y & Mr. Z) are appointed with overall responsibility for
individual division regarding administrative issues.
§ At same time, functional managers (Mr. A, Mr. B, Mr. C & Mr. D) retained their decision-
making authority regarding technical issues.
STRATEGIC CHANGE
The nature of change
Planned change(or proactive change)

§ Is deliberate and intended.
§ Entity makes change to move from an existing situation to a new one
§ Entity might see an opportunity to develop
Unplanned change (or reactive change)
Happens in response to developments, events and new circumstances
§ The change is not intended in advance.
§ Often seen as a reaction to a threat or an adverse event.
Change can be:

Incremental change
§ Fairly small change.
§ No need for a major reorganization or restructuring
§ The entity should be able to adapt easily to the change.
Transformational change
§ Big change.
§ Requires a major reorganization or a restructuring
§ Change has a big impact on entity and on the people working in it.
§ Requires change management skills from (the ‘change managers’).
Change is also either:

§ ‘A one-off’ event, or
§ A continuing process of development and change over long period
Triggers for change (Reasons for change)
External triggers for change (in environment) – PESTEL

Political § Unexpected political crisis
§ New Govt. Policy
Economic § Unexpected developments in economies of certain foreign
countries also attracts to shift business there
Social and cultural § Changing public attitudes and opinions
Technological § New technology
§ Existing technology becomes obsolete
Ecological/ environmental § People’s concern for environment friendly companies
Legal § Laws against pollution
§ Business became illegal due to local regulation by Govt
Internal triggers for change (within entity)
§ Change of senior management. - New person might want to introduce change because he
has his own ideas about how things should be done.
§ Acquisitions and mergers - Major changes will probably be required to integrate those
firms.
§ Demergers and divestments. - Changes in organisation, management and systems will be
necessary.
§ Reorganisation, downsizing and rationalisation. - Current organisation & systems are no
longer appropriate and change is needed. May be a loss-making entity needs to close down
an operating division, or needs to reduce the size of its total workforce.
Consequences of change
Blockages to change (Reasons for opposing change)

Reasons related to the job (employees might fear that)
§ Change will put their job at risk.
§ Their existing skills will no longer be required
§ Their working conditions will change for the worse.
Personal reasons and fears

§ Change will make them less important to their employer.
§ Change means that were working wrong previously
§ Fear of unknown.
Social reasons
§ Change will break up their workgroup and affiliates.
§ Might dislike manager who is forcing through the change.
§ Might dislike the change being introduced without consulting them.
Change and organisation culture
§ Some entities are more capable of adapting to change than others.

§ Management writer Elizabeth Ross Kanter suggested that there are cultural reasons why
an organisation might be more change-adept.
§ According to Kanter, change-adept organisations have 3 key attributes
- Imagination to innovate. (seeks new ideas for positive change)
- Professionalism to perform. (Management are competent and workforce is trained)
- The openness to collaborate. (share ideas with others)
§ Planned Change is more accepted than unplanned
§ It is appropriate to see change as an opportunity for successful implementation of business
strategies.
§ Entities that are change-adept are fast, alert and innovative
MANAGING STRATEGC CHANGE
Guidelines for change: change levers and management skills
General Guideline
§ Decide how to get where we want to be
§ Recognising the changes that are necessary to get there.
§ Change process consists of planning the changes, implementing them and then maintaining
the change
Levers of change (requirements for successful change)

§ A clear understanding of need for change
§ The commitment of the entity’s leaders.
§ Effective 2 way communication with everyone affected by the change.
§ Management should have required qualities to implement change
§ Organisation structure should be adapted to meet the change.
§ Reward systems should be amended
(based on performance targets that are consistent with the change)
§ Critical success factors and key performance indicators should be revised making those
consistent with the requirements of the change.
§ Employees should be educated and trained for change
Skills for managing change (by Rosabeth Moss Kanter)
Tuning in to the § Managers need to be aware of changes in the environment

environment. § Managers should create a network of ‘listening posts’
§ Pay special attention to customer complaints
Challenging prevailing § What is necessary
organisational wisdom. § The way that things should be done.
Communicating a § Should have a clear idea of what we wants to achieve
compelling aspiration. § Communicate this vision’ to everyone he deals with.
§ Must have personal conviction that the change is necessary
Building coalitions § Win the support and co-operation of all the individuals with the
knowledge, influence or resources to make change happen
Learning to persevere § Continue with process of change even though there are likely
(carry on). to be setbacks and ‘defeats’ on the way.
Making everyone a § Give full credit to everyone who helps to introduce change
hero. § Make them feel that their efforts are fully appreciated.
§ Individuals who help to introduce changes should be rewarded
Lewin: force field analysis
§ There are two forces

- Driving forces That support the need for change
- Restraining forces That oppose and resist the change
§ Force has a strength (might be measured on a scale of 1 to 5)
§ Change will not occur if the forces resisting the change are stronger
§ Change is only possible when the driving forces are stronger
Any of the following factors might be a driving force or a restraining force:

§ People involved in the change (what they want for themselves)
§ Habits and customs of the individuals
§ Their attitudes
§ The relationships between the people involved
§ Organisation structures within the entity
§ The entity’s policies
§ Resources available to make the change
§ Regulations
§ Events (happenings).
There are two ways that this might be done:

§ Strengthen the driving forces
Lewin argued that by increasing the driving forces, management run the risk that
restraining forces will also grow stronger.
§ Try to reduce restraining forces
- Identify main restraining force
- Consider ways of reducing their strength
(e.g discussions, try to win support of key individual)
Lewin: unfreeze, change, re-freeze
Prescriptive planned change theory

Planned process for change should begin with:
§ Identifying cause of the problems, and reasons why change is needed
§ Identifying opportunities of making improvements through change
§ Change process then needs to go through three stages:
1) Unfreezing 2) Changing 3) Refreezing
§ Shake up phase § Define problem § Locking in the

§ Acceptance that existing structures and § Identify solutions changes
ways are not working. § Devise § Stabilising the
§ Get people ready for change appropriate situation
§ Necessary to develop an awareness of: strategy to § Building
- Necessity of change implement relationships
- Nature of change needed change § Consolidating the
- Methods planned to achieve change § Implement system
- Needs of those affected solutions § Evaluation and
- Ways that progress will be planned support
and monitored § Preventing any going
back to the old ways
The change agent
This individual must have certain skills.

§ Explain the reasons for the change
§ Provide employees with reliable information. (reduce false rumors)
§ Involve the individuals affected in making the changes.
(In this way employees are less likely to resist change).
§ Maintain communications with employees at all time
§ Monitoring progress of change and telling others about the progress.
§ Provide training to the employees affected.
§ Emphasise the benefits of the change to the individuals affected.
An external consultant is often used (as a change agent) because:

§ Outside consultant is perceived to be independent and fair.
§ Experience of many organisations and should be able to advise us
The Gemini 4Rs

Re-frame § Create desire for change.
§ Create a vision of what the entity is trying to achieve.
§ Create measurement system to set targets for change & performance
Re-structure § Examine the organisation structure
§ Create an economic model showing how value is created by the entity
§ Where resources should be used.
§ Re-design processes so that they work better to create more value
Revitalise § This is the entity’s commitment to the future.
§ Find new products & new markets that fit well with our environment.
§ Change the rules of competition by making use of new technology.
Renew § Develop individuals within organisation.
§ Make sure that employees have skills needed and that they support
§ Create a reward system to motivate individuals to seek change.
§ Develop individual learning and creativity within the entity.
BUSINESS PROCESSES
A business process is a set of linked tasks or activities performed by individuals, groups,

departments or other organisational units within a business entity.
Business processes make up the value chain of an entity. Operations of most business entities
can be defined as a small number of processes, typically somewhere between 6 and 12.
Typical high-level processes might include;

§ Product development § Order processing
§ Distribution § Customer service
§ Manufacturing § Procurement.
Process redesign as an aspect of strategy in action
Process change exists at various levels:

§ Automation – Making existing operations more efficient by automating work or
computerising work previously done by hand. (e.g. using a software to calculate wages)
§ Rationalisation – Streamlining standard operating procedures (SOPs), so that procedures
become more efficient. (e.g. using EDI to place orders with suppliers)
§ Business process redesign or design – Major redesign of business processes. It might
combine radical changes in processes to cut waste, and eliminating repetitive paper-
intensive tasks to improve costs, quality and service. (e.g. allowing suppliers access to your
inventory records so that suppliers become responsible for your inventory management)
Technological change and process change (some examples)
Disruptive technology
Old methods & assumptions (IT developments that led New methods and options
to process redesign)
Sales representatives spend most E-mails and attachments They can receive and send
of their time away from the office, can be sent by mobile to information anywhere.
visiting customers. and from laptop.
Information can only be in one Shared databases, group People can share data and work
place at a time for one person. ware and networks. collaboratively.
Need of high levels of inventory to EPOS, extranets, electronic Just-in-time purchasing and
produce a reliable service to data interchange. inventory management.
customers that avoids ‘stock-outs’.
Only a limited range of standard Ordering and product Customers can ‘design’ their
products can be made available specification over the own products, and these can be
economically internet. manufactured economicaly
Only managers have the Decisions support systems, Decision-making is a part of the
information, skills and judgement expert systems, shared job of many employees, not just
to make decisions. information and networks. managers.
Activity Based Management (ABM)
§ By analysing the cost and value-added elements in a process or in a product or service mix,
it is possible to re-design it radically to obtain competitive advantage.
§ It can provide useful information for answering questions such as:
- Does the organisation understand the purpose and true cost of all of its activities?
- Which activities are a part of the ‘core service’? Which activities are discretionary, but
add value? Which activities are non-value-added activities and waste of resources?
- When resources are in limited supply, do we prioritise activities properly?
§ ABM should be a recurring process, and not a ‘once-only’ exercise.
There are 2 types of ABM as per Kaplan and Cooper:
§ Operational ABM uses information about activity-based costs to improve the efficiency of
activities. This is concerned with ‘doing things the right way’
§ Strategic ABM uses ABC information in order to make decisions about which activities to
use and which products to make and sell. It is concerned with ‘doing the right things’.
Methodology of Business Process Redesign

§ There must be a clear strategic goal for the process and for the process redesign.
§ This goal must be identified and understood.
§ Focus for process redesign should be on value chain rather than departmental activities.
§ The value chain should be analysed into lower-level processes
§ Lower-level processes further analysed etc., down to the level of individual activities.
§ A measure must be established for the outputs of the process.
§ Business Process Redesign includes the use of process diagrams, also called process maps.
- ‘Is’ diagrams / maps show the current process
- ‘Could’ diagrams / maps should a possible new way of performing the process
- ‘Should’ diagrams / maps show the process redesign that has been selected
Business process re-engineering (BPR)
Hammer and Champy defined BPR as ‘the fundamental rethinking and radical redesign of business
processes to achieve dramatic improvements in critical, contemporary measures of performance,
such as cost, quality, service and speed.’
The main principles of BPR have been described (by Hammer 1990) as follows:
§ There must be a complete re-think of business processes in a cross-functional manner.
§ Work should be organised around natural flow of information, or materials or customers.
§ Work should be organised around outcomes from process, not around tasks that go into it.
§ Objective should be to achieve dramatic improvements through a radical re-design.
§ Where possible, number of links in the chain of activities should be reduced.
§ ‘Internal customers’ within a process should be required to act as their own suppliers,
rather than depending on someone else to do the work for them.
§ There should not be a division or separation between the people who do the work and the
people who manage and control it.
§ In a BPR process, there should be review of critical success factors for organisation and re-
engineering of critical processes to achieve targets for CSFs and customer satisfaction
PROJECT PLANNING : PHASES AND TASKS
Splitting a project into stages (phases)
§ A task of the project manager is to

- Plan the work for the project;
- Obtain the resources (staff, equipment etc); and
- Schedule the work so that the project is completed on time
§ It is necessary to identify all the tasks that have to be completed.
§ First step is to identify the main stages of the project.
§ Each stage should have an identifiable beginning and an identifiable end (a ‘milestone’)
Stage Starting point Completion point (milestone)
Project planning Project initiation document Project quality plan
System analysis & design Project quality plan Detailed system specification
Programming Detailed system specification Completion of system testing
Database design Detailed system specification Construction of database
Implementation Completed system tests and Handover of system to the user
database construction / customer
Breakdown of work into lower-level tasks
§ Next step is to break down each stage into more detailed tasks, or ‘lower level tasks.
§ Number of lower level tasks should be restricted.
§ For each task, the project manager needs to:
- Estimate how much time will be needed to complete the task; and
- Allocate each task to specific individuals or small groups.
Work breakdown structure (WBS)

It is a tool for breaking the total work on a project into smaller and smaller parts, such as:
§ the main stages of a project stages
§ the lower-level tasks within each stage, and
§ work packages, which are items of work within each lower-level task.
Work for each small part of project can then be allocated to an individual or team. This helps
managers to plan work and allocate each work to individual members of the project team.
Dependencies between lower-level tasks
§ Many tasks in a project are inter-dependent.

§ Some tasks cannot be started until other tasks have been completed.
§ Some tasks can be carried out at the same time, in parallel with each other.
§ The most common planning tools for managing these lower level tasks (side by side) are:
- Network analysis (also called critical path analysis); and
- Gantt charts.
NETWORK ANALYSIS
Definition: Network
A network is a schedule of the work for a project, showing all the tasks that have to be completed, the
inter-dependencies between them and the time-scale for completing them. A network is shown as a
diagram or chart.
§ Network analysis (also called critical path analysis - CPA) is a technique that is widely used
to plan the timing and scheduling of a project, by
- Drawing the project network;
- Identifying the activities on the critical path;
- Total duration of the critical path; and
- Allocating resources to those activities where serious delays might otherwise occur.
§ For preparing a CPA chart, the following information is required:
- The individual tasks to be completed
- The estimated time to complete each task
- The inter-dependencies between tasks
(which activities must be completed before another activity can begin)
Constructing a CPA Chart
§ Each activity is represented by a line with an arrow.

§ Flow of the arrowed lines should be from left to right.
(It can be drawn at any angle)
§ Each activity starts at an ‘event’ (milestone) and
finishes at another event.
§ An event is represented by a circle with an event label.
§ Events are used to indicate the
- Earliest time that the previous activities can finish;
- Latest time by which the previous activities must
finish if the entire project is to be completed in the minimum possible time.
§ The latest event time cannot be earlier than the earliest event time.
§ When earliest event time is same as latest event time, the event is on the critical path.
Sequence of activities
§ By convention, the starting event is usually labelled event 0.

(EET and LET for this activity are both 0).
§ Activities should be drawn from left to right in the sequence
in which they should happen.
§ Each activity should be given a unique letter or a number,
for identification.
§ Each activity must start at an event and finish at an event
§ Two activities that can start at the same time can be drawn so that
they start at the same event.
(e.g. Activity F and Activity E can both start after Activity D)
§ Two activities that must both finish before the next activity can
begin can be drawn so that they finish at the same event.
(e.g. Activity K cant start until Activity C and Activity J completed)
§ Two activities cannot both start at the same event and finish at the
same event.
§ To prevent this from happening, it might be necessary to draw an
extra event, and then add a ‘dummy activity’
§ CPA chart must finish at a single event.
(it’s the final event at the right hand side of the diagram)
Adding the times on the CPA Chart
§ Write expected duration of each activity against the side of the its arrowed line.
(Note that Dummy activity has a duration of 0)
§ Now calculate EET and enter this into top right hand side of each event circle.
- Start from left-hand side (event 0) and work across to right-hand side.
- Add activity times to the EET of starting event and enter it to the EET of finishing event
- If 2 activities end at the same event, enter the higher of the two numbers
§ Now calculate LET and enter this into bottom right hand side of each event circle.
- Start from right-hand side (last event) and work across to left-hand side.
- Subtract activity times from LET of finishing event and enter it to LET of starting event
- If 2 activities start at the same event, enter the lower of the two numbers
Critical path
The critical path consists of the sequence of activities that must begin at the earliest possible time so
that the project as a whole will be completed in the minimum possible time. These activities go
through events where the earliest and the latest event times are the same.
It is usual to indicate the critical path by drawing two lines (//) across each activity on the critical
path.
Float
Float is the spare time on activities. It can be calculated as follows, for each activity:
Day/week
Latest completion time (latest time at the event where the activity ends) X
Earliest start time (earliest time at the event where the activity begins) Y
Total time available for the activity (X – Y)
Time required for the activity Z
Float for the activity (X – Y – Z)
§ If a delay occurs which is not greater than float, overall project duration will not be affected
§ There will be no spare time (float) on critical path activities.
Example: Network analysis
Question
Activity Preceding activity Expected time to complete (weeks)

A - 5
B - 3
C A 4
D B 9
E C, D 3
Required
(a) Draw a CPA chart for the above project
(b) Identify the activities on the critical path and their combined duration
(c) Calculate the amount of float for non-critical activities
Solution
a)
b) The critical path consists of activities B, D and E. The minimum completion time for the
project is 15 weeks (3 + 9 + 3).
c) There is a combined float of 3 weeks on activities A and C (12 – 0 – 5 – 4)

G ANTT CHARTS
§ A Gantt chart is another way of scheduling the activities in a project

§ A Gantt chart is a horizontal bar chart.
§ Each activity is shown as a bar, and length of the bar represents the duration of an activity
§ Gantt charts can also be used to number of employees required during each time slab
§ The project can be planned in a way that minimises total employee numbers
- By making use of float times, and
- Delaying start of non-critical activities until other employees become free.
Note: Actual performance can also be recorded on the chart, making it very useful for project
control purposes. Actual completion times can be shown as a different bar in a different colour.
Advantages of Gantt charts
§ Easy to understand
§ Easy to interpret.
§ Enables time management
§ Gives clarity of dates
§ Brings efficiency
Limitations of Gantt charts
§ Do not show the interrelationships between different activities as clearly as a CPA chart.
§ Can become unmanageable for detailed project plan
(Not easy to view everything on a single paper)
§ Unclear amount of work expected
P ROJECT MONITORING AND CONTROL
§ The project manager has the primary responsibility for monitoring and control of projects
§ Project manager is accountable to the project steering committee, or the project sponsor or
the system user (the customer).
§ Project steering committee might appoint a Project Assurance team, to carry out an
independent monitoring (discuss progress at regular intervals with project manager)
Quality, time and cost
§ Quality Actual achievements vs. the requirements set out in project quality plan.
§ Time Planned completion times for critical path activities vs. actual times.
§ Costs Actual expenditure vs. budgeted expenditure, on a regular basis
Monitoring completion times: slippage
A CPA chart can be used by the project manager to:

§ Check whether the time-critical activities are being completed on schedule
§ Recognise by how much non-critical activities can be delayed without risking completion
time for the project as a whole
§ Recognise when the completion time for an activity has over-run the schedule (and there is
‘slippage’ in timetable for completion)
§ Analyse what consequences of slippage will be for the completion time for entire project
§ Allocate extra resources to time-critical activities if there is a risk of delay
§ If critical dates are missed, or new estimates are there for expected time to complete
individual activities, the CPA chart can be updated and re-drawn.
Project management software
Project managers may use off-the-shelf project management software to help them to plan,
monitor and control a project.
Typically, project management software helps project managers to:

§ Create a list of tasks for the project and their expected duration
§ Construct a CPA chart or a Gantt chart
§ Assign resources to each task
§ Prepare a budget for the project
§ Track the progress of tasks (and update the CPA chart from time to time)
§ Record and monitor actual costs
§ Prepare progress reports
§ Amend plans more quickly, and prepare revised CPA charts and Gantt charts etc.
§ Prepare better and more comprehensive project documentation.
The main functions/benefits of project management software
§ To produce and edit CPA charts or Gantt charts easily.

- Project manager enter the activities, their interdependencies and expected duration.
- The software will then construct the CPA chart or Gantt chart automatically.
- Charts can also be amended when project activities are changed.
§ To provide an accounting function for the project, helping the project manager to
- Prepare a budget
- Record actual expenditure
- Monitor actual costs against the budget.
§ To plan and monitor the use of resources, particularly number of staff.
§ The project manager can enter the staff requirements for each activity
- Software will produce a detailed estimate of staff numbers required each day or week
- Project manager can then use software to look for ways of reducing staff requirements
at peak times without affecting the overall project completion time
- It can be done by delaying the start of non-critical activities, or reducing the number of
staff assigned to non-critical activities, and allowing these activities to take longer time.
Managing the team
Team manager is also responsible for managing the team members:

§ Selecting personnel and building the team;
§ Delegating roles and responsibilities;
§ Motivating team members;
§ Communicating information amongst the team;
§ Rewarding the team;
§ Disciplining team members.
Role of the accountant
§ Accountants bring a wealth of business experience to projects and can be highly effective as
either project managers or as advisors to project managers.
§ Project managers need to:
- Understand the economics of different options and decisions:
- Be able to forecast costs and profit;
- Generate accurate network analyses and Gantt charts;
- Use spreadsheets effectively;
- Consider the impact of external factors as well as internal factors relevant to project.
Chapter 8: Categories and Measurement of risk Page 89
RISK AND RISK MANAGEMENT
Nature of risk
§ Risk is usually associated with the possibility that things might go wrong.
§ However, risk has a broader meaning.
§ Risk exists whenever a future outcome or future event cannot be predicted with certainty,
and a range of different possible outcomes or events might occur.
§ Risks can be divided into two categories (i.e. Pure risks & Speculative risks)
Pure risk (downside risk)

§ A risk where there is a possibility that an adverse event might occur.
§ Events might turn out to be worse than expected, but they cannot be better than expected.
§ For example, there might be safety risk that employees could be injured by a machinery.
(expectation is that no-one will be injured but a possibility does exist)
§ Pure risks can often be controlled either by means of internal controls or by insurance.
(might be called internal control risks or operational risks)
Speculative risk (two-way risk)

§ Exists when actual future event or outcome might be either better or worse than expected.
§ For example, for an investor of shares the market price of the shares might go up or down.
§ Higher risks should be justified by the expectation of higher profits
§ Speculative risks cannot be avoided because risks must be taken in order to make profits.
(usually called business risk or strategic risk or enterprise risk)
Nature of risk management
§ Risk management is the process of managing both downside risks and business risks.
§ It can be defined as the culture, structures and processes that are focused on achieving
possible opportunities yet at the same time control unwanted results.
§ The safest strategy is to take no risks at all.
§ However, all business activity involves some risk.
§ The strategies should be consistent with the amount of business risk that the company is
willing to take, and the targets should be realistic for the chosen strategies.
Responsibilities for risk management
§ Risk management is a corporate governance issue.

§ Directors have a responsibility to safeguard assets of company.
§ Board should keep strategic risks within limits that shareholders would expect.
§ Board is responsible for defining risk policy, risk appetite and risk limits and ensuring that
these are integrated into day-to-day operations of company’s (see ch#17 for more details).
International Corporate Governance Network-ICGN Corporate Risk Oversight Guideline
§ The risk oversight process begins with the board. They:

- Are responsible for deciding the risk strategy and business model
- Should understand and agree the level of risk that goes with this.
- Should have oversight of implementation by management of risk management system.
§ Management has responsibility for developing and implementing the strategic and routine
operational risk management system, within the strategy set by board.
§ Shareholders have responsibility for assessing effectiveness of the board in overseeing risk.
Risk management and internal control
Turnbull Guidance states that in deciding company’s policies with regard to internal control,
the board should consider the:
§ Nature and extent of the risks facing the company
§ Extent and categories of risk which it considers as acceptable for the company to bear
§ Likelihood that the risks will materialise (and events will turn out worse than expected)
§ Company’s ability to reduce the probability of an adverse event occurring, or reducing the
impact of an adverse event when it does occur
§ Cost of operating the controls relative to benefits that company expects to obtain from it.
Elements of a risk management system
§ There should be a culture of risk awareness within the company.

(Managers and employees should understand the ‘risk appetite’ of the company)
§ There should be a system and processes for identifying, assessing and measuring risks.
(so that they can be prioritised, and measures for controlling risk can be made)
§ There should be an efficient system of communicating information about risk and risk
management to managers and the board of directors.
§ Strategies and risks should be monitored, to ensure that strategic objectives are being
achieved within acceptable levels of risk.
Organising for risk management
§ Some companies employ risk management specialists

§ Good risk management systems are a regulatory requirement in many countries for banks.
§ Board of large public companies may be expected to review the risk management system
and report to shareholders that the system remains effective.
§ Codes of corporate governance typically suggest that Board should establish a Risk
Management Committee for that purpose
§ A company may decide that it needs a senior management committee to monitor risks.
§ The function of this executive committee would be to:
- Co-ordinate risk management throughout the organisation.
- Be responsible for identifying and assessing risks, and reporting to the board.
- Formulate possible risk management strategies, for recommendation of board
- Agree on programs for the design and implementation of internal controls.
- Monitor the effectiveness of risk management throughout the company
C ATEGORIES OF RISK
§ There are no standard risk classifications, because nature of risks varies between business.
§ In many large companies, different risk committees are responsible for business risks in
different particular category.
§ Directors might use the same risk categories to provide their report on internal control and
risk management, or to discuss risk in their annual business review.
Categories of risk common to many types of business
Market Risk - The risk from changes in the market price of key items
- Market prices can go up or down
- Company can benefit from fall in prices or incur loss from a rise in prices.
Credit Risk - The risk of losses from bad debts or delays by customers in payments
- All companies that give credit to customers are exposed to credit risk.
- Credit risk is a major risk for commercial banks etc.
Liquidity - The risk that the company will be unable to make payments to settle
Risk liabilities when payment is due.
- Can occur if company has no funds, is unable to borrow money quickly, and
has no assets that it can sell quickly in the market to obtain cash.
Technologic - The risk that could arise from changes in technology
al Risk - Companies might decide whether or not to adopt the new technology.
- Adopting new technology too soon might incur higher costs.
- Delaying new technology might give advantage to competitor
Legal Risk - The risk of losses arising from failure to comply with laws and regulations
- Also the risk of losses from legal actions and lawsuits.
Health and - The risks to health and safety of employees, customers and general public.
Safety Risk - Companies are required to comply with health and safety regulations.
- If they fail to comply with regulations, they could be liable to a fine
- If there is an incident in which anyone suffer injury or ill health, company
could be exposed to large fines from Govt. and lawsuits from individuals.
Environment - Risks of losses arising, in short or long term, from damage to environment
al Risk (e.g. pollution or the destruction of non-renewable raw materials)
- Failing to deal with environmental risks could result in losses
· Might be fined for a breach of anti-pollution regulations.
· Might suffer a loss of customers due to bad reputation
Reputation - The risk that a company’s reputation with general public (and customers),
Risk or the reputation of its product ‘brand’, will suffer damage.
- Reputation risk is difficult to measure (quantify).
- Need to be alert for any incident that could create adverse publicity
- Public relations consultants might be used to assist with this task.
Business - The risk of losses from a failure to act in an honest way.

Probity Risk - Companies in some industries might be exposed to this type of risk.
(honesty & - In some products, companies might be tempted to deal with smugglers
integrity) - Companies might find that in order to win sales in some countries, they
have to pay bribes (‘commissions’) to individuals.
- By paying bribes, companies act dishonestly, and could be exposed to
regulatory action or criminal action by the authorities
Derivatives - Derivatives are contracts to buy and sell a quantity of products at a future
Risk date at a fixed contract price. In most cases, buyer and seller do not
intend to buy and sell the actual physical product
- Commodity derivatives are contracts on the price of certain commodities
such as oil, wheat and metals (gold, tin, copper etc.).
- Financial derivatives are contracts on price of financial instruments or
market rates, such as foreign exchange rates, interest rates, bond prices
and share prices.
- Derivative instruments include options, futures and swaps.
- Can be used to control risks by ‘hedging’ exposures to market risks
- They can also be used to speculate on changes in market prices.
Nature and importance of business and financial risks
§ Directors should consider business risk when it makes strategic decisions.

§ should choose should be chosen, but that business risks should be at an acceptable level.
§ Financial risk is a major cause of business risk.
§ Cash flow and liquidity problems can be very damaging to the financial health of a business.
Business risks in different business sectors
§ Companies in different industries might face the same risks

§ Business risk vary between companies and over time. E.g:
- Failure rate is greater for those businesses in cyclical industries like tourism.
- Failure rate among new start-up businesses is greater than that mature businesses.
§ In some industries the risk might be much greater than in other industries.
§ For example, credit risk is a significant risk in banking industry, but less significant in oil
industry; and risks of environmental regulation are higher for oil companies than banks.
CONCEPTS IN RISK MANAGEMENT
Exposure to risk
§ It is the maximum stake that is at risk

§ Companies need to assess the significance of their exposures to risk.
§ If possible, exposures should be measured and quantified.
(e.g. If company is owed 500,000 by its customers, its exposure to credit risk is 500,000)
§ After measuring exposure, company can estimate what possible losses
§ This estimate of the possible losses should help management to assess significance of risk.
§ Some risk exposures cannot be measured, because they are ‘qualitative risks’.
(e.g. It is difficult to estimate possible losses that could arise from damage to reputation)
§ Assessment of these risks depends on management judgement and opinion.
Residual risk
§ Controls cannot eliminate risks completely

§ Even after taking suitable control measures, there is some remaining risk exposure.
§ The remaining exposure to a risk after control measures is called residual risk.
§ If residual risk is too high for a company to accept, it should implement additional controls
The dynamic nature of risk assessment
§ Risks do not remain static but change over time and in different situations.
§ In some situations, environmental factors change relatively little
§ In other cases, risk factors can change a great deal. (also called ‘turbulent’ environments)
§ Extent of possible exposure to risk due to environmental change can be represented as a
scale or continuum between two extremes
- At one end (i.e. Static) there is never any change in external or internal environment of
an organisation. The risks faced do not change.
- At other extreme (i.e. Dynamic) external or internal environment of an organisation
changes constantly with the results that all risks are changing all the time.
Static Dynamic
Increasing environmental change and turbulence
§ Organisations occupy different positions along the static/dynamic scale (continuum).

§ Some organisations face very changeable risks whilst other companies face stable one.
§ Even static environments might change unexpectedly.
§ Risk management approach must meet the demands posed by the complexity of these risks
§ Failure to respond appropriately could lead to failure of the organisation’s strategy
§ Companies in dynamic environments need more investment in risk management strategies
Risk appetite
§ A company must accept some risk in order to make profits.

§ Risk appetite is concerned with how much risk management are willing to take.
§ Management might be willing to accept the risk of loss up to a certain maximum limit if the
chance of making profits is sufficiently attractive to them.
§ Directors might also have an appetite for one type of risk but an aversion to a different type
of risk.
§ The risk appetite of a Board or management in any particular situation will depend on the:
- Importance of the decision and the nature of the decision
- Amount and nature of the potential gains or losses, and
- Reliability of information available to help the Board/management to make decision.
Board policy on risk
§ The risk appetite of a company should be decided by the directors

§ Policy on risk should be decided and communicated by board to its management.
§ Managers need guidance on levels of risk that it would be ‘legitimate’ for them to take on.
§ Managers should not be allowed to take whatever decisions they consider to be suitable,
regardless of risk.
§ It would lead to inconsistent decisions and could expose company to unacceptable risks.
§ However, a risk averse culture is also undesirable, in which managers are discouraged
from taking any risky decisions
A risk-based approach
§ It is an approach to decision-making based on a detailed evaluation of risks and exposures,

and policy guidelines on risk appetite.
§ Some risk must be accepted, but risk exposures should be kept within acceptable limits.
§ Decisions should be based on a consideration of both expected benefit and the risk.
IDENTIFICATION , ASSESSMENT AND MEASUREMENT OF RISK
Risk identification
§ A company needs to understand what risks it faces

§ There are no standard rules about how risks should be identified.
- In a large company, it might be appropriate to identify risks at different levels in the
organisation (e.g. for each business division and for each department or function)
- Management might be responsible for identifying strategic risks
- Internal auditors might be more efficient at identifying operational risks
§ Many large companies set up risk committees to identify risks.
§ Risks identified by a company will fluctuate in importance.
§ After identifying risks, it is necessary to assess the importance of each risk to:
- Rank the risks in order of significance (order of priority), and
- Identify the risks that are the most significant, and
- Identify the significant risks where control measures are urgently needed.
The impact of risk on stakeholders

Employees - Employees are exposed to several risks in their job.
- These include the risk of a loss of job, and the threat to health or safety
- These risks to employees can be affected by risks that face their company.
- Jobs may be threatened by the strategic choices taken by a company.
- The risk appetite of some employees might differ from the risk appetite of
the company and the board’s policy on risk.
Investors - Investors have expectation about company and returns they might expect.
- Directors should try to ensure that risk appetite of company is consistent
with risk appetite of its shareholders
- Company should not expose itself to strategic risks that expose investors
to excessive risk.
- Directors should keep shareholders informed about significant risks.
Creditors - The main risks can be that company will not pay what they owe and the
company will stop buying goods and services from them.
- Liquidity and insolvency risk facing a company has an impact on the credit
risk for a supplier or lender.
Communities - Risks to the general public include:
and general · Consequences for the country of decline in business activities and
public profits of company due to recession especially when company is major
employer
· Health and safety risks from failures by a company to supply goods that
meet with health and safety standards
· Risks to the quality of life from environmental pollution
- Risks to local community also arise from economic risks faced by
company.
- Pressure groups and popular action groups can come into existence
Governments - A risk for government is that major companies will decide to invest in a
different country, or move its operations from one country to another.
Customers - Company might face operational risks from human error or system
breakdown in its operations. Errors and delays in providing goods and
services have an impact on business customers.
- Product safety risks are also a risk for customers who use them.
Business - There are risks in joint ventures for all the joint venture partners.
partners - A joint venturer might try to dominate decision-making to reduce the risk
that the joint venture will not operate in the way that they want it to.
- By reducing exposures to risk, company will affect risks for other partners.
- Risks in partnerships can be controlled for all the partners (to some
extent) by clear terms in contract agreement between partners
Assessing risks: impact and probability
§ The assessment of risk is sometimes called ‘risk profiling’ or ‘risk mapping’.

§ To assess each risk, it is necessary to consider the likelihood that losses will occur as a
consequence of the risk, and the size or amount of the loss when this happens.
Probability or frequency of the risk materializing

Low Probability / frequency High Probability / frequency
Impact/ High Consider the need for control Take immediate action to control risk
size of impact measures, such as insurance
potential Low Review periodically Consider the need for control action
loss Impact
§ It can help to identify risks where immediate control measures are required, and where
need for control measures should be considered or reviewed periodically.
§ ‘All key risks should be ‘owned’ by specific managers, who should take necessary control
measures and report to their senior manager about what they have done.
§ Companies in dynamic environment should assess the risks faced on an ongoing basis so
that they might respond to changes immediately.
§ Risk mapping can be a useful tool for those companies.
Measuring risks
§ Measuring risk means quantifying the risk.

§ When risks are quantified, the risk can be managed through setting targets for maximum
risk tolerance and measuring actual performance against the target.
§ Risk measurements can be financial measurements (e.g. measurement of expected loss) or
non-financial (e.g. measurement of expected injuries to employees at work).
§ If risks are assessed in qualitative terms, risk management decisions become judgemental.
Prioritising risks
§ Companies should establish a process for deciding which risks are tolerable and which
might need more control measures to reduce the risk.
§ Deciding on priorities for risk management might be a matter of management judgement.
§ Some entities use formal techniques to help them in this (e.g. Risk dashboard)
Risk dashboard
§ A risk dashboard can be used to identify which risks need further control measures.
§ On a simple dashboard, each identified risk is represented by a ‘coloured light’.
§ These are usually green, yellow and red, representing the colours of traffic signals.
- Red light indicates that further risk measures are needed
- Yellow light indicates that the risk needs to be kept under review.
- Green light indicates that the risk is under control
Risk item
Level of risk Red High risk
Red/Yellow
Green/Yellow
Green Low risk
Risk appetite and residual risk can both be shown on the dashboard.
§ A more complex risk dashboard can be used, for each risk, to show:
- Total amount of risk, assuming that no control measures are in place to contain the risk
- Residual risk (after allowing for the control measures that are in place)
- Risk appetite of the company for that particular risk
§ If risk appetite for a risk is low, then it can be recorded in the ‘green’ section of dashboard.
§ If risk appetite is higher, this can be shown in green-yellow or red-yellow sections.
§ Risk appetite is unlikely to be shown in the red section.
§ Residual risk can also be recorded, in the green, green-yellow, red-yellow or red sections.
§ When risk appetite and residual risk are in same section of dashboard, it means current
risk management/risk control measures are appropriate for the risk.
§ When risk appetite is in a lower-risk section than the residual risk, it indicates that further
control action is needed to reduce the residual risk to an acceptable level.
Role of the board of directors in identifying and assessing risks
§ Risk management is largely a responsibility for management. Management:

- Is normally responsible for identifying key risks
- Is responsible for assessing risks and for designing and implementing risk controls
- Is responsible for monitoring effectiveness of controls, and keeping risks under review
- Should report regularly to the board of directors on risks and risk management.
§ Directors has overall responsibility for risk management. Board should set the company’s
policy for risk, and give clear guidance about the company’s risk appetite.
ALARP (As Low As Reasonably Practicable) Principle
High
Risk
Low
Low Acceptability High
§ Low risk is obviously more acceptable than high risks.

§ This does not mean that all risk should be avoided.
§ The ALARP principle is that it is usually impossible (or too expensive) to eliminate all risk
but that any residual risk should be as low as reasonably practicable.
§ Risk is said to be ALARP if cost for reducing it would be disproportionate to benefit gained
Objective and subjective risk perception
§ It is important to assign accurate and reliable values to the likelihood and impact of a risk
§ It can be done with high degree of certainty for some risks but it can be difficult for others.
§ If both variables can be measured accurately the risk is been objectively assessed.
§ But if it is difficult to accurately assign a value to either likelihood or impact, in such cases
subjective judgements must be used.
§ Assessment on objective measurement is more robust than subjective judgement.
Related and correlated risk factors
§ Related risks are those that are often present at the same time.
§ Risks might also be correlated (means that they vary together)
§ Correlation might be due to the risks having a common cause or because one type of risk
might give rise to the other.
Chapter 9: Mitigation and Control of risk Page 100
MONITORING RISK
Role of the risk manager
Companies and other entities might appoint one or more risk managers. A risk manager might
be given responsibility for all aspects of risk. Alternatively, risk managers might be appointed
to help with management of specific risks (e.g. Insurance, Health and safety, compliance etc)
The role of a risk manager might therefore include:

§ Helping with the identification of risks
§ Establishing ‘tools’ to help with the identification of risks
§ Establishing modelling methods for the assessment and measurement of risks
§ Collecting risk incident reports (e.g. health and safety incident reports)
§ Assisting heads of departments and line managers in review of reports by internal auditors
§ Preparing regular risk management reports for senior managers or risk committees
§ Monitoring ‘best practice’ in risk management and encouraging adoption of best practice.
How effective are risk managers ?
Depends partly on his role and partly on support received from Board and senior management
§ Specific role of risk manager might give him authority to instruct line managers what to do.
§ Some risk managers have authority to make decisions for the entity
§ A culture of risk awareness should be promoted by the board of directors.
The role of risk committees
§ A risk committee might be a committee of the board of directors.

(should be responsible for fulfilling the corporate governance obligations of the board to
review the effectiveness of the system of risk management)
§ A risk committee might be an inter-departmental committee
(responsible for identifying and monitoring specific aspects of risk e.g. financial risk etc)
Functions of Risk Committee

§ To identify risks, monitor risks and report on effectiveness of risk management to board or
senior management.
§ Do not have management authority to make decisions about the control of risk.
§ Internal auditors might be included in the membership of risk committees.
(Alternatively, the internal auditors should report to the risk committees)
§ Risk managers might be included as member of risk committees, or might report to them.
§ Boards of directors should receive regular reports from these risk committees.
The role of risk auditing
Risk auditing involves the investigation by an independent person (the auditor) of an area of
risk management. A risk audit and assessment can be defined as ‘a systematic way of
understanding the risks that an organisation faces
The purpose of risk monitoring is to ensure that:

§ There are processes and procedures for identifying risk, and that these are effective
§ There are internal controls and risk management processes in place for managing those
§ Risk management systems appear to be effective
§ Level of risk faced by entity is consistent with policies on risk that are set by board
§ Failures in the control of risk are identified and investigated
§ Weaknesses in risk management processes are identified and corrected.
Unlike external audit, a risk audit is not a mandatory requirement for companies.
§ External auditors should monitor internal controls for financial risks as a part of their
annual audit process.
§ Internal auditors might also carry out checks on internal financial controls.
§ However, risk auditing can be extended to other aspects of risk, such as operational risks,
compliance risks and environmental risks.
Performing a risk audit
§ Stage 1: Identification.
- To identify what the risks are in a particular situation, strategy, procedure or system.
- Risks change continually in nature.
- Existing risks may disappear, and new risks may emerge.
§ Stage 2: Assessment.
- The probability of an adverse event or outcome, and the impact should be measured.
- The expected loss = Probability ´ Impact.
§ Stage 3: Review.
- Management may have taken measures to transfer the risk or to reduce the risks by
introducing control systems and monitoring systems.
- Auditor should look at those controls that are in place to manage the risk
§ Stage 4: Report.
- Should lead to a report to board or to management (whosoever has hired the auditor)
- Should be written in a language that the company’s management understand
Using internal auditors or risk managers as a Risk Auditor

§ Advantage is that the individuals who carry out the audit should be very familiar with the
company and its systems, procedures and culture.
§ Disadvantage is the ‘familiarity threat’.
§ Firms of management consultants may also be used who would be up-to-date with current
approaches to risk assessments (but they may have a ready-made solution to a risk
management problem, which they try to impose on all their clients)
E MBEDDING RISK
The importance of risk awareness throughout an organisation
§ Managers take decisions that expose the entity to risk.

§ They need to understand the possible consequences of their decision-making
§ They should be satisfied that risks they have ‘created’ are justified by the expected benefits.
§ Every employee needs to be aware of the need to contain operational risks. E.g.:
- All employees must be aware of health and safety regulations, and should comply with.
- All employees and managers should understand the need to report incidents where
there have been excessive exposures to risk, and control measures have failed.
Embedding risk awareness in the culture of an organisation
§ Risk awareness is ‘embedded’ in the culture when thinking about risk and control of risk is
a natural and regular part of employee behaviour.
§ Creating such a culture should be a responsibility of board and senior management
§ They should show their own commitment to management of risk in their relevant areas
§ There should be reporting systems in place for disclosing issues relating to risk.
§ There should be a sharing of risk-related information.
§ There should be a general recognition that problems should not be kept hidden.
(‘Bad news’ should be reported as soon as it is identified)
§ There must be openness and transparency. Employees should be willing to admit mistakes.
§ The attitude should be that problems with risks will always occur.
§ Risk management should be a constructive process.
Embedding risk awareness in systems and procedures
§ There are no standard rules about how risk awareness and risk control can be embedded
within systems and procedures.
§ Each organisation needs to consider the most appropriate methods for its own purposes.
§ Risk management should be an integral part of management practice.
§ Risk management must be a core function which managers and other employees consider
every day in the normal course of their activities.
The role of risk professionals and the need for embedded risk management
§ Risk managers and risk auditors cannot be effective unless risk is embedded in culture
systems and procedures of the entity.
§ The risk management team of an organisation can assist in the development of the risk
management framework and policies.
§ They can teach the team about risk management so as to ensure that strong reporting and
examining structures exist.
METHODS OF CONTROLLING RISK
Different approaches to controlling risk
Diversification
§ Diversification is also called ‘spreading risks’.
§ Purpose is to invest in a range of different business activities (build up a portfolio)
§ Each individual business activity is risky, but some businesses might perform better than
expected just as some might perform worse than expected.
§ Taking entire portfolio of different businesses, good performers will offset bad performers.
When is diversification not appropriate
§ When management does not have the skills and experience to manage such portfolio
§ It is much more risky when it takes the company into unrelated business activities.
- Each business is very different from the others.
- Investors in the company might also disapprove such diversification
- Investors can diversify by buying shares in specialist companies rather than buying
shares in a company that diversifies its activities.
§ Risks are not reduced significantly where risks in different activities are similar
Risk transfer
§ It involves passing some or all of a risk on to someone else
§ A common example of risk transfer is insurance.
§ More appropriate for risks where potential losses are high, but probability of loss is low.
Risk sharing
§ It involves collaborating with another person and sharing the risks jointly.
§ Common methods are partnerships and joint ventures.
Hedging risks
§ This is used extensively in the financial markets
§ It is commonly associated with the management of financial risks such as currency risk.
§ Hedging risk means making a transaction that offsets an exposure to another risk.
§ For example, if we have to receive a payment in US dollars after 3 months, we will lose
money if US dollar falls in value against Pak Rupee, a hedge can be created where we will
receives a payment against a pre-agreed exchange rate (More details in CFAP-04)
(whatever the fluctuation in exchange rate may be)
§ Risks can be hedged with a variety of derivative instruments e.g. futures, options and swap
Risk avoidance and risk retention
§ Control measures do not eliminate risk (They only reduce them)

§ The risks that remain after risk control measures are implemented are the ‘residual risks’.
§ An entity needs to develop a strategy towards these risks.
§ The basic choice is between risk avoidance and risk retention.
- Risk Avoidance means not having any exposure to a risk. (staying out of a business)
- Risk Retention means accepting the risk, in the expectation of making a return.
§ The choice between avoiding risks and accepting risk depends on risk appetite
Risk appetite and risk retention
§ Risk appetite is amount of risk that an entity is willing to accept by investing in activities
§ Risk appetite varies from one company to another.
(Some are willing to take fairly large risks whereas others are ‘risk averse’)
- Small companies are often more entrepreneurial than larger companies, and are
willing to take bigger risks in order to succeed and grow.
- In large companies with a high value, large risks will often be avoided if they threaten
to reduce value significantly.
- Large companies can sometimes afford to take bigger risks than small companies when
they are well-diversified
§ Business risk is often higher in markets where conditions are volatile
§ When a new market emerges, risks are high.
(investors must have an appetite for taking high risk in anticipation of potential benefits)
§ Risk appetite should be established by board by formulating a policy for strategic risk /
business risk.
§ Limits to strategic risks can be expressed in several ways.
- Board may indicate risks that it is not prepared to accept (risks should be avoided)
- Risk limits can be established in terms of maximum new investment to be approved
- Risk dashboard might be used as a method of establishing appetite for particular risks
The TARA framework for risk management
TARA stands for:

§ Transferring risk
§ Avoiding risk
§ Reducing risk
§ Accepting risk
Note: All of these approaches have already been discussed. Risks can be reduced by various
ways (e.g. risks of errors and fraud can be reduced by sound system of internal control)
Chapter 10: Effectiveness of ICT Page 106
IT STRATEGY
§ Quality of decision making depends on quality of information to management.

§ Quality of the service to customers also depends on the quality of transaction processing.
§ An entity should ensure that its Information Systems (IS) are suitable and will assist the
entity in achieving its long-term strategies.
§ Better IS systems can give an entity a competitive advantage over its rivals
Information systems (IS) – A Revision of CAF
§ Transaction processing systems. Systems for processing routine transactions, such as

bookkeeping systems and sales order processing systems.
§ Management information systems. Systems for providing information, mainly of routine
nature, to management for planning and controlling operations.
§ Decision support systems. Used by managers to help them to make decisions of a more
complex or ‘unstructured’ nature. A DSS will include a range of decision models, such as
forecasting models, statistical analysis models and linear programming models.
§ Executive information systems. Gives an executive access to summary information about
a range of issues, and also to ‘drill down’ into greater detail if this is required.
§ Expert systems. A system that is able to provide information, advice & recommendations
on matters related to a specific area of expertise.
Information technology (IT)
§ IT developments have resulted in many new products & improvements in existing products
§ IT developments have also radically altered methods of communication.
§ The Internet has emerged as a major source of external and easily accessible information.
§ Commercial transactions can be processed more quickly.
§ Changes in IT will continue, and these will have a significant impact on business strategy.
Information and organisation structure
Changes in IS and IT have an effect on organisation structure.

§ Databases and intranet systems can make information accessible to any employee.
§ It is now easily possible for decisions to be taken ‘locally’ by employees or managers.
§ IT therefore makes it possible for head office to control an organisation centrally.
Changes in IS and IT systems have already affected the organisation of many entities.
§ Many organisations have a ‘flatter’ management hierarchy, with fewer middle managers.
§ Decisions are taken either centrally by head office or locally by junior management.
§ No need for employees to work together in an office, because they can communicate easily.
§ Virtual organisations are working on their own, often from home, linked by IS/IT systems.
PRINCIPLES OF E- BUSINESS
E-commerce
Buying and selling of goods and services, or the transmitting of funds or data, over an electronic
network, primarily the Internet.
E-business
E-business includes all aspects of e-commerce, but also includes work flows and movements of
information within an entity, for example between departments or functions. Internal processes
are driven by e-business methods as well as external relationships with customers, suppliers
and other external stakeholders.
§ E-business transactions do not necessarily involve a payment for goods or services.

§ Transactions with customers and suppliers might involve the transfer of information
§ It is usual to associate e-business with the internet.
Implications of E-business for performance management
§ Objective of e-business is to increase the competitiveness and efficiency of an entity

§ Processes should be radically redesigned by e-business methods
§ E-business opportunities can alter strategic position and provide different strategic choices
§ E-business can change the nature of market place in which goods and services are dealt.
§ E-business also changes the nature of the relationships with suppliers and customers.
§ E-business significantly extends the volume and the scope of information accessible to
organisations for performance management purposes.
The impact of the internet on business strategy and competition
Porter argued that the 2 main factors that determine the profitability of a business entity are
§ Structure of the industry in which it competes, and
§ Ability of the entity to achieve a sustainable competitive advantage.
The internet and industry structure (Based on 5 Forces model)
Competitive - Internet encourages greater competition.

rivalry - Due to availability of information it it easier for competitors to copy you
- As a result of the stronger competition, selling prices are depressed
Threat of - By using internet, new competitors can enter more quickly and cheaply.
new entrant - They do not need to employ an expensive full-time sales force
Bargaining - Suppliers are able to use internet to increase number of customers
power of - Bargaining power of suppliers is likely to increase
suppliers
Bargaining - Bargaining power of customers has been increased substantially.
power of - Customers are able to obtain information about rival products of competitors
customers - Customers are finding it easier to switch suppliers for better quality and price
Individual firms and competitive advantage

§ Competitive advantage is achieved through operational effectiveness (reducing costs) and
strategic positioning (differentiation).
§ Internet affects operational effectiveness by allowing companies to exchange information
in real time across its entire value network.
§ However copying best practice make any operational advantage difficult to sustain.’
§ Through internet superior strategic positioning has become more easier
Main business and marketplace models for delivering e-business
Selling goods - ‘E-shopping’ by placing orders on a company’s website.

and services - When physical goods or services are purchased, the company must have a
delivery system in place that fulfills the customer’s order efficiently.
- Purchase of information, such as education packages (like online classes at
nearpeer.org) and software, can be delivered directly by internet (e-mail)
Electronic - Websites where customers can auction goods for sale, and put in bids
auctions - eBay is perhaps most well-known example
New - One of the problems with the internet is many number of different
intermediary websites.
companies - It’s difficult for customers to know which website to visit for specific need
- Business of intermediary is based on acting as agents for selling the
(similar) products of different companies, and attracting customers to their
website.
Alliances of - In some markets, businesses have created alliances with shared websites
suppliers for selling their products to customers over a wider geographical area.
E- - New opportunities are there for the business-to-business purchasing (‘e-
procurement. procurement’), by linking computer systems with their main suppliers
Advertising - Can advertise products on search engines like Google or on different
website
- They can also use their own websites to provide information to customers
Promotion. - Chance to send Promotion messages by e-mail to potential customers
Customer - By providing support, user forums and FAQ (frequently asked questions)
relationships - Internet can also be used to analyse customer interests and preferences
E-commerce and the globalisation of business
§ E-commerce reduces barriers of geographical distances

§ Internet have also made it easier for customers to search for suppliers in other countries.
§ Suppliers and customers can communicate with each other much more quickly and easily.
§ Customers compare rival products or services, and can compare prices.
§ Suppliers can try to attract more customers from other geographical markets as well by
advertising their goods or services on their website (or any other place)
§ Size of the market has increased and competition is now more international.
§ Efficiency in global markets depends on information and communication.
§ International groups need management control, and computer networks and IS/IT systems
help to provide management with the information they require to apply suitable controls
Barriers to e-business
§ It can be expensive for a small company to establish a full functional website with payment
options, online catalogue for photographs, keeping records of inventory etc (Set-up costs)
§ Some products and services are easier to sell on the internet than others. (e.g. clothing)
(In such sales there is a large amount of sales returns due to quality mismatch)
§ There might be an on-going operating costs.
- A website has to be updated frequently, to keep it interesting (and accurate)
- It might be necessary to keep making special offers to encourage customers.
§ It takes time to establish a website that customers know about and want to visit.
§ Existing staff might lack knowledge or skills to maintain a website (No in-house skills)
INFRASTRUCTURE
Layers of infrastructure
§ Each website is located on a ‘host computer’ which gives it access to the internet.
§ System software requirements include a web browser and a database management system,
which are used to display and locate the information on the website.
§ Content and customer information is held on data files.
§ The communication network is provided by the internet. (sometimes intranet or extranet)
§ Additional software applications like customer relationship management are also used
The internet
Internet is a network of computer networks. To link to the internet you need the following.
§ An Internet Service Provider -ISP (e.g. PTCL, wateen etc)
§ A browser (e.g. Google Chrome)
§ A communication link such as telephone line, fiber optic or a wireless technology
§ A modem to enable the computer to transmit over the communications link.
Website
§ World Wide Web (WWW) is a network of large internet computers (servers).
§ A website is a presence on the internet.
§ Each website is hosted on a computer which has permanent access to the internet.
§ Each website has a address called Uniform Resource Locator - URL (e.g. www.canotes.net)
§ Each URL has to be registered as a domain name to ensure it is unique.
§ We can choose certain key words which summarise or indicate what the site is about.
§ Search engines can help users finding websites by searching relevant tags (or key words).
§ Internet is based on client-server technology. Web browsers are the client applications.
§ The server, which may be a distant computer, holds e-mails and web pages.
§ Websites are usually arranged in a hierarchical pattern, starting with a home page.
§ Some web pages are static (always showing the same information)
§ Other web pages are dynamic (they are updated in real time and show the latest data).
Firewall
§ Unauthorised access to a user’s computer from the internet can be prevented by installing
a piece of software called a firewall.
§ Firewall hardware can also be installed, to improve the user’s security
Intranets and extranets
Intranet
An intranet is the use of internet technology within one entity.

§ It uses public communications network to provide this in-house communications network.
§ It also creates a risk of unauthorised access into the intranet by users of the internet.
§ Users of an intranet can access external internet as well as the in-house intranet files etc
§ Security against unauthorised access by external users is provided by firewall.
The benefits of an intranet are:

§ Better communication within the organisation
§ Access to more and better information within organisation for senior management
§ Internet access and e-mail.
Extranet
§ An extranet is a network in which the intranet of one company can connect with the
intranet of another company, usually a supplier or customer.
§ Example can be a buyer’s purchasing system communicating electronically with a seller’s
sales order system, through their intranets, to generate purchase order and order delivery
Designing a website for e-commerce
§ The website must be easy to use.

- User must be able to navigate through the site easily.
- Users should be able to select goods for purchasing without any possible confusion..
§ Screens should also be visually attractive.
§ Design features such as ability to enlarge images of products, or obtaining additional
information about a product, may also be very useful.
§ System must allow users to interact with it
§ The website must be kept up to date.
§ It can be designed in such a way that user’s attention is drawn to additional products that
he or she might be interested in buying.
§ Website must be available ‘all the time’ to users. Downtime must be kept to minimum.
§ The system must integrate with the company’s other transaction processing systems
§ The system must be able to reassure users that it is secure.
E- MARKETING
E-marketing and the 7Ps of the marketing mix
Product - Some products sold on internet can be customised to customer’s specifications.

(e.g. customers of Dell Computers can order a computer on the internet, and
specify the features of the computer they want)
- Products can be bundled (e.g. many airline sites offer hotel, car hire etc)
Price - This is more transparent on internet and users can compare prices easily.
- Some websites are specifically designed to compare prices
- Changing prices are continuously being displayed on the websites
Place - Some goods, such as music, video and software can be delivered over internet
Promotion - Websites and e-mail are new ways of advertising goods and services.
- Targeted promotion can be done
- Traditional media has now become less attractive for advertisers
Physical - Design of a website is important, because visitors will not stay on a website if it
Evidence is not attractive, difficult to navigate or don’t provide the relevant information
People - Internet does not involve people (customers are communicating by computer)
Processes - A sale must be followed up by an efficient delivery service.
- Many companies send a confirmation of order to the customer immediately
The 6Is of the e-marketing mix
Interactivity - A website is a pull medium, it attract customers to visit the site.

- It can also be used to interact with customers, and create a dialogue.
- Getting visitors to the site to provide details about themselves
- Also can involve getting visitors to buy a product or service and pay for it
using internet. (after getting emails, dialogue can be continued in future)
- This connection with customer helps to establish a long-term relationship
Intelligence - Internet can be used as a relatively low-cost method of collecting market
research data and data about customers and other visitors to a website.
- This data can be analysed to get information about what customers buy
- ‘Clickstream analysis’ of data can be used to get customer preferences
Individuali- - In traditional media the same message tends to be broadcast to everyone.
sation - Communication via internet can be tailored or ‘personalised’ to individual
Integration - Internet provides scope for integrated marketing communications
- Website might provide a number to call in order to speak to representative
- Website can also have a call-back facility built into it.
(Customer visiting a relevant area can after wards be called by the staff)
Industry - Internet can lead to a re-structuring of industry supply chain.
Structure - Disintermediation is the removal of intermediaries such as distributors etc
- Re-intermediation where intermediary sell products of other suppliers
Independence - Users of a website cannot easily tell from the website whether it is owned
of location by small local company (This gives a good opportunity to small companies)
E-marketing: promotion strategy
The objectives of e-marketing with a website should be to:

§ Get as many potential customers as possible to visit the website.
§ Keep visitors at the website long enough to make a marketing proposal to them.
§ Achieve a successful marketing outcome, so that the marketing process can continue.
(Might be persuading customer to give e-mail i.d and agree to receive future messages)
Factor Traditional media Internet

Advertising space An expensive commodity Cheap and virtually unlimited
Time consumed Expensive for the advertisers Expensive for internet users
Advertising image Creating an image is usually more Content of message is usually
important than content of message more important than image.
Communication Push, one-way from advertiser to Pull, drawing the customers to
customers the website.
How customers are Provide an incentive Offer them information (and
persuaded to act? possibly incentives)
E-marketing has become much more preference in recent years due to following reasons:
§ Individuals are spending a substantial amount of their time on the internet.
§ Many people have started to make regular use of internet to obtain information about
products and services, or even to buy online.
§ ‘Readership of newspapers is declining, and internet is stealing more and more attention
§ Individuals are also much familiar with internet and confident about using it
§ Users have come to expect more from websites (more information, ease of use etc)
Companies with the ‘best’ websites can gain a very useful marketing advantage, attracting more
visitors (and so potential customers) and obtaining more online sales.
E-mail marketing (direct mail and the internet)
§ These might simply provide updating information to the customer

§ Or it might include advertising material or a sales offer.
§ Companies wanting to use e-mail marketing should acquire customer lists
- These can be built up ‘in house’ over time, by collecting e-mail addresses from visitors
- Alternatively, they can be purchased from ‘list owners’ or ‘list brokers’
§ The great disadvantage of e-mail advertising is that since it is so cheap, many businesses –
even very small ones – can use it for direct mail
Spam
§ Spam is unsolicited and unwanted e-mail.
§ Spam is a problem because of the very high volumes of mail received.
§ Now a days many email service providers have a built-in feature of protecting users from
‘Spam mails’; e.g. gmail automatically places messages detected as spam in a spam folder
§ From the perspective of internet users, spam is wasteful of their time and resources.
§ Legislation and regulation may be there to control the spam issue.
E-branding
§ A brand image can be defined as a collection of perceptions in the mind of the consumer.
§ A strong brand is important because it immediately confers a certain amount of recognition
§ Brand identity can be defined as the elements that are used by a customer to recognise a
brand: logos, symbols, colours, packaging etc.
When an established company is planning to market its products by internet for the first time,
it has to consider what to do about its brand identity. There are four choices:
§ Duplicate its existing brand identity online.
§ Extend traditional brand by creating slightly different version of brand (e.g. BBC online)
§ Partner with an existing e-brand.
(e.g. hotels could market through an airline website and so associate with airline brand)
§ Create a new brand for the web.
- New brand name allows to break free from perceptions associated with old brand.
- For a dynamic presence on web, a new brand is needed without associations of old
CUSTOMER RELATIONSHIP MANAGEMENT (CRM)
§ On internet it can be very difficult to retain customers and build up customer loyalty
§ Customers can visit websites of other suppliers whenever they are dissatisfied with us.
§ Retaining existing customers, as well as attracting new customers, is important challenge
§ Purpose of CRM is to:
- Find out more about purchasing habits and preferences of customers
- Profile the characteristics and needs of customers more effectively
- Change the way the company operates, in order to improve its service to customers.
§ CRM is normally associated with computer software.
§ CRM ‘is not just application of technology, but is a strategy to learn customers’ behaviour
CRM software solutions
A CRM software system is available as an off-the-shelf application package. Some companies

have developed or purchased bespoke (tailored) CRM systems.
The main functions of a CRM system are to:

§ Collect information for identifying individual customers and categorising their behaviour.
§ Store the customer information and keep it up-to-date.
§ Access the information, often instantly, whenever it is needed.
§ Analyse customer behaviour.
§ Use the analysis of customer behaviour to develop a more effective marketing strategy.
§ Provide customers with a better ‘experience’ when they contact the company.
- Calling them by their names gives the customer an elevated feel
- Customers perceives a better service because company know their preferences
§ Monitor key customer management performance indicators, such as number of complaints
CLOUD AND MOBILE TECHNOLOGY
Mobile Technology
This refers to technology that is portable. It includes laptops, tablets and smartphones all with
high power and functionality. The development and improvement of such devices has been
stimulated by the growth and improvement of the internet.
Benefits Risks
- Members of a workforce are now better - Portability of the devices means that they
able to communicate with each other and to can be dropped and damaged lost or stolen.
interact with organisations IT systems. Business device might contain confidential
- Many potential customers are equipped data that, if lost, could be very damaging.
with mobile technology allowing them to - Its connectivity with internet makes it
search for products and services, place prone to attack by hackers and others who
orders and make payments with ease. might wish to steal data.
- Organisations are able to market their
offerings to a much wider market
Cloud computing
Cloud computing is a general term for the delivery of hosted services over the internet. It is the
practice of using a network of remote servers hosted on the internet to store, manage, and
process data, rather than a local server or a personal computer. It enables use of a computing
resource without the need to build and maintain in-house computing infrastructures.
Cloud computing has the following characteristics:

§ The hardware and software are managed by a cloud vendor.
§ A user only pays for services used
§ Services are scalable
Benefits Risks
Cloud computing allows an organisation to: - An organisation surrenders its data to a third
- Minimise up-front IT infrastructure costs; party (cloud vendor). Could lead to problems
- Focus on its core business instead of if vendor’s system were subject to attack or
devoting resources on IT systems; corruption.
- Gain quicker access to applications; - Connectivity with internet has its own risk
- Respond quickly to fluctuating demand
- Employees can operate system remotely
BIG DATA
§ ‘Big Data’ is term used to describe a huge volume of both structured and unstructured data
that is so large it is difficult to process using traditional database and software techniques.
§ Big data is currently measured in petabytes (1,024 terabytes) or exabytes (1,024 petabytes).
§ An example of big data might be the billions (or trillions) of records relating to millions of
people from different sources including Web sales, social media and mobile data.
§ Big data comprises both structured and unstructured data:
- Structured data describes traditional data formats which fit neatly into columns and
rows in a relational database.
- Unstructured data describes data that takes many different forms and is generated from
many different sources such as industrial sensors, search engines and social media.
(It is estimated that over 90% of data now generated by organisations is unstructured)
Three “V” of Big data (Research report by Laney - 2001)
Velocity - Incredibly high speed that data is created, stored, analysed and visualised.
- Traditional batch processing might only update master files once per day
- Big data is updated real time (or near real-time)
- Speed at which new data is generated across the globe is incredible.
- A study (Datafloq – 2015) estimated that every minute 200 million emails are
sent, 100 hours of YouTube video are uploaded, 20 million photos are viewed
and 2.5 million queries on Google are performed.
Variety - Wide range of data types and sources reflected within big data.
- Furthermore, wide variety of data facilitates new ways of thinking & analysing.
- For example, Facebook can provide insights such as sentiment analysis on a
brand. Sensory data can provide information about how a product is used etc
Volume - Huge volumes of new data generated every second.
- All this new data needs processing, storing and to be made readily accessible for
searching and analysing.
- For example, Aeroplanes generate around 2.5 billion terabytes of data per year
from sensors installed in their engines.
- Datafloq study estimated that 90% of all data created was generated in past 2
years and will continue to double in volume every two years.
Additional Four “V” for Big data by some commentators
Veracity - Data needs to be correct and error-free in order to be reliable and relevant
Variability - Meaning of big data can also vary widely depending on the context.
Visualisation - Making vast data comprehensible that is easy to read and understand.
Value - It is capable of creating huge value for organisations, societies & consumer
- E.g. Potential annual value of big data to US health care is $300 billion
(McKinsey - 2011 big data report)
Adding value and the strategic importance of big data
McKinsey Global Institute shared some statistics in a report in 2011:

(‘Big data: The next frontier for innovation, competition and productivity’)
§ 5 billion mobile phones were in use in 2010
§ 30 billion pieces of content were shared on Facebook every month
§ 40% projected growth in global data generated per year vs. 5% growth in IT spending
§ 60% potential increase in retailers’ operating margins possible with big data.
In their research they identified 5 ways in which value might arise:

1) Creating transparency.
- Improved accessibility for relevant stakeholders in a timely manner can create value.
(e.g. making data readily accessible across separate departments within government)
2) Enabling experimentation to discover needs, expose variability and improve performance.
- Organisations can develop processes then set up controlled experiments and use the
data to analyse variability in performance.
3) Segmenting populations to customise actions.
- It enables highly specific segmentation to be developed to support tailored products and
services that precisely meet those needs.
4) Replacing/supporting human decision making with automated algorithms.
- Sophisticated analytics can substantially improve decision making, minimise risks and
unearth valuable insights that would otherwise remain hidden.
5) Innovating new business models, products and services.
- Manufacturers might use data obtained from the use of actual products to improve the
development of next generation products to create, say, innovative after-sales service
Strategic importance of big data
§ Big data, when captured, formatted, manipulated, stored and analysed, can help a company
to gain useful insight to increase revenues, get or retain customers and improve operations.
§ Analysis of datasets can also help identify new correlations and spot business trends
§ The use of big data is becoming a key way for leading companies to outperform their peers.
§ Forward thinking leaders are able to aggressively build organisations’ big data capabilities
§ Companies who are well placed to benefit from the strategic benefits of big data in particular
include those companies positioned in the middle of large information flows
§ Ivey Business Journal presented an article by Salvatore Parise in 2012 that explained a
number of strategies for commercially leveraging big data.
§ 4 strategies reflect a particular combination of data type and business objective as follows:
Data Type
Transactional data Non Transactional data
Business Measurement Performance Management Social Analysis
Objective Experimentation Data Exploration Decision Science
§ Performance management involves understanding the meaning of big data in company

databases and using predetermined queries and multidimensional analysis.
(e.g. years’ worth of customer purchasing activity)
§ Data exploration also leverages existing transactional data but involves using statistics to
experiment and challenge areas managers may not have previously considered. Cluster
analysis is one technique used to segment customers into groups based on similar attributes
§ Social analytics measures 3 key areas: awareness, engagement and word-of-mouth (reach).
(e.g. conversations and reviews on applications such as Facebook, Twitter and WeChat)
§ Decision science explores social big data in order to conduct field research and test
hypotheses. In concert with community feedback, decision scientists are able to determine
the value, validity, feasibility and fit of new ideas. It involves using listening tools that
perform sentiment analysis and can help marketers to gauge interest in new products.
(e.g. Dell has been running ‘Storm Sessions’ since 2007 which in their first 4 years generated
14,000 ideas and over 90,000 comments).
Big data Challenges
§ Shortage of talent necessary for organisations to take advantage of big data.

§ When dealing with larger datasets, organisations face challenges in being able to create,
manipulate and manage big data
§ As data becomes further digitised and portable the issues of privacy, security, intellectual
property and liability will become even more relevant.
§ Some critics suggest that big data is simply a new buzzword craze that has become an
obsession with media and business leaders.
§ They suggest that big data remains too focused on reacting to data sets to discover
correlations rather than helping with identifying the drivers behind those correlations.
How Big Data Is Revolutionising Finance
§ Big data analytics has managed to transform not only individual business processes but also
the entire financial services sector.
§ The exponential growth of technology and increasing data generation are fundamentally
transforming the way industries and individual businesses are operating.
§ The financial services sector, by nature, is considered one of the most data-intensive sectors,
representing a unique opportunity to process, analyse, and leverage the data in useful ways.
§ Computers have replaced humans decision making elements based on inferences drawn
from calculated risks and trends.
Real-time stock market insights

§ Big data is completely revolutionising how the stock markets worldwide are functioning
§ Machine learning, the practice of using computer algorithms to find patterns in massive
amounts of data is enabling computers to make accurate predictions
§ Business model monitors stock trends in real time.
§ It incorporates the best possible prices, allowing analysts to make smart decisions and
reduce manual errors due to behavioral influences and biases.
Big data analytics in financial models

§ Big data analytics presents an exciting opportunity to improve predictive modeling to better
estimate the rate of return and outcomes on investments.
Customer analytics
§ Big data initiatives by banking and financial markets companies focus on customer analytics
to provide better service to customers.
§ Companies are trying to understand customer needs and preferences to anticipate future
behaviors, generate sales leads, take advantage of new channels and technologies, enhance
3their products, and improve customer satisfaction.
Risk management and fraud detection

§ Financial organisations use big data to mitigate operational risk and combat fraud while
significantly alleviating information irregularity problems & achieving compliance objective
§ Banks can access real time data, which can be helpful in identifying fraudulent activities.
(e.g. if 2 transactions are made through same credit card within a short time gap in different
cities, bank can immediately notify cardholder of security threats and even block it)
§ To tackle fraud effectively, Alibaba built a fraud risk monitoring and management system
based on real-time big data processing. It identifies bad transactions and captures fraud
signals by analysing huge data of user behaviors in real-time using machine learning.
Accurate risk analysis.

§ Big financial decisions like investments and loans now rely on unbiased machine learning.
§ Calculated decisions based on predictive analytics take into account everything from the
economy, customer segmentation, and business capital to identify potential risks.
Analyse financial performance and control growth.

§ Data integration processes have enabled companies like Syndex to automate daily reporting,
help IT departments gain productivity, and allow business users to access and analyse
critical insights easily.
ARTIFICIAL INTELLIGENCE (AI)
Artificial intelligence (AI) is a wide-ranging branch of computer science concerned with

building smart machines capable of performing tasks that typically require human intelligence.
AI has many branches like Robotics, Fuzzy Logic, Expert System etc.
Expert system
§ An expert system is a computer program that is designed to solve complex problems and to
provide decisionmaking ability like a human expert.
§ The expert systems are the computer applications developed to solve complex problems in
a particular domain, at the level of extra-ordinary human intelligence and expertise.
Major components of an expert system are:

1. Knowledge base: It is a database of human experience, scenarios and detail information
about the subjects, gathered from various resources.
2. Inference rules: These are set of logical judgements applied to the knowledge base each
time a user describes a situation to the expert system.
3. User interface: It permits the end user to describe the problem or goal.
Capabilities of Expert Systems
The expert systems are capable of :-

§ Substituting human decision makers
§ Possessing human capabilities
§ Producing accurate output for inadequate knowledge base
§ Refining their own knowledge
§ Advising
§ Instructing and assisting human in decision making
§ Demonstrating
§ Deriving a solution
§ Diagnosing
§ Explaining
§ Interpreting input
§ Predicting results
§ Justifying the conclusion
§ Suggesting alternative options to a problem
Certain essentials for expert system:
§ A subject area which can be suitably defined.

§ The problem cannot be solved through conventional transaction processing system.
§ An expert who can provide the knowledge.
§ Users who know what they want and how they want to use it.
§ A knowledge engineer who can translate the expertise into facts and rules for the system.
§ A short but useful glossary of technical terms which may be encountered in the world of
expert systems is included.
Advantages of expert system:
§ It enables individuals who lack expertise in any subject to be able to make expert decisions.
§ It is accurate and offers advice on a consistent basis.
§ It has flexibility to change input details to explore alternative solutions.
§ It can handle several problems simultaneously through a multi-access system.
§ Staff costs are reduced because less expert staff is required.
§ It gives the opportunity to capture expertise before it is lost.
§ Human experts is able to concentrate on more complex issues.
§ Expert advice is available all the time.
IT CONTROL
Threats to systems security
§ Data deletion or corruption due to human error.

§ Technical error in the computer hardware, the software or the communications links
§ Some computer systems may be exposed to risks of natural disasters (e.g. earthquakes)
§ Systems are also exposed to risk from criminal damage, or simply theft.
§ Deliberate corruption (e.g through virus or hacking).
§ Loss of key personnel with specialist knowledge about a system.
§ Exposure of system data to unauthorised users. (e.g. hackers)
In addition, there are risks within the computer software itself:

§ Software might have been written with mistakes in it, so that it fails to process all the data.
§ Software might not contain enough in-built controls against risk of input / processing error
General controls and application controls
General controls are controls that are applied to all IT systems and in particular to the
development, security and use of computer programs. Examples of general controls are:
§ Physical security measures and controls
§ Physical protection against risks to the continuity of IT operations
§ General controls within software such as passwords, encryption software, and firewalls
§ General controls over the introduction and use of new versions of a computer program
§ The application of IT Standards.
Application controls are specific controls that are unique to a particular IT system or IT
application. They include controls that are written into computer software
General controls in IT
Physical access controls
§ Putting locks on doors to computer rooms when there are no authorised staff in the room.
§ Putting bars on windows, and shatterproof glass in computer room windows
§ Locating hardware in places that are not at risk from flooding
§ Physical protection for cables (to provide protection against fire and floods)
§ Back-up power generators, in the event of a loss of power supply
§ Installing smoke detectors, fire alarms and fire doors
§ Regular fire drills, so that staff know the measures to protect data and files in emergency
§ Obtaining insurance cover against losses in the event of a fire or flooding.
§ Arrangements with different providers of hot and cold sites (in case of emergency shifting)
Passwords
§ It is defined as ‘a sequence of characters that must be presented to a computer system

before it will allow access to the systems or parts of a system’
§ Typically, a computer user is given a prompt on the computer screen to enter his password.
§ Passwords can also be placed on individual computer files, systems and programs.
§ To gain access to a system, it may be necessary to input both a user name and a password.
§ However, password systems are not always as secure, mainly due to human error.
Problems of password systems include the following:

§ Users might give their passwords to other individuals who are not authorised to.
§ Users are often predictable in their choice of passwords, so that a hacker might be able to
guess, by trial and error, a password to gain entry to a system or program or file.
§ Passwords are often written down so that the user will not forget it.
A security culture should be developed within the organisation, so that the user’s staff are aware
of the security risks and take suitable precautions.
Encryption
§ Encryption involves coding of data into a form that is not understandable to casual reader.
§ Data can be encrypted (converted into a coded language) using an encryption key.
§ A hacker would not be able to read the data, and would not be able to convert it back into a
readable form without a special decryption key.
§ Encryption is commonly used to protect data that is being communicated across a network.
§ The on-line shopping system should provide for encryption of sender’s details (using
‘public key’) and the decryption of message at seller’s end (using a ‘private key’)
Preventing or detecting hackers
§ Physical security measures to prevent unauthorised access

§ Use of passwords
§ Encryption of data
§ Audit trails, so that transactions can be traced through system when hacking is suspected
§ Network logs of attempts to gain access to the system
§ Firewalls.
Firewalls
§ Firewalls are either software or a hardware device between user’s computer and modem.
§ Purpose is to detect and prevent any attempt to gain unauthorised entry through Internet
into a user’s computer or Intranet system.
§ A firewall:
- Will block suspicious messages from Internet, and prevent them from entering system
- May provide an on-screen report to the user whenever it has blocked a message
§ Firewalls can be purchased from suppliers.
§ Some firewall software can be downloaded free of charge from the Internet.
Computer viruses
§ Viruses are computer software that is designed to deliberately corrupt computer systems.
§ Viruses are written with malicious intent, but they may be transmitted accidentally.
§ Viruses can be introduced into a system on a file containing the virus.
§ A virus may be contained in a file attachment to an e-mail or On a storage device like DVD.
§ Viruses vary in their virulence (amount of damage they may cause to software or data)
Term Description
Trojan A virus that disguises itself often hidden within other software or files.
horses When system is carrying out one program, it secretly carries on another.
Worms This is corrupt data that replicates itself within the system, moving from
one file or program to another.
Trap doors An entry point to a system that bypasses normal controls
Logic bombs A virus that is designed to start ‘working’ (corrupting files or processing)
when a certain event occurs.
Time bombs A virus that is designed to start ‘working’ (corrupting files or processing)
on a certain date/time.
Denial of Rendering system unusable by legitimate users
service (e.g. by overloading website with millions of computer-generated queries)
Measures that might be taken to guard against computer viruses.

§ Computer user should install anti-virus software and keep up to date to:
- Detect known viruses in a file; and
- Isolate the virus so that it is not able to corrupt software or data in the computer.
§ Computer user might restrict the use of floppy disks and re-writable CDs
§ Firewall software and hardware should be used to prevent unauthorised access
§ Staff should be encouraged to delete suspicious e-mails without opening any attachments.
§ There should be procedures, communicated to staff, for reporting suspicions of any virus.
IT Standards
§ IT Standards are a form of general control within IT that help to reduce the risk of IT
system weaknesses and processing errors, for entities that apply the Standards.
§ A range of IT Standards have been issued (e.g. ISO has issued IT security system standards).
§ There are also IT Standards for the development and testing of new IT systems.
Application controls in IT
§ Application controls are controls that are designed for a specific IT system.
§ Common example of application controls is data validation. These are checks on specific
items that are input to a computer system, to test the logical ‘correctness’ of the data. E.g.:
- If a transaction is input to system without value, an error report should be produced.
- Entered value should be within a range of codes, otherwise error would be generated
- Key code numbers can be designed to include a ‘check digit’.
Monitoring of controls
It is important within an internal control system that management should review and monitor
the operation of the controls, on a systematic basis
IT controls audit
§ Large organisations might employ an internal audit team.

§ Organisation could also employ IT auditors who specialise in a particular IT system
§ Alternatively, IT control audit might be outsourced to a firm of independent auditors
§ The steps involved in IT Control audits typically include the following:
- Auditor must understand the risks faced by the systems.
- Auditor would then consider the design of the controls that have been put in place.
- Auditor will then test the key controls to ensure they have been operating effectively.
§ They might perform IT controls auditing on cyclical basis addressing different parts
§ Alternatively they might audit all areas of the system at every audit.
§ Another approach would be to adopt a ‘risk-based’ approach
Exception reporting
A periodic (e.g. daily / weekly / monthly) exception reporting should
§ Describe control failures that occurred
§ Describe the impact of the control failure
§ Suggest the new control(s) that should be adopted
The effectiveness of IT control monitoring is driven by the action taken by management to

address control failures when they occur.
COBIT (Control Objectives for Information and Related Technologies)
Purpose of COBIT is to provide management and process owners with an IT governance model
that helps in understanding and managing the risks associated with IT. It is a control model to
meet the needs of IT governance and ensure integrity of information and information system.
§ An IT governance tool that has been of tremendous benefits to IT professionals
§ Linking IT and control practices, COBIT consolidates and harmonises standards from
prominent global sources into a critical resource for management control professionals.
§ COBIT represents an authoritative, up-to-date control framework, a set of generally
accepted control objectives and a complementary product that enables easy application
§ COBIT applies to enterprise-wide information systems, including personal computers,
mini-computers, mainframes and distributed processing environments.
§ COBIT is used by the persons who:
- have the primary responsibilities for business processes and technology;
- depend on technology for relevant and reliable information
- are providing quality, reliability and control of information technology.
Application of COBIT in Business process
§ COBIT is business process oriented and addresses itself to the owners of processes.
§ COBIT is not applied only by the IT department, but also by the business as a whole.
§ Business process owners bear final responsibility for IT as deployed within processes.
§ They will obviously make use of services provided by specialised parties like IT dept etc.
§ COBIT provides the business process owners with a framework which should enable them
control all the different activities underlying IT deployment.
§ They can gain assurance that IT will contribute to achievement of their business objectives.
COBIT components
COBIT’s Management Guidelines component contains a framework which responds to

management’s need for control and measurability of IT by providing tools to assess and
measure the enterprise’s IT capability for the 34 COBIT IT processes.
The tools include:

§ Performance measurement elements
(outcome measures and performance drivers for all IT processes)
§ A list of CSF that provides concise, non-technical best practices for each IT process; and
§ Maturity models to assist in benchmarking and decision-making
COBIT comprises six specific components:
1) Management Guidelines
- Maturity models, to help determine the stages and expectation levels of control and
compare them against industry norms
- CSF, to identify the most important actions for achieving control over the IT processes
- Key Goal Indicators, to define target levels of performance; and KPIs
2) Executive Summary
- An executive overview which provides thorough awareness and understanding of
COBIT’s key concepts and principles.
3) Framework
- It explains how IT processes deliver the information that the business requires
- This delivery is controlled through 34 high-level control objectives, one for each IT
process, contained in the four domains.
- The Framework identifies which of the 7 information criteria (effectiveness, efficiency,
confidentiality, integrity, availability, compliance and reliability), as well as which IT
resources (people, applications, technology, facilities and data) are important
4) Control Objectives
- Provide critical insight needed to define a clear policy and practice for IT controls.
- Included are statements of desired results or purposes to be achieved
5) Audit Guidelines
- Suggest actual activities to be performed corresponding to each of the 34 high level IT
control objectives, while substantiating the risk of control objectives not being met.
- These are an invaluable tool for information system auditors
6) Implementation Tool Set
- Management Awareness and IT Control Diagnostics;
- Implementation Guide FAQs;
- Case studies from organisations currently using COBIT; and
- Slide presentations that can be used to introduce COBIT into organisations.
WebTrust
WebTrust
It is a seal of assurance attached to a Website to assure users of its integrity and safety.
It is seal of best practices, and a new service jointly developed by Canadian Institute of
Chartered Accountants (CICA) and American Institute of Certified Public Accountants
(AICPA).
WebTrust enables consumers and businesses to purchase goods and services over Internet
with the confidence that vendors' web sites have historically met specific high standards for
privacy, security, business practices, transaction integrity and more.
Three principles are used to evaluate a site:

§ Business and information privacy practices
§ Transaction integrity
§ Information protection
WebTrust seal provides assurance of an unqualified report with respect to above 3 objectives
for a particular website.
Chapter 11: Management approaches and employee Recruitment Page 130
Management and Leadership
Management
Management is getting people to work harmoniously together by making efficient use of

resources to achieve objectives
§ Management is the process of controlling resources and people to achieve specific purpose.
§ In simple words, management is art of getting things done through people in organizations.
§ Management also deals with behaviour of peoples
(sets objectives, communicates with, motivates and develops people)
§ The manager is dynamic, life giving element in every business.
§ Summing up, the purpose of management is to help achieve objectives of an organization
through efficient usage of human, physical, and financial resources
Role of Management
§ Set objectives
§ Plan for the achievement of those objectives
§ Organise resources and employees for achievement of plan
§ Establish controls for activities and operations
§ Co-ordinate activities
§ Establish effective communication system (both inside & outside organisation)
§ Monitor actual performance
§ Take corrective action where necessary
§ Review actual achievements & establish new planning objectives.
Leadership
§ Leadership is termed as the process to influence the individuals to attain a common goal.
§ Leadership is both similar as well as different from concept of management in many ways.
§ A successful leader is the one who is able to understand the needs and interests of a group
of individuals or an organisation to achieve a specific purpose.
§ Leadership also has the additional capacity to provide different opportunities to the
employees so they can learn and grow professionally.
§ It is important for a leader to possess certain qualities such as integrity, courage, attitude,
initiative, energy, optimism, perseverance, balance and ability to handle stress.
Comparison of managers and leaders:
Managers Leaders
Transactional leadership Transformational leadership
Doing things right Doing the right things
Administer Innovate
Maintain Focus on systems Develop focus on people
Reliance on control Inspire trust
Short-range view Long-range perspective
Imitates Originates
Accepts the status quo Challengers the status quo
Theories of Early and Modern Management
Early management ideas
§ Practice of management has existed for centuries and can be traced back to ancient times
(great examples are the Egyptian pyramids, the Great Wall of China or the Taj Mahal)
§ These were only possible because some people (managers) told each worker what to do,
ensured that there would be enough material at the site to keep workers busy.
§ Another example can be wars with armies of men and a tremendous number of weapons.
(victories were not possible if these resources were not organised with a direction)
Pre Scientific Management - (prior to1880)
§ This management period is mainly referred as period I.

§ Relationships during this period were based on social caste and it was mainly dominated by
systems of autocracy, the feudal system and management style of ancient Egyptians.
§ There were no particular principles in management which could guide people.
§ Need to study or organise all concepts of management was not given much consideration.
§ People were content without much aspiration to do better or improve their living standard
§ One development of that era was that the group of craftsmen doing the same kind of work
formed guilds similar to modern trade unions.
Classical and Scientific Theories of Management (1880-1930)
F W Taylor (1856 – 1915) and scientific management
Background
§ This period is referred as period II and was dominated by rise of business enterprise and
revolution of industrialization.
§ Scientific management theory was focused on improving the efficiency of each individual
§ Major emphasis was on increasing production numbers by using intensive technology
§ This theory basically studies the tasks performed on production floor
- These tasks are routine and repetitive in nature
- Workers are divided into many groups based on repetition of similar activities
- These activities do not require the worker to use complex-problem solving ability
- Contribution of the worker is seen as mere support to the machines.
- Therefore, more attention is required on standardization of working methods and
improving efficiency of the activities
Four underlying principles of scientific management
§ There should be a science of work
- Analysis of work methods and work times
- Dividing larger tasks into smaller units
- Finding most efficient way of carrying out tasks
- A fair level of performance or efficiency can be identified.
- Workers should be rewarded accordingly
(e.g. higher pay for performance exceeding standard level)
§ Workers should be selected carefully.
- Should have skills and abilities that best suits the work
- Should also be trained in how to do the work efficiently.
§ Scientifically-selected and trained workers and science of work should be brought together
for best results and greatest efficiency
§ There should be an equal division of work between the workers and management (Both
should operate closely together)
Criticisms of scientific management

§ It results in dull, repetitive and monotonous work.
§ Tasks are reduced to such small units that they demoralise the workers who do the jobs.
§ Efficiency of employees will be low because they
- Are doing dull and repetitive work
- Are not at all interested in what they are doing.
Administrative Period of Management
Entire management theory and administrative period of management relies on methods of

production and emphasized on application of observed studies for faster and effective methods
of production. Theories of this era are given hereunder.
Henri Fayol (1841 – 1925) and principles of management
Fayol suggested that there are 5 main tasks of management:

§ Plan (and look ahead)
§ Organise
§ Command
§ Co-ordinate, and
§ Control (monitoring performance)
Principles of good management that apply to all types of organisation
Mnemonic for memorizing: “DADU SEE I CROSS U”
Division of Work–When employees are specialized, output can increase because they
become increasingly skilled and efficient.
Authority – Managers must have the authority to give orders
Discipline – Discipline must be maintained in organizations
Unity of Command – Employees should have only one direct boss.
Scalar Chain – Hierarchy or chain of command should be very clear.

Equity – Managers should be fair to staff at all times, both in maintaining discipline and acting
with kindness where appropriate.
Esprit de Corps – Should strive to promote team spirit and unity
Initiative – Employees should be given the necessary level of freedom to create and carry out
plans.
Centralization – How close employees are to decision-making process

Remuneration – Should be fair for all (financial and non-financial)
Order – Workplace facilities must be clean, tidy &safe for employees
Subordination of Individual Interests to the General Interest – Interests of one employee
should not be allowed to become more important than those of the group
Stability of Tenure of Personnel – Managers should strive to minimize employee turnover
Unity of Direction – Teams with the same objective should be working under the direction of
one manager, using one plan.
Principles of organisations – Lyndall Urwick
Mnemonic for memorizing: “BADC3ROSS”
Balance Various units of an organisation should be kept in balance.
Authority There should be a clear line of authority to every individual in

group
Definition Content of each position (duties involved and

responsibilities) and relationships with other positions
should be clearly defined in writing and published to all
concerned
Co-ordination Facilitate co-ordination and unity of effort
Correspondenc Responsibility& authority should correspond

e
Continuity Organisation’s structure should be designed to ensure the
organisation’s survival.
Responsibility Responsibility of superior for acts of juniors
Objective Organisation and all parts of it must be an expression of its

main purpose
Specialisation Activities of every member should be confined to the

performance of a single function.
Span of Control No person should supervise more than 5 or 6 direct

subordinates whose work links.
Weber (1864 – 1920) and bureaucracy
He argued that an ‘ideal’ bureaucracy has following characteristics.

§ There should be a hierarchy of authority, from top management down to workers at the
bottom.
- Positions should be ranked in hierarchical order
- Information should flow up the chain of command
- Instructions and directions should pass down the chain.
§ Bureaucracy should operate in impersonal and impartial way.
§ There should be written rules of conduct.
§ There should be promotion of individuals within organisation
(based on their achievement)
§ There should be division of labour and specialisation of work.
Weber believed that bureaucracy provide a rational organisation for co-ordinating activities,
based on hierarchy of authority.
Bureaucracy is often condemned because of ‘red tape’, ‘pen-pushing’ & ‘soul- destroying work’
Rosemary Stewart on bureaucracy
4 Main features of bureaucracy
§ Specialisation
There is specialisation of work (not individuals)
There is continuity.
When one person leaves, the job continues, and another person fills the same position.
§ Hierarchy of authority
Hierarchy with clearly defined levels of authority and ‘ranks’ of managers.
§ A system of rules
People must know what the rules to do their job successfully are.
§ Impersonal
Exercise of authority and system of privileges and rewards are based on a clear set of rules.
Neo-Human Relations Theory or Behavioural Approach (1930-1950)
§ Classical theories of management did not give much importance to human aspects
§ Result was lack of efficiency and co-operation between the management and workers.
§ Human Relations period was entirely focused on all human relationships in organizations.
§ Thinkers believed that organization is a social system of interpersonal relationships
between different people and groups of people.
§ They gave importance to the management of people and their needs.
Elton Mayo (1880 – 1949) and the human relations school
§ He was first management theorist to draw attention to social aspects of working.

§ Managers should become more involved with workers, and earn respect of workers.
§ Result would be improved motivation and higher productivity.
§ As a result of Mayo’s work, people started paying more attention to the human factor
§ Many other social psychologists also presented their research and related theories
§ Emphasis, in this era, shifted from production, structures & technology to social interaction
Experiments on productivity at Hawthorne plant at the West Electric Company

Aim of experiments was a scientific management study into effect on productivity of changes
in working conditions (lighting, rest periods during day, length of working day and pay
incentives). Experiments were conducted with help of Elton Mayo (Harvard professor)
§ Some individual workers were selected for experiments
§ Their working conditions were varied in various ways
(e.g. shorter rest breaks, various intensities of light and longer hours working)
§ Results of experiments were unexpected.
§ Even when working conditions were changed, their productivity continued to rise.
§ Mayo suggested that the reasons for improving productivity were:
- Motivation and commitment of individuals in experiment
- Relationship between the employees and management.
- Workers become a team developing social relationships along with work relation
Arguments related to effect of positive motivation on productivity
§ Work has a social value for workers.

§ Informal organisation is important in affecting workers’ attitudes
§ Productivity of workers is affected by their self-esteem
§ Satisfaction lies in recognition, security and a sense of belonging
(rather than money rewards)
§ Motivation (and productivity) is affected by relationship between management & workers.
- Managers need to communicate with workers.
- Management must develop and apply ‘people skills’
McGregor: Theory X and Theory Y
There are two different approaches to managing people
Theory X
§ Approach is based on following views about people at work:
- Average person dislikes work and will avoid it if possible
- Average person prefers to be directed, wants to avoid responsibility, has no
ambition
§ Approach to management is an authoritarian style.
(Manager instructs his employees and tells them what to do)
Theory Y
§ Approach is based on following views about people at work:
- Putting effort into work is as natural as play.
- Individuals will apply self-direction and self-control to work
(without the need for constant supervision)
- Individuals usually accept and then seek responsibility.
- Individual’s commitment to the organisation’s objectives is related to rewards
associated with achieving those
- Individuals have much more potential that could be utilised.
§ Approach to management is a participative style.
(Manager encourages employees to participate in decision-making)
The implications of McGregor’s theory
Theory X is more suitable

§ In a factory environment.
§ In situations when manager must exercise his authority, because this is the only way of
getting results.
Theory Y can often be used

§ To manage the managers and professionals.
(it is better to explain problems to them to get their commitment)
§ Where employees are positively motivated to work and mature
(work must be sufficiently responsible to allow some flexibility)
William Ouchi: Theory Z
William Ouchi made a study of Japanese companies and compared them with US companies. His
aim was to identify the reasons why
§ Japanese companies performed better than US companies, and
§ Specifically produced better-quality products than US competitors
His study of Japanese companies found that in Japan,

§ Managers have a high level of trust in their workers
§ They assume that workers have a strong loyalty towards company
§ Companies in turn show loyalty and give employment for life;
He suggested that most efficient type of organisation for the US might be one that combined
features of ‘typical’ US and Japanese companies. He put forward his ideas in a book: Theory Z:
How American management can meet the Japanese challenge (1981).
Some of the main features of Theory Z are set out below:

§ Collective decision-making.
§ Long-term employment and job security.
§ Job rotation, generalization and overall understanding of company operations, replace job
specialization as a key component of the model.
§ Slow advancement/promotion.
§ Emphasis on training and continual improvement of product and performance.
§ Holistic concern for the worker and his or her family further personalize management.
§ Explicit, formalized measures, despite implicit, informal control, ensure efficiency of
operations.
§ Individual responsibility for shared accomplishments.
Contemporary Management (1950-present)
§ Earlier thoughts of management were about hoe managers should manage organisations.
§ During 1960s, researchers began to view what was happening in external environment
§ Two contemporary management perspectives, systems and contingency derived out
§ This period began in 1950 and it eventually extends to the present time
(it is often characterized with the processes of refinement and extension in management)
Modern management or the Systems Approach
§ Attention was brought to focus on the organisation and its systems including the number of
the inter-related systems within organisations
§ Another important aspect is that organizations are equally dependent on environment.
- They rely on their environment for necessary inputs as well as outputs.
- Any organization cannot ignore government regulations, supplier relations etc
§ This approach is synthesized with classical approach along with human relations model
§ There are many writers on management theory (some are described hereunder)
Peter Drucker (1909 – 2005)
He suggested that there are 5 areas of management responsibility:
1) Setting objectives.
Set objectives for organisation, and decide on targets
Communicate the targets to other people in the organisation.
2) Organising work.
Dividing it into activities and jobs.
Integrate the jobs into a formal organisation structure
Select and appoint people to do the jobs.
3) Motivating and communicating.
4) Measuring.
Comparing performance against a target or benchmark.
They analyse and assess performance
Communicate their findings to their superiors and subordinates
5) Developing people.
Managers need to develop their employees and also themselves. Manager ‘brings out what
is in their employees or he suppresses them. He strengthens their integrity or he corrupts
them.’
Drucker suggested 3 aspects of manager’s responsibilities in business
Managing the business.

§ Responsible for matters such as innovation &marketing
(Drucker was first one to argue for ‘putting the customer first’)
Managing managers.
§ Managers need to be managed.
§ Give them targets for achievement and monitor their performance
Managing workers and their work.

§ Set objectives for their team
§ Divide their work into manageable activities.
§ Motivate staff and communicate with their team
§ Measure and review their performance
§ Train and develop their people.
Henry Mintzberg
Managers perform 3 main roles (analysed into 10 different functions)
Figurehead Often perform a ceremonial role, representing the organisation at

events and as their ‘public face’.
Also represent in dealings with other organisations
Liaison Act as a link or bridge with other groups
Leader Also deal with relations between individuals inside organisation
(hiring, firing, training, motivating etc)
Monitor Build and use ‘intelligence-gathering’ systems and monitor the
information they receive.
Disseminator Disseminate information, acting as channel of information within the
group and with others.
Spokesman As spokesperson for group, in ‘public relations’
Initiator/ Have an entrepreneurial role, and take initiatives.
Improver and
Changer
Disturbance Have a role in resolving conflicts and disputes, and dealing with other
handler similar unexpected problems.
Resource allocator Decide how resources should be used
(e.g. how the money should be spent)
Negotiator They negotiate with others, and reach decisions
The Contingency Theory
It says that all organizations are different, they face different situations (contingencies), and
hence they require different treatments of managing their respective tasks. Some of the factors
such a theorist may consider in choosing a management approach are:
§ Size of the organisation
§ People and workforce
§ The relevant technological issues
§ The operating environment and industry
HUMAN RESOURCE STRATEGY
§ Success of a business entity depends on skills and experience of its human resources (HR).
§ HR are mainly employees (full time, part time, home workers).
§ HR might also be external individuals who provide consultancy services or expert services.
§ Objective of a HR strategy is to ensure that the human resources are available, as required.
Human resource planning (Workforce Planning)
There are four main stages in the planning process:

§ Studying the corporate objectives of entity and strategic objectives of each division.
- Estimate the likely total size and organisation structure of the entity.
- Total HR numbers should be consistent with the corporate and divisional strategies.
§ Demand forecasting.
- The required numbers and skills of human resources should be estimated.
- Business disposals and product closures
- Introduction of new technology (e.g. new production equipment saving need of labor)
- Business acquisitions, joint ventures, strategic partnerships
§ Assessing current resources.
- An assessment of current HR
- What might happen to these existing resources each year over the forecast period.
- Scheduled changes to composition of existing HR (e.g. promotions; new qualification)
- Normal loss of workforce - e.g. through retirement, "normal" labour turnover
§ Preparing policies and plans.
- Close the Gap (i.e. Demand – Supply = Shortage/Surplus)
Meeting Shortage of HR
§ Internal Promotions, Transfers (Redevelopment Plan)
§ Training. (Training & development Plans)
§ Reducing Labor turnover (Retention Plan)
§ External recruitment (Recruitment Plan)
Meeting Surplus of HR
§ Restricting recruitment
§ Part-time working
§ Redundancies (Redundancy Plan)
The plans should be realistic, and should take into consideration environmental factors like:
§ Changes in population trends, and total size of the work force country of operation
§ Changes in government policy, such as changes in the retirement age of workers
§ Availability of individuals who are trained in a particular skill or vocation
§ Changing patterns of employment (e.g. part-time workers etc)
§ Competition for human resources from competitors
§ Trends in sub-contracting and outsourcing
§ Trends in IT and other technological changes that might affect labour requirements.
Example of HR Planning
Number Number
Number of employees needed by the end of Year X (for a division) 1,400
Current number of employees (in that division) 1,200
Net increase in numbers required 200
Estimate of staff turnover in the period

Employees leaving (resignation, retirement etc) 300
Employees moving to another job in the organisation 150
Turnover of employees 450
Numbers required (total) 650
Fill from internal promotion or training -350

External recruitment Required 300
Advantages of HRM:
§ Decrease in Staff Turnover § Lesser conflicts

§ Increase in Productivity § Increase quality
§ Increase in Group learning § Increased co-operation
§ Increase in initiative § Increased commitment
§ Decrease Absenteeism § Better Corporate Image
Roles/Scope of HR Manager:
Staffing: Motivation/ (Individuals):

§ Job Analysis § Job Analysis and Design
§ HR Planning § Pay and Promotion
§ Recruitment
§ Selection Leadership and Groups:
§ Retirement
§ Creating effective teams
§ Resignation
§ Managing conflicts between teams
§ Redundancy
HR Development: Other Aspects:

§ Performance Appraisal § Health and Safety
§ Career Planning § Workforce diversity (Equal Employment Opportunity)
§ Training § Compliance with legal and other standards
§ Development § Personnel record and Information System
THE RECRUITMENT AND SELECTION PROCESS
§ Efficiency and effectiveness of an organisation depend on skills and abilities of its HR.
§ Over time, changes occur in the work force.
§ Workforce planning is really important for identifying the need for recruitment
§ It is important to make sure that job vacancies are filled when they occur.
§ It is also important to make sure that suitable individuals are appointed to do the jobs.
Stages in the recruitment and selection process
§ Recruitment is concerned with quantity – getting candidates to apply for job vacancies
§ Selection is concerned with quality – choosing the individual who seems the best for job.
Roles and responsibilities in recruitment and selection
Operational managers (‘line’ management)
§ Report any vacancies arising in their department, or should agree any vacancies with the
management responsible for the HR plan.
§ Identify individuals already working for them who might be suitable for a job vacancy
(as part of the process of developing and promoting staff internally)
§ Be involved in specifying the nature of job, and skills that job holder should have.
§ Normally be involved in process of selecting individuals from the job applicants applying in
their department.
HR ‘staff’ specialists
§ They should have specialist skills in recruitment and selection.

§ They should also have specialist knowledge about selection methods.
§ Typically, they work with line management, with responsibility for ensuring that enough
candidates apply for vacancies.
External recruitment agency (head hunters)
§ In some cases, an organisation might use their services to identify potential candidates.
§ However, selection process should be responsibility of organisation’s own management.
Reasons for ineffective recruitment and selection
Reasons for Poor recruitment
§ The job vacancies are advertised in an improper way (not gathering proper attention)
(Poor Advertisement)
§ The requirements of the job are not properly considered before the job is advertised
(Poor Job Analysis)
§ There is a failure to agree the minimum acceptable requirements for the job
(Poor Person Specification)
§ The job itself is not attractive enough, or the pay is too low
Reasons for Poor selection
§ Due to poor design of the ‘Job Application Form’ a candidate may be offered the job when
there is insufficient relevant information about him or her.
§ Selection techniques are inappropriate.
§ Individuals making selection are not trained in selection, and do not have necessary skills.
§ Effectiveness of selection process is not monitored and reviewed regularly
(need to improve the selection system is not recognized)
E FFECTIVE RECRUITMENT
Job analysis (Define Requirements)
§ Involves looking at a job and identifying what it

consists of (or what it will consist of).
§ The purpose of a job analysis is to:

- Produce a detailed specification of job; and
- Produce a specification of qualities needed
from the proposed individual
Note: Job Analysis, Job descriptions and person

specifications are described in more detail later.
Internal Recruitment vs. External Recruitment
Advantages of Internal Recruitment
§ Gives existing employees greater opportunity to advance their careers in the business
§ May help to retain staff who might otherwise leave
§ This person already knows the organizational culture
§ Reduced risk of selecting an inappropriate candidate
(Employer should know more about the internal candidate's abilities)
§ Usually quicker and less expensive than recruiting from outside
Disadvantages of Internal Recruitment (leading towards need of external recruitment)

§ Limits the number of potential applicants for a job
§ External candidates might be better suited / qualified for the job
§ Another vacancy will be created that has to be filled
§ Existing staff may feel they have the automatic right to be promoted, whether or not they
are competent
§ No new blood, no innovation and new perspectives
§ Morale problems of those not promoted
Internal vacancies are usually advertised Ways of looking for staff outside business:
within the business via a variety of media: § Employment / recruitment agencies
§ Staff notice boards § Job centres
§ Intranets § Government Funded Training Schemes
§ In-house magazines / newsletters (E.g. Punjab Govt. Internship program
§ Staff meetings for Masters Degree holders)
§ Advertising
§ References from key employees
Methods of advertising vacancies
Recruitment agencies
§ An organisation may inform an external recruitment agency of its job vacancies.

§ The agency attracts individuals looking for a job, and tries to match relevant individuals
§ Many recruitment agencies specialise in finding applicants for particular types of job
§ Some agencies specialise in finding suitable applicants for senior management positions.
Media advertising
Media advertising has decreased in recent years with rise of internet and digital advertising.
§ A national newspaper may be used to advertise vacancies for managers, some professional
staff and some senior technical staff.
§ A local newspaper may be used to advertise jobs where only local people are expected to
be interested in applying.
§ Specialist journals & magazines are used to advertise job vacancies in particular industries.
§ Radio or television might be used to advertise job vacancies, but this is unusual
Content of a job advert

§ Details of the business/organisation (name, brand, location, type of business)
§ Outline details of the job (title, main duties)
§ Conditions (special factors affecting the job)
§ Experience / qualifications required
§ Rewards (financial and non-financial)
§ Application process (how should applicants apply, deadlines etc)
Choice of medium depends upon

§ Type of job
- Senior management jobs merit adverts in national newspapers and/or specialist
management magazines (e.g. the Economist, Business Week).
- Many semi-skilled jobs need only be advertised locally
§ Cost of advertising
§ Readership and circulation
§ Frequency (how often does the business want to advertise the post)
Other methods of recruiting
The internet
§ Can be on their own web site.
§ Many recruitment agencies also advertise job vacancies on the internet
(e.g. www.jobee.pk in Pakistan)
§ Facebook and LinkedIn are also increasingly being used to advertise job vacancies.
List of Individuals
§ An organisation may keep such a list of individuals who have applied in the past for a job
§ These individuals can be contacted and asked if they are still looking for a job
Job application form
§ Applicants for a job are often asked to fill in a job application form.
§ This is usually a standard application form, used by an organisation for all its job vacancies.
§ An application form usually asks questions about the following.
- Personal details about the applicant (e.g. name, address, contact number, address etc)
- Details of education and educational qualifications, or other formal qualifications
- Details of the individual’s current job
- The applicant’s social and leisure interests and activities.
- Why the individual wants the job, or what he is hoping to achieve in his future career.
The purpose of a job application form
§ It provides basic details about the applicant, so that organisation is able to contact him.
§ It gives the applicant for a job an opportunity to ‘sell’ himself or herself to the organisation.
§ Filtration is possible when applicants are too many
§ Comparison of candidates is easy, and ranking them in order of preference for interview
The limitations of a job application form
§ They usually contain only apparent information about the applicant.

§ They cannot be used to assess the qualities of applicants (e.g. intelligence, motivation etc)
§ Applicants might provide false information, particularly about qualifications & experience.
References
§ On job application form, applicants are often asked to provide the details of 1 or 2 referees.
§ The preferred referees are typically:
- A former employer, senior manager or supervisor that the applicant has worked with
- A senior teacher or course tutor who has taught the individual, or
- A renowned person who knows the applicant socially (e.g. a doctor or a CA)
§ Application form might state that the organisation reserves the right to contact the referee
§ Organisation normally ask for these references only if it intends to offer job to individual.
§ A reference is usually in a form of a letter from the referee.
(Alternatively, the referee might be asked to complete a special questionnaire)
§ A reference may provide useful information about the applicant, and may:
- Confirm matters of fact that the applicant has stated in the application form
- Confirm impressions about the character and competence of the individual
Problem with references
§ Referee may not give an honest opinion about the individual.

(would provide only positive opinion and would try not to discuss negatives of applicant)
§ There may also be a risk of legal action against the referee by applicant, if the information
in the reference is unfair.
JOB ANALYSIS
Definition and purpose of job analysis
§ Job analysis is ‘a detailed examination of a job to determine the duties, responsibilities and
specialised requirements necessary for its performance’
§ Job analysis concentrates on what job holders are expected to do.
§ It provides the basis for a job description and employee specification.
§ Influences decisions on recruitment, training, performance appraisal and reward systems.
The purpose of job analysis
§ It is a starting point for preparing a job description and person specification for a job.
§ It is useful for recruitment (advertising a job) and selection.
§ It is used for job evaluation.
- The process of studying a job, and comparing one job with other jobs
- Deciding what the job is ‘worth’ in terms of salary and rank/grade
§ It can help with organisation structure, and deciding boundaries of authority for each job.
§ It can help management to plan a training programme for the job holder.
§ Job analysis can also be used when job content is reviewed.
How is a job analysis carried out (systematic approach)
§ Research business documents - e.g. procedures manuals

§ Ask relevant managers about the requirements and purpose of the job
- Key activities
- What relationships does the job have with other posts
§ Interview the existing job holder and his boss
§ Observe the job holders to see what they really do
The information gathered for analysis
§ Job purpose What is the job meant to do

§ Job content Duties and responsibilities
§ Accountabilities What results / outputs is the job holder responsible for?
§ Performance criteria How will the job holder's performance be measured?
§ Responsibility To whom you are responsible
§ Position in organisation
§ Career development What career opportunities are available for employee
§ Environmental factors Working conditions, hours of work, health and safety issues
The skills required for job analysis
§ Needs to know what information to look for, and what questions to ask.
§ Must be able to carry out the analysis, and apply analysis to its specific purpose, such as:
- Preparing job description and person analysis for the job, or
- Evaluating the job, and deciding what level of wage or salary is appropriate
If job analytic is an external agencies, they should also have a well-established method of job
analysis that has been proved (from experience) to work well.
Justifying the use of job analysis
Job analysis may be justified when

§ Creating job descriptions and person specifications will improve the quality of recruitment.
§ Re-design the content of some jobs is possible.
Job analysis is difficult to justify when

§ Job content is already well-defined (with formal job descriptions and person specifications)
§ It can become out-of-date within a short time due to changing environments.
§ Cost of analysis is higher than the expected benefits.
JOB DESCRIPTIONS AND PERSON SPECIFICATIONS
Job descriptions
A job description is a formal description of a job, its purpose and scope, and the formal duties
and responsibilities of the jobholder.
The contents of a job description include:

§ Job title
§ Date of preparation of job description
§ Name of the department or section in which job is located
§ Relationship of the job to other jobs in the organisation structure
- Who is the ‘boss’ of the job holder?
- Who are subordinates of the job holder?
§ Is the job a part of a team, and if so, what is the size of the team?
§ Purpose of job, and objectives of job in relation to the overall objectives of department
§ Tasks associated with the job
- List of key tasks and principal duties
- Which tasks will take up most of the job holder’s time
§ Responsibilities associated with the job
§ Limits to the job holder’s authority
§ Accountability of the job holder
§ Salary range or wage range for the job
§ Conditions of employment (working hours, entitled holidays etc)
The purpose of a job description
§ It can be used in a job evaluation exercise.

- Should be possible to assess whether the job involves too little or too much work
- What the rate of pay for the job ought to offer.
§ A job description can be given to the job holder, so that he is aware of exact requirements.
§ It can be used to advertise a vacancy for the job
§ Might help an employer to identify the personal qualities that the job holder needs to do
Person specifications
A person specification describes the requirements a job holder needs to be able to perform the
job satisfactorily. These are likely to include:
§ Education and qualifications
§ Training and experience
§ Personal attributes / qualities
A person specification is used in recruitment and selection:
§ To advertise a job vacancy
§ Judge the applicants
Person Specification - Rodger: 7-point plan
§ He grouped the personal characteristics into seven categories

§ He suggested that an interviewer could use this analysis during the selection process
The 7 categories of personal qualities in Rodger’s model were as follows:
1) Physical make-up (e.g. state of health, aged, speech, height)

2) Attainments (e.g. education completed, relevant market experience etc)
3) Intellectual Competence (e.g. Strategic, judgment, planning)
4) Special Aptitudes (e.g. verbal reasoning; numerical aptitude)
5) Interests (e.g. social activities; sporting activities, artistic)
6) Disposition/ Adaptability (e.g. open, honest, flexibility with change)
7) Personal circumstances (e.g. living alone/with family, ability to work full/part time)
Rodger suggested that personal characteristics of applicants should be matched with personal
requirements for the job holder. He grouped personal requirements into 5 categories:
§ Intellectual requirements;
§ Practical requirements;
§ Physical activity requirements;
§ Working with other people; and
§ Artistic requirements.
Limitations of Rodger’s 7-point plan
§ It matches individuals with jobs on basis of superficial information about the individual.
§ Assumptions, about the qualities required to do a job well, might be incorrect.
§ It is important to consider the type of job that an individual wants to do, not just the type of
job that he or she seems well suited for.
Person Specification - Munro Fraser: 5-point plan
1) Impact on other people. (e.g. physical make-up and appearance, way of speaking)
2) Qualifications. (e.g. knowledge and academic & professional experience)
3) Brains and abilities. (e.g. quickness of understanding, and aptitude for learning)
4) Motivation. (e.g. determination to achieve goals and the success rate)
5) Adjustment. (e.g. emotional stability, handling people & stress)
Difference between person specification and a job description

A job description describes the job ; a person specification describes the person
needed to do the job, therefore, form the basis for the selection of the most
suitable person to fill the job.
CHANGING NATURE OF EMPLOYMENT
Changing attitudes to work
§ In some countries, attitudes to work are changing.

§ There has been increasing reluctance to work full time for large and formal organisation.
- More people are choosing to work from their home
- They are seeking more job satisfaction, possibly through flexible working.
- There is likely to be an increase in portfolio working
(where individuals do part-time contract work for a number of different employers)
- There may be an increase in downshifting
(individuals are prepared to sacrifice some income in return for a better quality of life)
Attitudes of employers are also changing.

§ Might expect recruits to remain with them for only a short time before shifting to next job
§ There is a growing trend towards ‘flatter organisations’ with fewer layers of management
§ As technology advances, employees must have relevant skills and education.
The Shamrock organisation (by Charles Handy)
A shamrock organisation is an organisation with 3 types of person working for it. Handy used
as a comparison a shamrock with 3 leaves, each leaf representing a different type of worker.
§ First leaf represents core full-time workers.

- Organisation needs a core of full-time professionals, technicians and managers to deal
with the general day-to-day running of operations.
- Core workers are essential, because they have detailed knowledge and understanding
of the organisation, its aims, objectives, policies and procedures.
- They are paid a high salary and other rewards
- They are expected to commit themselves to organisation, and often work long hours.
- Size of core work force is shrinking, and employers are increasingly using other types
§ Second leaf represents a flexible work force of ‘in-sourced workers’.

- Who are either part-time workers or temporary workers.
- They do work for employer when the work is required, and are not paid at other times.
- They might be on permanent employment contracts (as part-time employees)
§ Third leaf represents individuals who do work for entity as outsourced sub-contractors.
- Independent sub-contractors or entities that provide services on an outsourcing basis.
- Many activities can be outsourced (e.g. advertising, research and development, IT
services, building management, payroll administration etc)
- Are paid fees normally on the basis of outputs rather than time worked.
S ELECTION METHODS
Application forms
§ Application forms are used by applicants to apply for a job vacancy

§ They provide some information about themselves.
§ They may be submitted in paper form or electronically, via e-mail or employer’s web site.
§ Applications forms can be used in the selection process:
- As a ‘first screening’ to make an initial assessment of applicants; and
- In selection interviews as a basis for asking further questions in the interview.
Letters of application
§ Employer may ask applicants to submit a letter of application, written in their own words.
§ Application letters reveal more about the personality of the applicant, his or her reason for
wanting the job, and his/her ability to express himself/herself and communicate in writing.
Interviews
§ Applicants who get through first screening process may be invited to a selection interview.
§ Selection interview is a face-to-face interview at which applicant is asked some questions.
§ Face-to-face interviews can take different forms:
- Applicants may be interviewed by 1 person e.g. manager or supervisor with authority
over the relevant department (One on one interview)
- Applicants may be interviewed by ‘interview panel’ of 2 or more people. It is a good
practice to keep an interview panel fairly small (Panel Interview)
- Applicants might go through a succession of face-to-face interviews, each with a
different person. (Sequential interview)
- Interviewers may ask same set of questions in same order to all candidates. Their
responses are reviewed for their relevance, accuracy and bias. (Structured interview)
§ Interviews may be conducted in either an informal setting, or in a very formal setting.
- An informal setting should help to put the applicants at their ease.
- If employer wants to observe applicants under pressure, the setting might be formal
Stress interviews
§ A type of face-to-face selection interview, where interviewers deliberately put applicant
under stress (for example by asking questions in an aggressive manner and criticising him)
§ May be used to interview applicants for a senior management position
§ But it might put off good applicants from wanting to take the job even if they are offered it.
Problem-solving interviews
§ Applicant is given a hypothetical problem by interviewer and asked to solve it.

(e.g. ‘What would you do in the following situation…?)
§ It may be difficult to assess and compare the answers of the applicants
Information that can only be learnt from interview

§ Conversational ability - often known as people skills
§ Natural enthusiasm or manner of the applicant
§ See how applicant reacts under pressure
§ Queries on comments or details missing from CV or application form
Tests
§ Testing could be used as another stage of screening, to eliminate unsuitable candidates

before interview.
§ Alternatively, tests may be used in addition to an interview.
§ There are 4 main types of selection test
Intelligence - Tests (such as a general IQ test) to establish the general level of intelligence.
tests - May also test problem-solving skills of applicants, and their speed of thought.
Aptitude - Designed to establish a particular aptitude or ability of the applicants.
tests (For example, it might test the mathematical ability, or artistic ability)
Competence - To establish whether candidate has reached a certain level of competence in a
tests specific area.
- It tests what the candidates have learned in the past.
(e.g. an applicant for a job in word processing might be given a competence
test to establish his level of skill and ability in word processing)
Personality - Designed to analyse personality and character.
tests or - It is commonly in form of a series of MCQs.
psychometric - Candidates are asked in each question about their likes and dislikes, what they
tests would do in a particular situation, their preferences and attitudes etc
- Purpose is to identify candidates having suitable personality characteristics
Qualities of a good test system

§ Validity - Should be capable of measuring attributes (required in candidate)
§ Reliability - Provide consistent results among the various candidates.
Group selection methods
§ It is an alternative method of selection that can be used instead of (or in addition to)
individual interviews and testing
§ A number of people from the organisation observe a number of applicants for a job as they
go through a series of specially-designed activities.
§ Activities may include role play requiring applicant to perform particular role in work.
§ Candidates are observed, and compared with each other.
§ Best applicants can often display their ability and potential in work-related scenarios.
Usefulness and weaknesses of selection methods
Usefulness Weakness
Application forms
- Useful as a first screening process - Information provided on form is not enough to make
to eliminate unsuitable a selection decision.
applicants
Individual interviews
- Give employer an opportunity to - Not all interviewers have proper skills for that.
see and listen to the applicants. - Poor interviewing technique leads to poor selection
- Reveal more about each applicant - Halo Effect (based upon single attribute)
than testing can reveal. - Interviewers might be biased
- Unreliable assessment (wrong decision)
- Stereotyping candidates on the basis of dress,
hairstyle, accent etc.
Tests
- Can be used to obtain measurable - A clear link between good test results and ability in
or quantifiable information about the job has not been clearly proved.
job applicants. - Some types of individual perform better than others
- Are objective, and free from bias in particular types of test.
(unlike interviews). - It might be possible for candidates to improve their
- Quicker than interviews test scores by coaching and practice before formal
(can be administered in groups) test.
- Conditions are artificial, and might not provide an
opportunity to demonstrate in actual environment.
- Candidates might guess the correct answer to some
questions.
- Results of tests often need experts to interpret their
meaning.
- Can also be expensive to administer
(including preparing tests or hiring external experts,
arranging and carrying out the tests, and arranging
the marking and analysis of results)
Group selection methods
- Provide an opportunity to - Expensive to administer and time-consuming.

compare the candidates directly. - Generally only appropriate when the employer is
- Can be used to study the trying to fill several similar and senior vacancies.
candidates in work-related
scenarios.
T HE O FFER OF EMPLOYEMENT
Involvement in the selection decision
The selection decision is made by either:

§ The manager with authority over the job where the vacancy exists
§ Staff in the HR department
§ A committee of individuals, possibly a mixture of line management and HR staff experts.
There are no rules, but as a general guide:

§ If vacancy is for a low-level job (there are only limited prospects of career development),
the selection decision will be taken by a manager with direct authority over the job.
§ If vacancy is for a job where the successful candidate will have good career development
prospects, the HR department should be involved in the selection decision.
§ External experts (e.g. recruitment consultants) might offer advice on selection.
(however actual decision should be taken by organisation’s own managers)
The importance of good selection
§ Improve the quality of employees within the organisation.

§ Helping the organisation to be more successful in achieving its objectives.
Disadvantages of poor selection
§ Selected employees might perform badly in their job, or might need training
§ Competitor organisation with high-quality employees might perform much better.
§ The individuals given the jobs might be disappointed with the work
§ Labour turnover might be high.
(expensive and time-consuming process of recruitment and selection must be done again)
§ It might become necessary to dismiss some employees for incompetence.
§ It could affect the long-term human resources plan of the organisation
§ Might take up significant amounts of senior management time and attention.
The offer of employment
§ Selection process ends with an offer of employment and acceptance of the offer.
§ It is prudent to identify a short-list of acceptable applicants, listed in order of preference.
- If candidate at top of list refuses the job, the next person on list can be made an offer
- And so on until someone in the list accepts the offer of the job.
§ When the job has been accepted, the arrangement should be confirmed in writing
§ Employment laws might require a formal written contract of employment.
§ Employer should also contact unsuccessful applicants, usually in writing.
(should be thanked for their interest in the job, and for their application)
Chapter 12: Learning Organisations Page 163
L EARNING IN THE WORKPLACE
The process of learning
The learning curve
§ One method of learning is to complete a task many times, and learn from experience.
§ By repetition of task, he should get better and faster at doing it as experience is gained
§ This learning process is known as ‘learning curve’ or ‘experience curve’
§ For each new task, he will do the job more quickly with each repetition of the task.
Learning through training and development
§ Training is a process in which individuals are taught something specific.

- To teach individual some theoretical or practical knowledge, or
- To give the individual a new insight into an aspect of their work.
§ Development is a process of learning through experience and doing work.
- Development is not a learning curve effect
- Individuals learn as they develop by doing different things & gaining new experiences
Learning styles: Honey and Mumford
The four learning styles in the Honey and Mumford model are:
§ Reflectors
- Learns by observing and thinking about what he has seen
- Like to stand back and look at a problem from different perspectives before concluding
- Prefer to avoid ‘jumping in’ to a task, and prefer to watch from the side-lines
- Enjoy watching other people and listening to their ideas before they act
§ Activists
- Learns by doing and acting
- Activists like to be involved in new experiences.
- They enjoy action, and will often act first and consider the implications later.
- Activists like to ‘get their hands dirty’
§ Theorists
- Learn with facts, concepts and models
- They think in a detached and analytical way, rather than in an emotional way.
- This individual likes to understand the theory that supports the practice.
§ Pragmatists
- Find abstract theories and concepts of no use unless they can see their relevance to
practical action
- Likes to see how theory is put into practice in the ‘real world’
- They are practical and ‘down to earth’
They learn best Don’t learn best Preferred training

when when method
Reflectors - They watch others at - they are given tasks - One-to-one discussions
work; without time to plan - Interviews
- They are not given - in a training - Observing activities
tight deadlines situation, they are - Feedback from others
- They have time to asked to act as leader - Coaching
think and reflect. or to play a role in - Taking time out to think
front of others.
Activists - They are involved in - Listen to lectures and - Group discussions
new experiences long explanations; - Case studies
- They work with - Read, write and think - Brainstorming
other in team tasks on their own - Role play
- They enjoy role play; - Follow precise - Puzzles, competitions
- They lead instructions about
discussions or chair what to do.
meetings.
Theorists - They are put into - Participate in - Models
complex situations situations where - Statistics
to use their skills emotions and - Background information
and knowledge feelings are
- They have an important;
opportunity to look - Take part in an
at the ideas involved unstructured
in a problem. activity;
- Do things without
knowing the
concepts or
principles involved.
Pragmatist - They have an - There is no obvious - Discussions
opportunity to apply immediate purpose - Case studies
ideas and techniques to what they are - Problem solving
in practice, and are learning
then given feedback - Learning is all theory
- There is a model that - There are no
they admire and can practical aspects or
copy (such as a ‘role practical guidelines
model’ boss). in learning.
§ Honey and Mumford argued that each individual has a preference for a particular style.
§ They suggested that:
- individuals need to understand what their ‘natural’ learning style is, and
- they should seek opportunities to learn in that style.
§ However, to be effective learner, they should develop an ability to learn in other styles too.
§ A feature of Honey and Mumford’s work is that they developed a questionnaire that
enables individuals to identify their preferred learning style.
Barriers to learning
The barriers to learning within an organisation can be analysed into 3 categories:
1) Motivation of the individual
§ A heavy work load leaving no time for learning new things

§ Low morale (do not have the motivation to do their work better)
§ Lack of interest to learn something
§ Lack of support and encouragement by boss
§ Under-achievement at school.
(Failure in past may discourage an individual from trying to learn in later life due to fear)
§ Family commitments (leaving with no time for training out-of-work hours)
2) The Organisation
§ The organisation might be unwilling to give employees time off work for training.
§ It might not commit enough resources (money and employees’ time) to training.
§ There might be no such plans for employee development
§ Supervisors and managers might show no interest in staff development.
§ There might be no or ineffective appraisal system
3) The training itself
§ Training rooms might be over-crowded or uncomfortable.

§ Training programs might be badly designed
§ The training methods might not be well-suited to the learning style of the trainees.
§ The quality of the trainers might be poor.
§ The quality of the training materials might be poor.
§ Learning program tries to teach individuals without using the supporting object
(e.g., a training computer skills will not be effective unless trainees have computers)
§ Learning program sometimes are too advanced without giving basic skills in advance
§ Training materials are badly written, and the reader does not understand important words.
Organisation development (OD)
“Organisation development is the planned and systematic approach to enabling sustained

organisation performance through the involvement of its people”
§ OD is interdisciplinary in nature and draws on theories of motivation and learning as well

as sociology and psychology.
§ Its overall aim is to increase an organisation’s effectiveness and efficiency.
§ OD should be embedded in an organisation’s culture in order to ensure that it is an all-
encompassing initiative and that staff buy-in to its objectives.
§ Primary objective is to develop organisation as a whole in the way it thinks and operates.
Benefits of OD
§ Empowering leaders and individual employees

§ Creating a culture of continuous improvement and alignment around shared goals
§ Making change easier and faster
§ Putting the minds of all employees to work
§ Enhancing the quality and speed of decisions
§ Making conflict constructive
§ Giving leaders more control over results, by giving employees more control over work
In practice, OD typically involves:

§ Team-building
§ Career development
§ Training and e-Learning
§ Innovation
§ Talent management
§ Change management
§ Organisational assessments
§ Coaching and leadership development
THE ROLE OF TRAINING AND DEVELOPMENT
Education, training and development
Training
§ A planned process to improve knowledge or skill, or to amend attitudes or behaviour

through learning experiences.
§ Aim is to improve work performance in an activity or a range of activities.
§ Training has a work focus.
§ Individuals can be educated and developed through the use of training.
Common types of training include:

§ Technical or technology training
§ Quality training (ensuring employees understand the quality levels necessary in their job)
§ Skills training
§ Health and safety training (protecting employees from work-related injuries)
Education
§ Improves basic knowledge, skills and attitudes, but does not have an immediate work-
related purpose.
§ It is not just related to a work environment and improving performance at work.
Development
§ Achieved through gaining experience and therefore developing a career.

§ Individuals learn and develop through experience in different work situations and by
having extra responsibilities or opportunities to use their own initiative.
Benefits of training and development
Benefits for the employer (organisation)
§ Creates a more talented and skilled work force:

- Higher productivity (therefore lower costs of output)
- Less waste
- Better performance by employees (higher standards of achievement)
- Less need for close supervision of subordinates
- Ability to compete more effectively with business rivals.
§ Improve the morale of employees, and increase their commitment to the organisation.
§ Would be easier to attract external applicants for job vacancies.
Benefits for the employee
§ Improves the motivation of the individual and gives them a sense of being more valuable.
§ Career development increases job satisfaction.
§ Raising level of skills improve individual’s prospects for promotion and higher pay.
Since both the individual and organisation gains personal benefits, training and development can
help to create compatibility between personal objectives of individual and corporate objectives.
Role of the training manager
§ Identify the training needs of the organisation.

§ Plan training programs.
§ Implement the training programs
§ Monitor the implementation of the training programs
§ Evaluate the benefits of the training
§ Consider methods of improving the training.
§ Also responsible for training budget, and achieving objectives with the available resources
Note: All of the above points are further elaborated in next unit
Training manager might work in HR department or may be line managers with added training
responsibilities for a group of employees.
TRAINING NEEDS
The training and development process
Identify - Training needs are analysed and identified by assessing the training gap.
Needs - The target audiences for the trainings are defined.
Set - The objectives are identified
objectives (aims of the training and what is meant to be achieved are outlined)
Design - The content of the training
program - Delivery method (e.g. classroom / webinar)
- Who will deliver the training
- Delivery logistics (e.g. classroom booking)
- Decision on the training styles and approaches
Deliver - Training is delivered by the trainer to the trainees.
training
Review and - Organizational changes as a result of training
evaluate - Trainees’ reaction to experience
training - Changes in job behavior following training
Analysing training needs (training gap)
Training needs are training requirements that ensure that the organisation has an appropriate
number of employees with required level of skill, knowledge and ability to do jobs in HR plan.
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.
§ Training needs can be estimated by comparing the skills, knowledge and abilities that we
require from employees, with that we have if there is no training. And allowing for:
- Promotion of some employees to more senior positions
- Movements of employees between jobs in the organisation
- Staff turnover
- Changes in the job structure and total employee numbers
- Recruiting employees from outside organisation, who already have required skills.
§ The training needs are detailed in the training needs analysis document, which details all
the information that has been gathered.
§ In addition, there might be some legal requirements to provide particular types of training.
(e.g. providing all employees regular training about procedures to follow in case of a fire)
What training cannot solve

§ Poor management (although management training might help!)
§ Poor job design
§ Ineffective or inefficient equipment, production organisation
§ Poor Recruitment
§ Internal Motivation and other characteristics of employees (e.g. intelligence)
Meeting training needs
§ Training needs can be met by a combination of a ‘top down’ and a ‘bottom up’ approach.
§ However, the training plans must be kept within the spending limits and budget
Top-down planning
§ Involves the training manager and training department planning training programs
§ For example, it might be a policy that all employees in accounts department above a certain
rank or grade must become qualified accountants.
§ Training department/manager may also identify individuals who must be given training
Bottom-up applications for training
§ Need for training might be identified from the appraisal process.

§ Managers might notify training manager of training requirements for their employees
§ Individuals might be responsible for their own personal development plan.
- This should identify gaps in their development that might be filled by training.
- Individuals might discuss training needs with their boss on basis of their own needs.
§ Training manager may also notify employees and their managers about different training
programs that will be available, and invite applications from individuals to attend those
§ Employees may be encouraged to apply for training.
M ETHODS OF TRAINING AND DEVELOPMENT
Methods of training
1) Formal training in a training room environment
Formal training can be

§ In House (all the trainees are from the same organisation); or
§ External (provided by external trainer, and trainees come from different organisations)
Formal training can take any 1 or more of the following forms:
Lectures or - Often with projectors and screens, and possibly electronic whiteboards.
talks - Well-suited where trainees have to learn large quantities of technical details
Group - Participants share their views and opinions with other participants.
discussions - Systematic exchange of information, views and opinions about a topic or
issue
Training - Might provide practical training (e.g. health and safety regulations)
films - Might also be used to teach ‘soft’ skills, such as interpersonal skills etc
- Watching the film is usually supported by group discussions afterwards
Case - Method of analysis and a specific research design for examining a problem
studies - Case studies can be used as a basis for group discussions.
Role-play - Particularly useful for the development of interpersonal skills, including
activities selling skills, negotiating skills and counselling skills
Business - Used to provide training in team-building as well as management skills
games
Film - Using CCTV to film delegates and then playing back the film.
delegates - This is particularly useful for training in presentation skills and selling skills.
Formal training may end in an examination, leading to a qualification or certificate
2) Computer based training (CBT) and e-learning
§ Training delivered through trainee’s computer.

§ In its simplest form, CBT is little more than a training book displayed as pages on computer
§ Many CBT programs involve some inter-activity (e.g quizzes for participants)
§ Trainee can normally access training material using any computer as per his convenience
3) Induction
§ Might be given to individuals who have just joined an organisation.

§ Purpose is to teach the individual about the organisation and its business operations etc
§ It might consist of talks by senior managers in different departments, and site visits to see
operations in action.
4) Training in the work place
§ It is a method of training as well as development of individuals

§ It is training in technical or practical skills, whereas work place development helps the
individual to gain experience and develop personal skills, such as skills of management etc
§ It is directly related to work that the trainee will be doing.
§ It might be provided by a coach (a skilled and more experienced colleague) or supervisor.
5) Work shadowing.
§ By watching an experienced colleague do the work, and asking questions about actions
§ Trainee is following the experienced colleague in order to learn how the job is done.
§ Example can a ‘teacher on training’ watching an experienced teacher delivering lecture
Methods of development
Job Rotation - Moving an individual from one job to another at fairly regular intervals
- Individual gains familiarity with the work done in each job.
- It gives individual a broad range of experience in activities of organisation.
- Useful when he is ready for promotion.
Secondment - Employee might be ‘seconded’ to work somewhere else for a period of time.
- It’s the time spent away from normal working environment, in another
department or as part of a project team.
- Individuals gain experience from working with people from different parts
of the organisation, or with external consultants.
Deputising for - An individual may be given opportunity to do the tasks of his boss when the
manager boss is absent from work for an extended period (e.g. on a holiday)
- He gains experience by doing the job of the boss for a period of time
Delegation of - Individuals will gain experience from additional authority & responsibility
responsibility - He will be accountable to their boss for how they acted in that time
Mentoring - Mentor provides guidance and assistance
- May occasionally discuss the individual’s work and work problems.
Appraisals - Formal appraisals are also a part of a system of development (See Ch # 13)
Job Design - Involves looking at current jobs, and considering whether they can be
altered (designed) to gives more and greater experience to employee
- It can take form of ‘Job enrichment’ or ‘Job enlargement’
Job enrichment (‘vertical job enlargement’)

- Making the job ‘richer’ by building more responsibility into it.
- Job holder is given more authority (authority of a higher level)
Job enlargement (horizontal job enlargement)

- Giving the job holder more tasks to do
- All additional tasks are at the same ‘level’ as the existing tasks in the job.
- It might be used to increase work load in a job (if he is under-worked)
- It might be used to give him a greater variety of tasks (to reduce monotony)
Self-development (Personal Development Plan)
§ Many individuals have some ambition and want to develop their career.
§ Some individuals have a lifelong career with the same employer, but others do not.
§ Such persons cannot always rely on their managers to promote or develop them
§ Self-development is used for activities & learning providing lifelong personal development
and contributing to professional competence or achievement of organisation’s goals.
§ Goal is to increase his readiness and potential for a position of greater responsibility.
Enhancing self-development by individuals
§ They should use staff appraisal system to agree targets for achievement
§ They should follow up on their appraisal interview.
- They should try to achieve the objectives they have been set; or
- Try to ensure that they get training or development that is agreed with their manager.
§ If they do not get the training from their employer, they could arrange for some training in
their own out-of-work time
Skills development programs
Organisations may have a formal skills development program. Some examples are:
§ Training needs analysis.

- Involves a comparison of the current skills with the desired skills
- A training development program is then designed to ‘close the gap’
§ Management development program.
- It identifies the management skills that will be required, and arranges training and
development initiatives to groom existing managers for promotion.
§ Graduate recruitment program.
- This is a formal program typically in a large organisation for recruiting graduates from
university and training and developing them for senior positions in the future.
Chapter 13: Management Challenges Page 176
PERFORMANCE ASSESSMENT AND APPRAISAL
§ Success of an entity in achieving its objectives depends on performance of its employees

§ Performance assessment is an evaluation of performance, where performance is measured
and compared with some form of target or benchmark.
Competence and Performance
§ An assessment of competence is an assessment of what a person is capable of doing.

§ Competence may relate to an individual’s technical skills, practical ability, judgement and
insight, ability to work with others and the ability to provide leadership.
§ Competence is usually measured on a scale between ‘not competent’ to ‘very competent’.
§ Competence is often judged according to the performance of the individual in his or her job.
§ Competence can also be measured by the individual’s potential to do something
§ Competence and performance are often assessed within a system of staff appraisal.
The nature of performance appraisal (staff appraisal)
Performance appraisal is a formal process for reviewing and assessing the competence of
individual employees, and considering what might be done to develop them.
§ Appraisal process involves an interview or discussion between employee and a manager.
§ Appraisal interviews should be carried out within a formal appraisal system.
§ In addition to the appraisal interviews, there should also be a system for:
- Recording the outcome of the appraisal interview, and keeping these records
- Agreeing measures for training or development to improve employee’s competence
- Agreeing targets or standards for future performance
- Implementing the agreed measures for training and development.
The main components of staff appraisal
1) A reward review.
§ It may be seen as an opportunity for employee and his manager to discuss pay & rewards.
§ Although rewards will be discussed in an appraisal interview, it is normally inappropriate
to combine the annual appraisal interview with the annual pay review.
2) A performance review.
§ Might be used to assess the performance of the employee since the previous appraisal.
§ A way of doing this is to agree a target for individual, and to compare actual performance
3) Potential review.
§ Can also be used to discuss employee’s potential for career development and promotion.
§ There should be system of reporting to senior management and making recommendations
The benefits of performance appraisal
Benefits for the employer
§ Provides a formal system for assessing the performance and potential of employees
§ Provides a system for identifying ways of improving the competence of employees
§ A valuable system for HR planning, and ensuring that employees are ready for promotion.
§ It can improve communications between managers and their employees.
Benefits for the employee
§ Employee gets feedback about his performance, and an assessment of his competence.
§ An opportunity to discuss his future prospects and ambitions.
§ May be used as a basis for considering pay and rewards.
§ Can be used to identify and agree measures for further training and development
Barriers to effective performance appraisal
§ Employee thinks it has no purpose.

- Nothing happens as a result of the interview, which is badly organised.
- The entire process is seen as a waste of time and a pointless exercise.
§ Employee become defensive (Confrontation)
- Employee uses the interview to argue back and to accuse the manager of failure.
§ The interview might be one-sided.
- Employees will often resist a system of appraisal in which they do not have an
opportunity to answer back and give their own opinions.
§ Might be seen as an Annual event.
- It happens every 12 months, and nothing more happens afterwards until 12 months.
- Appraisal systems must include follow-up and procedures for monitoring results
§ Lack of training in appraisal interview techniques.
- Managers are sometimes not given proper guidance in what they should be doing
§ Lack of a record system.
- Records provide a basis for follow-up action and feedback.
§ Biased attitude of appraiser
T HE APPRAISAL PROCESS
Approaches by management to the appraisal interview
Tell and sell method
§ Interviewer gives assessment, and makes suggestions for a development plan of employee
§ Appraisal will often include constructive criticisms of the employee
§ The employee does not have much opportunity to reply to the appraisal by the interviewer.
§ This approach calls for high level of management and interpersonal skills from interviewer
Tell and listen method
§ Interviewer tells employee how assessment will be made and then invites him to respond.
§ Interviewer must listen to the comments from employee, and encourage him
Problem solving method
§ Interviewer and employee must agree in advance as to the objective of appraisal interview
§ The approach is based on joint agreement that there is a problem
(how to develop the employee or how to improve the competence of the employee)
§ Interview is then conducted as joint attempt to find answers to jointly-recognised problem
360 degree approach
§ Performance appraisal interview is based on:

- An assessment by a number of other people (‘raters’) familiar with the individual, and
- A self-assessment by the individual.
§ There should be at least 3 to 5 raters, and all of them should be ‘credible’ to the individual
§ Each rater is asked to complete a questionnaire about the performance of individual.
§ The opinions and assessments of each rater are kept confidential
§ Assessments by each rater are collated by manager who carries out appraisal interview.
§ These assessments are compared with individual’s self-assessment
§ This provides the basis for the discussion at the interview.
Preparing for an appraisal interview
§ Organisation should issue guidelines to both the interviewer and the employee, and
§ There should be documents for the interviewer to look at in advance of the interview,
containing information that can be used as the basis for questions in the interview.
Questions for the employee to prepare Questions for the interviewer to prepare
- What have been achievements during the - What do you think were your most
year with which the employee is pleased? significant achievements during the year?
- How do the achievements during the year - What aspects of your job caused you the
compare with previously agreed objectives most difficulty?
- In what respects does employee consider - Have you met the targets or objectives we
that further improvements can be made? discussed at previous appraisal interview?
- What factors outside the employee’s control - What should be your objectives or targets
have affected his or her performance? for the next period?
= Do these factors still affect performance? - What training or coaching do you need in
= What can be done to remove problem? order to improve performance and
- What extra training or new work abilities?
experience will help the employee to do the - What are your career ambitions? Is there
job better? anything that we can (reasonably) do to
- What personal aspirations and ambitions help you to achieve them?
would the employee like to discuss? - Are there any other issues about your work
and job that you would like to talk about?
Location and time of the interview
§ If interview is held in the manager’s office, the employee must be notified well in advance
§ Should have an official time for the interview to begin.
§ Enough time should also be allowed for the interview
§ Organisation may also prefer to select a special location (e.g. conference room in a hotel) to
emphasise the importance of the appraisal process
The documents for an appraisal interview
Job description - To ask employee which aspects of the job have been performed well
Records of - What was discussed and agreed at the previous appraisals
previous - To ask questions about the progress that has been made since then
appraisals
Self-assessment - Interviewer can compare replies to the questions in the
form questionnaire with his or her own opinions about the employee.
Other comments - Such as letters from customers or suppliers about employee
about the - These could be either favourable or adverse
employee
Employee’s HR - To check for any notable aspects of behavior
record (e.g. formal warning or any other disciplinary measure)
Interviewing skills
§ Ask questions that allow the employee to give full answers. Do not ask ‘closed questions’.
(These are questions where the answer is a short ‘Yes’ or ‘No’.)
§ In a ‘tell and listen’ or a ‘problem-solving’ interview, give employee time to ask questions
§ Don’t ask complicated questions.
§ Ask follow-up questions to clarify answers to initial questions.
§ Keep the discussion focused on relevant issues.

§ Handle difficult areas with sensitivity and consideration.
§ Let the employee know that you are listening and that you have understood his points
Recording the results of an appraisal interview
Criteria for assessment
They could be any of the following, or a combination of any of the following factors:
§ Volume of work produced within a given time period, meeting deadlines etc.
§ Knowledge of the work
§ Quality of work produced.
§ Management skills. (ability to communicate, delegate, motivate and control operations)
§ Personal qualities (initiative, self-confidence, interpersonal skills, adaptability etc)
§ Performance targets. (Whether targets agreed at previous appraisal interview been met)
Techniques of assessment
Ranking - Manager can rank employees in order of competence.

- Establishes which members of the team are better than the others
- This method is subject to bias, and is only practical with fewer employees
Scoring - Organisation may use rating scales to score the competence of an
employee.
- Each employee may be given a numerical score (up to a maximum) for each
competence/performance factors.
- Overall competence is calculated by adding up the scores for each factor
Grading - Rating on a non-numerical scale (e.g. excellent, good, satisfactory, poor etc)
Critical - Focus on any critical incident occurring after the previous appraisal.
incident - How the employee dealt with the critical incident (well or badly)
method - Whether any lessons can be learned for the future.
Performance - Comparison between targets that had been set for the employee (at
related previous appraisal) and whether those targets have been achieved.
assessment
Feedback from the appraisal interview
§ There may be agreement between interviewer and employee about further training that
the employee needs, or ways in which the employee can be developed.
§ These agreements should be recorded as part of official record of appraisal interview.
§ Agreed action plan should be reported to senior management and the HR department.
§ Interviewer should follow up appraisal report and should arrange training or development.
§ At next appraisal interview, they should discuss whether things agreed were provided
THE MANAGEMENT OF HEALTH, SAFETY AND SECURITY
Risks to health, safety and security at work
Some examples of hazards at work are as follows

§ Employees might be exposed to injury from moving parts in machines or other equipment
§ There could be a risk of injury from an organisation’s motor vehicles in its transport depot.
§ Health risk at work from hazardous substances (chemicals and gases etc)
§ There could be sometimes exposure to radiation.
§ A risk of fire.
§ Risk of injury from slipping on wet floors, or tripping over exposed electricity cables.
§ Employees using computers may be at risk from eye strain or back disorders.
§ There are also hazards to health from poor working conditions, such as working in poorly-
lit areas, in extreme temperatures, or in places where there is a continual loud noise.
Consequences of breaching regulations
In many countries, employers have a legal obligation for aspects of the health and safety
relating to employees and others. The consequences of breaching regulations might include:
§ Fines and other penalties levied against the organisation (including the directors);
§ Suspension and/or revocation of an operating licence.
§ Loss of reputation and subsequent loss of business
§ Injury, death or other loss suffered by employees as a direct result of breaching regulations
(e.g. a fatal accident in factory due to a critical safety procedure being avoided to save cost)
§ Payment of compensation to injured parties
Preventative and protective measures (some examples)
Preventing risks (stopping the risk)
§ Making sure that no exposed electric cables above floor level.

§ Not using hazardous materials, and removing any such materials currently in work place.
§ Providing safe working environment, away from extremes of temperature or poor lighting.
Providing protection against risks (measures to reduce the chance of injury)
§ Workers exposed to hazardous materials be given protective clothing

(e.g. protective suits, helmets and face masks).
§ Hazardous materials should be stored in a safe and secure environment.
§ Guards and rails might be used to prevent employees from getting close to dangerous items
§ Handrails might be attached to all ladders
§ Protective screen covers might be put over computer screens to reduce eye strain, and the
office furniture might be designed to reduce risk of back strain.
General policies for reducing risks in the work place
Safety procedures - Organisations may have formal procedures for minimising risks.
(e.g. In hospital, there are formal procedures for washing hands)
- Organisations should also have fire drill, guiding employee what to do
Reporting - Should have a rule that all accidents must be reported formally
accidents - Managers should investigate any incidents or accidents that occur.
- By investigating, managers can take appropriate measures in the
future.
Encouraging - Making employees more aware of risks.
safety- - An effective method is the provision of short training courses.
consciousness - Another way is to place easily-visible warning signs in the work place.
Dialogue with - Management may discuss health and safety issues regularly with
employees employees or their representatives, or with safety officers.
Employing people - Employ safety officers, whose job is to monitor risks in the work place
to deal with risks - Should either deal with them or discuss them with management.
- An organisation might employ a fire officer, whose task is to check that:
# there are no fire hazards in organisation’s premises; and
# that equipment for responding fires are in place and working order
Safe materials - Should have procedures for the safe handling of materials.
handling - Hazardous materials should be stored in safe containers
- Warning signs should be placed on any doors or buildings where such
hazardous materials are located.
- May have rules requiring employees to use appropriate equipment to
transport materials, and against carrying heavy weights by hand.
Health and safety training
§ Employees might be given training in some aspects of health and safety.

§ All employees might be required to undergo training programs on safety procedures.
§ Employees might be required to practice safety drill (e.g. fire drill)
Legal aspects of health and safety management

§ In many countries, employers have a legal obligation for aspects of the health and safety
relating to employees and others (for example, visitors to the work place).
§ There are also laws relating to the health and safety of goods and services
Responsibilities of employees
§ Employees have a legal duty to comply with an organisation’s health and safety guidelines
(as they are given in an organisation’s handbook)
§ Employees also have a moral and ethical duty to comply with health and safety guidelines
§ Take reasonable care of themselves and others.
§ Inform the employer of any situation which may cause danger.
§ Use all equipment properly.
CONFLICT AT WORK
Two persons/groups may be in conflict when one of them believes that the other one is trying
to prevent them from achieving its goals or aims.
Causes of conflict
§ Personality differences
§ Task interdependence (if managed badly)
§ Role ambiguity or conflict in any responsibility
(they believes that they have responsibility for doing that thing and not the other person)
§ Operative goal incompatibility (e.g. operations manager wants to invest in new equipment
and the finance manager not allocating budget for him)
§ Incompatible objectives (e.g. trade union representatives vs management)
§ The other persons are not listening to you (and you think they should listen)
§ If success of a group depends on failure of other (e.g. management vs auditors)
§ Conflict may be ‘political’
Characteristics / impact of conflict
§ Unfriendly rivalries between workgroups, departments or individuals.

§ The persons in conflict are unlikely to communicate openly with each other.
§ Inter-departmental disputes and arguments.
§ They will be unwilling to listen to ideas from others with whom they are in conflict.
§ There will be a refusal to co-operate.
§ Rivals will constantly make blames of wrongful treatment or improper behaviour.
§ Frustrated in work and attitude of blaming and shaming
How manager can manage the conflict
§ Manager may ignore the conflict between subordinates and pretend that it does not exist.
§ Manager may impose a solution (after listening to both persons/groups)
§ If issue relates to single individual, manager may decide to move him to different position
§ Encourage people in conflict to talk through their differences, and try to change attitudes
§ Manager may try to act as a ‘peacemaker’, by listening to the views of each side, and trying
to encourage them to take a more rational and constructive approach to the problem
Conflict - How constructive (Positive) Conflict – How destructive (Negative)

Different solutions Distract attention from task.
Creativity and testing of ideas Objectives may be disrupted for secondary goals
Attention on individual contribution Disintegration of the group
Brings emotions into open Emotional/ Win-lose conflicts may arise.
Motivational factors brings out (Close competition)
Taking disciplinary action
Disciplinary Procedure:
§ Establish the facts of each case
- Investigate any existing or potential disciplinary matters without unreasonable delay.
- An investigatory meeting with the employee might also be held.
§ Inform the employee of the problem with a notice. Such a notice should:
- Contain enough information about the case
- Be accompanied by copies of supporting written evidence.
- Also provide details about the time and venue of the disciplinary meeting
§ Allow the employee to be accompanied at the meeting
- Workers may have a right to be accompanied by a companion as well.
- This companion could be a colleague or a representative from trade union.
§ Decide on appropriate action
- After meeting, a decision about disciplinary action is to be taken.
- The employee then is informed accordingly
§ Provide employees with an opportunity to appeal
- Appeals should not be delayed unreasonably and be heard at an agreed time and place.
- Appellant should let the management know the grounds of the appeal in writing.
- It should ideally be heard by manager who has not been involved in case previously
Disciplinary Alternatives (different disciplinary actions)
Oral - For the first misbehavior, employee should receive an oral warning
Warning - Management should ensure privacy and be specific about the issue.
- He should be reminded of acceptable & desired norms of organisation
- Consequences must also be communicated
- The date should be marked and discussion points should be recorded.
- A monitoring period should ideally be allocated.
Written - Next alternative (after oral warning) may be a written warning.
warning - Letter must state that it is a written warning
- The problem area must be discussed very specifically with documentary proof
- Any past disciplinary action if taken should also be cited in detail
- Impacts of the issue and consequences of repeated occurrences to be stated
Suspension - Normally next level after written warning(s)
without - Suspend employee for a certain days and pay is deducted for those days
Pay - Suspension letter should clearly state length of suspension period, problem
area, previous disciplinary actions, consequences and appealing rights
Reduction - This alternative might be opted for in place of suspension without pay.
of Pay - Letter containing such intent will include same details as in suspension letter.
Demotion - May be demoted temporarily or permanently depending on gravity of offense
to Lower - Should be backed by an expectation that employee would perform well there.
Class
Dismissal - It is the last resort.
- In very serious cases (e.g. fraud) employee is dismissed with immediate effect.
INCENTIVES AND REWARDS
Motivating and supporting employees (revision of CAF)
Content theories of motivation

§ Concentrate on what motivates individuals in their work.
§ Rewards will satisfy a need and individuals will be motivated to obtain those rewards.
§ Examples of content theory are:
- Maslow’s hierarchy of needs
- Herzberg’s hygiene and motivator factors
- McClelland’s motivational needs theory
Process theories of motivation

§ Concentrate on process by which individuals are motivated, and strength of motivation.
§ Individuals are motivated differently, and strength of motivation depends on many factors
such as needs, personality , perceptions about outcome, rewards and other expectations
§ Examples of process theory include “Vroom’s expectancy model”
What managers can do to motivate staff

There are differing views about this.
§ Management must get the ‘basics right’ first: (fair pay structure) to
- Meet the physiological and security needs (Maslow); or
- Prevent dissatisfaction from employees (Herzberg)
§ Job enrichment is a key to better motivation (Herzberg)
§ Rewards system should be seen to be fair (Adams)
§ Involve employees in problem-solving and decision-making (McGregor and Argyris)
§ Management should try to identify high achievers. (McClelland)
§ Try to increase the strength of expectancy. (Vroom)
§ Provide inspiring leadership.
Performance-related pay for individuals

Cash bonuses: Payments in cash that are related to meeting short term targets, such as
meeting budget targets (e.g. exceeding a profit target).
Other Incentives: Incentives for the achievement of longer term goals are often paid to senior
managers, (e.g. company shares or share option)
Rewards not always given as pay; Promotion & recognition may be equally important
Bonuses and performance

For a cash bonus scheme to be effective, payment of a bonus should be clearly linked to the
performance of an individual/group
§ Performance of the individual or group can be measured.
§ They can affect performance through efficient or effective working.
The scope of reward management
§ For employee, rewards are the benefits that are received in exchange for doing the work.
§ Reward systems can be used to improve performance (if employees are also motivated)
§ Bratton developed following 5-stage model of reward management:
Perspective Aim Comment
Strategic Cost - Likely to be interested in relatively ‘cheap’ employees.

leadership
Differentiation - Needs employees capable of designing the differentiated
products and services.
- Likely to have higher skills and will be more expensive.
Providing a Performance - Suitable employees have to be attracted and retained.

reward improvement - Performance must be directed towards desired standards.
system Improve - Commitment and motivation do not necessarily depend
commitment on financial rewards.
Selecting Basic Pay - A constant amount per hour, week, month or year
the Performance - Includes cash bonuses and shares
methods of Related Pay
Reward Other benefits - Health insurance, company car, pension etc
Deciding Job analysis - Explained in Ch # 11

the amount Job evaluation - Job evaluation determines the relative worth of jobs.
of rewards
Appraisal - Appraisal determines individuals’ performance.
Making Reflect - If pay is set too low, it will be difficult to recruit and retain.
rewards conditions in - If it is too high, it will make the organisation
competitive labour market uncompetitive.
- Competitive forces constrain the amount that employers
can afford to pay.
- Many larger companies have ranges of pay linked to
grades
Methods of reward
§ Rewards for an employee might be both extrinsic and intrinsic.

- Extrinsic rewards are rewards provided to the employee by the employer
(e.g. salary and promotion, company car, free medical etc)
- Intrinsic rewards are rewards that individual feels personally as a result of doing work
(e.g. job satisfaction)
§ The structure of reward systems varies between different entities.
Factors to consider in designing reward schemes
§ Should rewards be explicit or implicit?

§ Should the rewards be based on results (outputs) or on the effort that has been put in?
§ Should rewards be given in a money form or in non-monetary form?
§ How large should rewards for performance be?
§ Over what time period should performance be measured before rewards are given?
§ Should rewards be given for individual performance or group/team performance?
§ Should rewards involve equity participation (e.g. giving shares or share options)?
What are the tax implications of different reward schemes?
A
Method Advantages Disadvantages
Wages and - Simple and easy to use - Workers may dislike being paid the
Salaries same as a colleague who they feel is
not so productive
Piece-rate - Increases speed of work - Workers do not focus on quality of
(Per item) and productivity work as emphasis on speed of work
- Often workers not entitled - May ignore rules of Health & safety
to sick pay etc which issues, in they try to speed up
reduces cost
Fringe - Encourages loyalty to a - Widespread use will increase costs
Benefits company so employees sharply
(Perqs) may stay for longer
- Helps meet a workers
human and social needs
Performance - Easier for managers to - It can be difficult to measure the
related pay monitor and control their performance of employees in
(Targets etc) staff service based industries
- Reduces the amount of - It does not promote teamwork and
time spent on industrial can lead to workers feeling they are
relations treated unfairly if colleagues are
awarded more
Profit - Improve loyalty to the - Share is often too small to provide a
sharing company worthwhile incentive
- Break down the “them and - Workers may feel that however
us” barrier hard they work it will not have a
- More likely to accept noticeable effect on the company’s
changes to their working profit level, so therefore no
practices if they can see incentive
that it may decrease costs
and so increase profit
Share - Employees will work - Often only available to the senior
ownership harder as they have a managers so can cause resentment
stake in the company, just among other staff.
like a shareholder has.
- Workers are less likely to
leave the firm
Relationship of reward practice to specific areas
Quality - Performance must be managed in order to achieve any quality initiative.

initiatives - There should be some kind of award for meeting quality initiative targets.
Process - Reward system can be used to encourage employee behaviour with some
Redesign kind of award for meeting the process redesign milestones and other
targets.
Harnessing e- - Reward practice can be used to encourage the generation of ideas
business - Reward practice can be used to encourage the adaptation of new e-business
opportunities initiatives
Advantages of linking reward schemes to performance measurement
§ Help the organisation to implement its strategies and achieve its strategic objectives.
§ Rewards can also help to attract and retain talented individuals.
§ Helps to inform managers & employees about what the critical aspects of performance are.
§ It will encourage employees to focus on continuous improvement.
Disadvantages of linking reward schemes to performance measurement
Problem Possible Solution

§ Meeting only the lowest targets § Higher bonuses should be paid according to the
§ No attraction for exceeding target amount by which the budget target is exceeded.
§ Earning the bonus is priority § There should be a number of bonus incentives for
§ Other objectives are ignored achieving a number of different targets.
§ Using more resources than § Should provide rewards for achieving variable
necessary. costs per unit that are less than budgeted
§ Avoiding risks § Bonus system rewarding managers and
§ Reluctance in unplanned employees for beating a range of budget targets
initiative
§ Taking risks to achieve bonus § Bonus system rewarding managers and
(e.g. giving more loans by banker) employees for beating a range of budget targets
Individuals or groups
When group performance is measured, there may be a problem in the following situations:
§ High performer members may be annoyed if rewards are paid to all members including the
undeserving members.
§ A reward system providing rewards to some members of a group, but not to others
(e.g. a departmental manager is rewarded, but none of the departmental staff)
Chapter 14: Business Operations Page 195
OPERATIONS MANAGEMENT
Operations
‘Operations’ (production) describes the process of transforming inputs such as raw materials and
components into outputs such as products and services.
Operations management and strategy deal with the operational processes such as purchasing,
warehousing and transportation.
Operations strategy involves making decisions regarding such things as:

§ Capacity
§ Location
§ Processes
§ Technology
§ Timing.
Operations management
Operations management involves planning and controlling day-to-day activities in operations

department such as:
§ Product (or service) design
§ Process design (e.g. layout of a factory)
§ Job design
§ Capacity management
§ Planning and control of daily operations
§ Inventory control
§ Quality control.
Production planning and control

§
§ It involves reconciling demand for resources and outputs with their supply.
§ Includes dealing with uncertainties in demand and providing for unforeseen variation like:
- Insufficient supplies due to shortages or delivery delays
- Insufficient output of finished products – hold-ups, bottlenecks and inefficiencies.
Inventory management
§ How much inventory to hold including buffer inventory (safety stock) to cover unexpected
demand, and when to make orders
- Financial managers might prefer low inventories to minimise holding costs
- Marketing managers might prefer high inventories to ensure quick orders deliveries
- Manufacturing managers might prefer high inventories of raw materials etc to
minimise delays
§ Anticipating inventory in seasonal businesses e.g. ski equipment or summer fashion
Capacity planning and control
§ To achieve suitable balance between the demand and the provision of capacity.
§ Factors to consider include:
- Cost and cash-flow of under-utilised capacity (e.g. paying workers when idle)
- Quality (e.g. quality may fall if temporary staff are used to avoid full-time employees)
- Set-up costs (e.g. it might be cheaper in the long-run to operate a skeleton workforce in
lean times rather than temporarily closing factory to attract high re-start costs)
Creating value and value chain

Already covered in Ch # 4
The supply chain
There is a supply chain from the producers through to the entities that sell to customers.
The 4 main characteristics of a product supply chain are:

§ Location of each link in the chain
§ Manufacturing
§ Inventory management
§ Distribution.
Value systems
§ Value system is the sum of the value chains in all the firms in a supply chain.
§ Value that customers pay comes from the value created by the entire value system.
§ Firm should try to improve efficiency and effectiveness of own activities in creating value.
§ Collaboration between business entities and their key suppliers can help to add value.
Procurement and vendor development
Negotiating and managing supply relationships
Organisations typically pursue any one of these two forms of strategic supply relationships:
§ Competitive relationship
(buyers negotiate hard to achieve the lowest possible price; it often creates a win/lose and
‘us’ vs. ‘them’ mentality often focusing on short term gains)
§ Long-term strategic relationships
(organisations collaborate with key suppliers and form long-term strategic partnerships)
Reck and Long – Strategic positioning tool (4 Stages)
Relationship Features
Passive - Purchasing reacts to requests from other departments
Independent - Attempt to formalise communication links with technical functions.
- Awareness of financial implications – price negotiations
Supportive - Purchasing department is viewed as essential by top management.
- Greater awareness of how purchasing affects strategic goals.
- Timely info re: price change, emphasise internal coordination.
Integrative - Significant reliance on purchasing for competitive success.
- Purchasing now a ‘facilitator’ to its functional peers.
Supply agreements
§ Supply (master) agreements are commonly used to establish the terms of supply
§ Every purchase transaction is then executed as per the terms
(saving time through removing the need to create an agreement for every new purchase)
§ Supply agreements typically include details of:
- Product range and Price information
- Response time / supply lead times
- Minimum purchase requirements
Supply networks and sourcing strategies
§ Single supplier sourcing can offer the following benefits:

- Streamlined processes leading to shortened lead times
- The ability to share R&D and design work if time to market is critical
- Development of strategic relationships which may develop into core competencies
- Reduced costs, improved efficiency and hence increased profits.
§ Supply networks normally include a large number of suppliers for each major raw material.
§ Suppliers compete on price and organisations avoid risk of over-relying on single supplier.
Parallel sourcing describes situation in larger companies where each plant/factory/location

operates single supplier sourcing but from different suppliers.
Network sourcing originated in Japan and has the following features:

§ Founded on a tiered network of small business suppliers
§ There is a small number of relationships between each tier which creates a pyramid
§ Access to a large number of suppliers but only needs a relationship in next tier down
§ Combines the key benefits of both single sourcing and dual sourcing arrangements
§ Outsourcing should be maximised within the network
§ Network members tend to form long-term relationships
(able to focus on strategic issues rather than transactional/ operational aspects)
§ First tier suppliers are:
- Often high cost/complex sub-assembly e.g. a car engine
- Heavily dependent on top level purchasers and hence focus on long term relationships
Supplier associations
§ Trade associations that might be found at regional, national or global levels. They:
§ Promote the interest of members e.g. through government lobbying
§ Promote industry-wide standards
§ Provide information, news, statistics, education and training.
E- BUSINESS AND THE SUPPLY CHAIN
E-commerce and the supply chain
§ E-commerce involves making agreements to buy and sell through electronic dealing.
§ E-commerce transactions can occur at any stage of the supply chain.
§ E-business is a method of increasing value by reducing costs, and also by improving the
value of benefits offered to customers.
The virtual supply chain
§ It consists of electronic communications links between suppliers and customers

§ The links may be made via websites, extranet links or electronic data interchange (EDI).
§ The role of a virtual supply chain may be either to:
- Improve information flows with suppliers and customers, and so improve efficiency
and effectiveness of the physical supply chain, or
- Replace some of the ‘traditional’ links in supply chain
§ Information about changes in demand or supply conditions should be communicated along
the virtual supply chain.
§ Customers and suppliers at each link in chain should then collaborate to respond to change
Checking the efficiency of the virtual supply chain
It is useful to ask the following questions to test the efficiency of any virtual supply chain.
§ Are our customers happy with existing delivery times?
§ Are our suppliers willing and able to adjust quickly to changes in demand ?
§ Are there good communications links all the way through the supply chain ?
The push and pull models of the supply chain in E-Commerce
Push Strategy
§ A company uses the internet to try to persuade customers to buy its products or services.
§ Typically, companies acquire a customer list and send e-mail marketing messages to them
Pull Strategy
§
§ Selling goods through the internet, particularly to consumers, is largely a pull strategy.
§ A company normally relies on customers coming to its website
E-procurement (Components and Benefits)
§ A term used to describe electronic methods used in any stage of the procurement process
§ There are 3 areas where e-procurement methods can improve efficiency:
1. E-sourcing
§ Use of electronic methods for finding new suppliers and negotiating terms for purchase.
§ Negotiations about the terms of purchase agreements can be conducted through e-mail.
§ Benefit can be:
- It enables companies to purchase more easily from other countries or new suppliers
2. E-purchasing
§ Submitting requests for quotations to suppliers, inviting them to submit a quotation

§ Receiving quotations/tenders from potential suppliers
§ Placing the order electronically.
§ Benefits can be:
- Reduce the time for suppliers to respond and a purchase to be made.
- Save costs and improves efficiency in the purchasing process.
- Purchasing efficiency is improved
3. E-payment
§ Using electronic methods for payment e.g. electronic invoicing or direct bank transfer etc
§ Benefits can be:
- Can streamline payment processes for both purchaser and supplier
- Reducing costs and errors
E-procurement and collaboration with major suppliers
§ Effective collaboration with major suppliers involves the joint design of new materials and
components, and new product design.
§ One method is to exchange information directly between computer system of a company
and its supplier. (simply involve sending e-mails with documents attached).
§ Output from supplier’s computer system can be fed directly into the company’s system,
without human intervention and vice versa.
§ Removing need for human input saves time and reduces the risk of error.
§ Any of following methods can be used for linking computer systems of both::
- Extranets (described earlier)
- Electronic data interchange or EDI, which is a system for the electronic translation of
data from one computer system so that it can be read by a different system.
- A supplier can be given direct access to a company’s intranet. It can use this access to
obtain information about inventory levels, and recognise when a re-supply of materials
will be required.
INVENTORY MANAGEMENT
Benefits of holding inventory
§ If there is a sufficient quantity of inventory, stock-outs are avoided, and sales will not be
lost to competitors.
§ Keeping inventories of raw materials and parts help to ensure that the production process
is not disrupted due to a shortage of materials.
§ Bulk purchase discount price can be obtained
§ Buying in large quantities reduces the number of orders from suppliers each year, and this
will reduce annual ordering costs.
Costs of holding inventory
§ The inventory has been purchased (and usually paid for) at a cost, and this investment in
inventory ties up capital. There is a cost to capital.
[Annual cost of holding = Cost of average inventory levels × annual cost of capital %]
§ Running expenses incurred in holding inventory, such as the warehousing costs
(warehouse rental, wages or salaries of warehouse staff).
§ Inventory often suffers loss through damage, deterioration, obsolescence and theft.
Economic order quality (EOQ)
Assumptions in the basic EOQ model

§ There are no bulk purchase discounts for making orders in large sizes.
§ Annual demand is constant throughout the year.
§ Order lead time (time between placing anorder and receiving delivery) is predictable,
The EOQ formula

The EOQ formula gives an order size, the economic order quantity or EOQ, that minimises the
total combined annual costs of:
§ Ordering the stock from the supplier, and
§ Holding the stock.
(Annual holding costs are the average stock multiplied by the holding cost per year)
Two bin system
§ Each item of stock is stored in two bins or large containers.

§ Stock is taken from Bin 1 until it is empty, and a new order is placed to fill Bin 1 again.
§ Since delivery of more units will take time, units are now taken from Bin 2.
§ Stock is taken from Bin 2 until it is empty, and a new order is placed to fill Bin 2 again.
§ By this time, Bin 1 should be full again, and units will then be taken from Bin 1.
§ This cycle continues indefinitely.
Periodic review system
§ There is a reorder quantity and a reorder level for each item of inventory.
§ Inventory levels are checked periodically
§ If the inventory level for any item has fallen below its reorder level, a new order for the
reorder quantity is placed immediately.
ABC method of inventory control
In ABC method, it is recognised that some items of inventory cost much more than others to
hold. Inventory can be divided into 3 broad categories:
§ Category A inventory items, for which inventory holding costs are high.
§ Category B inventory items, for which inventory holding costs are medium.
§ Category C inventory items, for which inventory holding costs are low and insignificant.
The ABC approach is to control each category differently, for example:

§ Category A items might be controlled by purchasing the EOQ as soon as the inventory level
falls to a set reorder level.
§ Category B items might be controlled by a periodic review system, with orders placed to
restore the inventory level to a maximum level.
§ Category C items might be purchased in large quantities, and controlled by means of a two-
bin system
JUST- IN -TIME (JIT) SYSTEMS
JIT production and JIT purchasing
§ JIT originated in Japan in the 1970.

§ It is based on concepts that have close similarities to continuous improvement (‘kaizen’),
lean manufacturing and total quality management (TQM).
§ Principle of JIT is that producing items for inventory is wasteful, because inventory adds no
value, and holding inventory is therefore an expense for which there is no benefit.
§ It follows that in an ideal production system:
- There should be no inventory of finished goods: items should be produced just in time
to meet customer orders, and not before (= just in time production)
- There should be no inventories of purchased materials and components: purchases
should be delivered by external suppliers just in time for when they are needed in
production (= just in time purchasing).
§ JIT has also been called ‘stockless production’ and ‘fast throughput manufacturing’.
§
Practical implications of JIT
Finished goods must be available when customers order them, and raw materials and
components must be supplied when they are needed for production.
§ Production times must be very fast.
§ Production must be reliable, and there must be no hold-ups, stoppages or bottlenecks.
§ Deliveries from suppliers must be reliable
(suppliers must deliver quickly and purchased materials must be of a high quality)
Flexibility in production
§ Production system must be flexible, so that it can be switched immediately to making
products that are ordered by customers, as soon as the order is received.
§ Batch sizes should be small (to avoid inventory), and the ideal batch size is 1.
§ A flexible production system requires a skilled and flexible work force.
Lower costs
Another aim of JIT is to reduce costs. Costs can be reduced by:
§ Eliminating waste in production
§ Speeding up production times
§ Reducing inventory levels to zero.
Eliminating waste
In Toyota car manufacturing system in Japan, 7 causes of waste were identified.

§ Over-production. Producing items is wasteful if the items go into inventory or are held in
production as part-finished work in progress.
§ Waiting time. Time spent waiting for work is wasteful, and creates inefficiency in both
labour and machine usage.
§ Transport (movement of materials). It costs money and uses up time to move items
from one place to another, but moving items adds no value. The layout of the factory floor
should therefore be designed in a way that minimises movement of materials.
§ Waste in the process. Waste in the process results in lost materials.
§ Inventory. Holding inventory is wasteful. It creates a cost and ties up cash. The aim is to
reduce inventory to zero.
§ Motion. When individuals move from one place to another in work, they might not add
value. Aim should be to simplify work procedures by eliminating unnecessary movements.
§ Defective goods are ‘quality waste’.
JIT techniques
§ Work flow and the layout of the factory floor.

- Layout of floor should be designed to minimises waste of transportation and motion.
- One way of doing this is to organise the work around ‘dedicated work cells’.
- A work cell is a small group of employees with all the equipment and skills to produce
a finished item.
§ Reducing set-up time.
- ‘Set-up’ activities are activities that have to be carried out to get ready for the next job,
(e.g. tidying up workplace and cleaning machinery, and getting materials for next job).
§ Total productive maintenance (TPM).
- To prevent breakdowns in equipment that cause unscheduled hold-up in production,
by improving maintenance systems.
§ ‘Kanban’ systems and visibility in the work place.
- There should be clear signs that indicate when more production is required.
- In a JIT system, ‘kanban’ cards might be used as a signalling system.
- These are signals – similar to flags – that send messages to other parts of the system.
- For example, a card can be used by one stage in the production process to signal to the
previous stage in production that more output is now required.
JIT in service operations
§ JIT can be applied to service operations. In particular, JIT regards queuing as wasteful,
because it wastes the time of the individuals waiting in the queue.
§ It might also be expensive to provide a system for holding customers in a queue (such as a
system for making people wait in a telephone answering system).
Problems with JIT
§ Zero inventories cannot be achieved in some industries, where customer demand cannot
be predicted with certainty and the production cycle is quite long.
§ It might be difficult to arrange a reliable supply system with key suppliers.
Information requirements and JIT
§ Costing systems such as absorption costing, whose main purpose is to value inventory, are
too complex for management information needs.
§ Managers need information about bottlenecks in production that create delays for JIT.
§ If employees are ‘empowered’ to take more decisions themselves, the information system
must be capable of providing these employees with the information they need
PRODUCTION MANAGEMENT SYSTEMS (IN MODERN BUSINESSES)
Materials requirements planning (MRP I)
Computer system for scheduling production in a complex manufacturing environment where:

§ Many raw materials and components are purchased from external suppliers
§ Raw materials and components are used to manufacture sub-assemblies
§ Sub-assemblies are assembled, possibly with other components and sub-assemblies
purchased from external suppliers, into a finished product.
Purpose of an MRP I system is to plan purchasing and production scheduling exactly, so that:
§ All raw materials and components are purchased and available in time, and
§ Finished products are manufactured on time to a planned production schedule.
The master production schedule is obtained from estimates of sales, which are both orders
actually received and a forecast of future sales demand in the planning period.
A bill of materials file is a database containing details of all the components, parts and
materials required for the manufacture of each type of sub-assembly and finished product.
MRP-I will also specify when production activities & purchase orders should be scheduled
Benefits of MRP I systems
§ The MPS and MRP can be amended quickly when sales estimates change.
§ An MRP I system gives early warning of possible problems with production due to capacity
limitations, or problems with purchasing due to delays in supply times.
§ MRP I systems can be used with JIT
Limitation of MRP I
MRP I is not appropriate when sales demand is difficult to estimate accurately in advance.
(MRP I production schedule based on sales estimates is likely to result in wrong production)
Manufacturing resource planning (MRP II)
Manufacturing resource systems (MRP II systems) are an extension of MRP I, and an MRP I
production scheduling system is a central feature of MRP II.
MRP II systems extend MRP I systems by adding other planning processes, such as:
§ Financial requirements planning
§ Labour scheduling
§ Equipment utilisation scheduling.
Optimised production technology (OPT)
A computer system that provides a different approach to production planning and capacity
management. The OPT approach is based on his Theory of Constraints.
§ Theory of Constraints is that production output is optimised by focusing on the constraints
that restrict production activity.
§ The capacity of a production system is limited by one or more bottleneck in the system.
§ To increase throughput and optimise production, management should identify the key
constraint and find ways of removing it.
§ When key constraint is removed, another constraint will become the key constraint
§ Management should continually identify and remove constraints in order to raise capacity.
§ An OPT computer system schedules production in a way that produces the maximum
output possible within the limitations imposed by the existing key constraint.
Concepts in OPT
§ A bottleneck or key constraint limits production capacity for the entire production system.
§ Losing time in a bottleneck activity means time lost – and output lost
§ Saving time in non-bottleneck activity is a wasted effort, because it has no effect on output.
§ Producing items at a faster rate than they can be used means that inventories will increase.
§ Inventories are wasteful and expensive. They add no value.
§ Batch sizes should be variable, to optimise throughput, and should not be a fixed.
Enterprise resource planning (ERP)
§ ERP systems are a further extension of MRP II,

§ Software companies such as SAP and Oracle have specialised in developing ERP systems.
§ ERP system additionally integrates data from all operations within the organisation.
§ An ERP system might provide an integrated database for:
- Manufacturing
- Purchasing
- Finance and accounting
- Human resource management
- Sales and marketing
- Logistics (distribution activities)
- Customer services
- Strategic reporting.
QUALITY MANAGEMENT
§ Quality is an important aspect of product design and marketing.

§ Quality is also important in the control of production processes.
Quality-related costs
Prevention costs - Designing products and services with in-built quality

Costs of action to prevent defects - Designing production processes of a high quality
(or reduce number of defects). - Training employees to do their jobs to a high standard.
Appraisal costs - Inspection and testing costs.
Costs of checking quality of work
Internal failure costs - Cost of scrapped items
Costs incurred when defective - Cost of re-working items to bring them to the required
production occurs quality standard
- Cost of production time lost due to failures and defects.
External failure costs - Dealing with customers’ complaints
Costs incurred when the quality - Costs of carrying out repair work under a warranty
problem arises after goods have - Costs of recalling all items from customers
been delivered to the customer. - Legal costs, when a customer sues organisation
- Cost of lost reputation (lost customers):
Total Quality Management (TQM)
§ TQM is a philosophy of quality management with its origins in Japan

§ The TQM approach to quality costs is to ‘get things right the first time’.
§ TQM is ‘the continuous improvement in quality, productivity and effectiveness obtained by
establishing management responsibility for processes as well as outputs.
§ TQM has several different aspects, including:
- Statistical quality control systems and
- A ‘zero defects’ policy – similar to the approach in JIT
- Continuous improvement
- Quality circles.
Potential benefits from TQM
§ Formally establishing a TQM system will establish the importance of ‘quality’ in a way that
all employees and managers should recognise.
§ Commitment to quality should also establish ‘customer satisfaction’ as a prime objective.
§ Successful introduction of TQM should result in continuous improvements in all processes.
(successful application will depend on provision of relevant quality-related information)
Continuous improvement (kaizen)
Aim is to keep on finding ways of improving performance. Improvements should continue all
the time, and everyone should be constantly looking for ways of improvements
ISO 9004 international quality standard describes this as an 8-step method:
1) Involve the entire organisation
2) Initiate quality improvement projects or activities
3) Investigate possible causes of quality problems
4) Establish cause-and-effect relationships
5) Take preventative or corrective action to improve quality
6) Confirm the improvement
7) Sustain the gains
8) Continue the improvement.
Quality circles
§ Might be used as a part of a continuous improvement programme.
§ It is a small group of employees, usually 5 to 8, who meet regularly to discuss work-related
problems and possible solutions to them.
§ Ordinary workers are encouraged to contribute ideas for improvement
§ Quality circles cannot replace other quality management processes and methods
TQM and JIT compared
§ Aim in both should be to have zero inventory.

§ A ‘pull system’ should operate, with items being manufactured only when they are required
by customers. This is different from the traditional ‘push’ system of manufacture, when the
aim was to maximise use of production capacity
§ Aim should be to create a uniform factory load and continual rate of production
§ Key aim should be to provide a level of quality that satisfies customers
§ Employees should be encouraged to participate in the TQM/JIT process.
§ Many JIT systems use a factory layout that minimises the need to move materials.
Movement of materials does not add value, and should be avoided. This is consistent with
the TQM view that movement is waste.
§ Set-up times between jobs should be minimised, because setting up does not add value.
§ There should be a focus on simplification of products and processes, in order to maximise
the utilisation of available resources.
Chapter 15: Marketing Essentials Page 210
RESEARCH AND DEVELOPMENT STRATEGY
The need for innovation
Innovation is necessary for several reasons.
Product - Changing the design of a product can help to renew or prolong its life.
Renewal - Many products undergo design changes during their life to maintain sales
Product - Products can be adapted for a new market segment.
adaptation - E.g. for a different country you might need to customize it as per new
needs
Developing - New products are continually being invented and developed.
new products - When a new product is successful, the 1st firms will often be market
leaders
Developing - From time to time, new technology becomes available
new - IT creates opportunities for new products and for new ways of doing
technology things.
- Changes in IT and communications technology are most notable examples
§ If a business entity fails to innovate, it will be at a competitive disadvantage to its rivals.

§ Sometimes entity believes that it does not need to innovate because it can copy the
innovations of its competitors, it will always be in a position of ‘copy cat’ (and follower)
A Research and Development (R&D) function
§ In some industries, entities establish an R&D department with research laboratories either
at head office or at divisional level.
§ It normally exist in high-technology industries, where
- Pace of technological change is rapid; or
- New product innovation is a major strategic objective
§ Some industries do not need an R&D function.
- However entities within these industries must have a way of developing new products.
- Might use product design teams or rely on skills of employees to provide innovation
R&D strategy
§ A decision has to be made about how much in total to spend on R&D each year.
§ The need for R&D spending will vary between different industries.
§ Entity might adopt a general strategy of investing a certain percentage of sales each year.
§ Decisions must be made to allocate spending between research and project development.
§ R&D strategy must allow for failures (which should be considered a common thing)
§ It might be tempting to reduce R&D spending and invest more in established products.
§ However, in an industry where innovation is vital, a strategy of restricting or reducing
spending on R&D is likely to result in strategic failure over the longer term.
Intrapreneurs
§ Initially, innovation is provided by the entrepreneur.

§ In larger entities that have passed initial stage, there is no obvious role for entrepreneur.
§ Its senior managers should be competent and should have talent for innovation.
§ If large entity does not have any such persons, its competitors will be more successful.
§ A large entity can deal with this risk in several ways:
- It can establish a formal R&D function, or a design team
- It can acquire successful entrepreneurial companies and innovate through acquisitions
- Larger companies can also need intrapreneurs (a person who takes responsibility for
converting a new product idea into a profitable product, by taking risks)
- Companies should try to identify individuals who are capable of being intrapreneurs
- To encourage intrapreneurship, individuals should be expected to invest some of their
own money, in risk-taking ventures, to increase their commitment to project’s success.
PIMS ANALYSIS
§ PIMS analysis stands for Profit Impact of Marketing Strategy analysis.

§ PIMS database contains data provided by several thousand SBUs of major corporations.
§ The data consists of details about the activities and performance of the SBUs
§ It can be used to analyse the factors that appear to make some strategies more successful.
(e.g. market share, diversification strategy, investment intensity, product quality etc)
§ The PIMS database appears to show a link between profitability and relative market share.
§ The higher the market share, the higher the return on investment will be.
This connection between market share and investment return arise from the following factors:
§ The purchasing benefits of being a large buyer
§ The advantage of selling in large volumes.
§ Scale of advertising.
§ More efficient use of equipment and other non-current assets.
Other findings of PIMS analysis
§ Relative quality of a product or service is an important factor in obtaining high returns.

§ High investment in capital equipment seems to reduce profitability.
§ Acquisition strategies are not successful at increasing returns for company’s shareholders.
(main beneficiaries of acquisitions are usually the shareholders in the acquired company)
§ Diversification is not a particularly successful strategy in terms of return on investment.
C USTOMER NEEDS
§ Companies and other business entities compete with each other in a market
§ Markets can be defined by their customers and potential customers.
§ Most profitable entities sell their goods or services most successfully.
§ Should Provide goods or services to customers that meets customer needs successfully
What are customer needs?
§ Better-quality product
§ Better design features
§ Availability
§ Convenience of purchase
§ Right Price
Customers may be grouped into 3 broad types:

§ Consumers: these buy products and services for their personal benefit or use
§ Industrial and commercial customers: customers might include other business entities
§ Government organisations and agencies.
Difference between a Customer & Consumer

§ A customer Purchases and pays for a product or service
§ A consumer Ultimate user of the product or service;
Consumer may not have paid for the product or service
Example: A food manufacturing business makes own label, ready meals for the major
supermarkets; the customer is the supermarket to whom it supplies meals and the
consumer is the individual who eats the meal
Who should the business target?
§ In reality – it needs to understand needs and wants of both the customer and
consumer.
§ For supermarkets; Their requirements for ready meals (e.g. packaging, delivery etc).
§ For consumers; It also needs to understand the needs and wants of the consumer.
How are tastes changing? Are consumers happy with the standard / taste of the
product?
Marketing and marketing mix
Marketing is concerned with persuading customers to buy products or services by offering

them a unique value proposition that meets their needs better than the competitor.
Marketing can be described as a process of:
§ Identifying customer needs and wants
§ Designing products or services that meet those needs and wants
§ Creating a customer awareness of these products or services
§ Creating a understanding of how they meet those needs and wants
§ Creating a desire by potential customers to have the product or service
§ Making products or services available to customers through suitable distribution channels
A marketing strategy should be implemented that will help entity to implement its competitive
strategy within its chosen markets – this is called the ‘marketing mix’.
§ The 4 Ps of marketing mix are:
- Product
- Price
- Place
- Promotion.
§ Extra 3 P’s relevant to service industries are:
- Physical environment
- People
- Processes
Product strategy
§ Product strategy is concerned with:
- designing new products
- designing new variations of existing products, to sell to a different market segment, or
to create new demand.
§ Actual and perceived features of a product are very important because it provides the value
§ Some different features of product design that might be relevant to marketing are:
Feature Comment / example
Its functions What does it do? Does it do what customers want it to do?
Comfort For example, some chairs are much more comfortable than others
Convenience For example, a mobile that fits into a pocket or Ready-to-cook meals
Quality Customers will pay more for a diamond ring than for a plain gold ring
Useful life A long-life battery has more value than a short-life battery
Reliability How often will it break down or fail to function properly?
Safety Some consumers might be concerned about healthiness of food products
Uniqueness Some customers will always buy an entirely new product
Packaging The wrapping or packaging can add to their appeal to consumers.
§ Product design should be related to what customers want and need.

§ The starting point for designing a new product might therefore be a market research.
Three levels of a product

§ Core Product
- It reflects the core customer value.
- It is the major reason the product is being bought for.
- E.g. when a customer buys a car, the basic core value he seeks is “transportation”.
§ Actual Product
- Where the core benefit is turned into an actual product.
- E.g. car would be the actual product.
§ Augmented Product
- Builds around the core value and the actual product
- It refers to the additional services and benefits being offered along with the product.
- E.g. warranties, guarantees, after-sales service, product support etc.
Product Development Process

1) Idea generation
Search for new product ideas
- Internal sources (R&D)
- External sources (customers, competitors, distributors, suppliers)
2) Idea screening
Evaluation against criteria to spot good ideas and drop poor
3) Concept development and testing
- Product concept is a detailed version of the new-product idea stated in
meaningful consumer terms.
- Concept testing involves testing the concepts with a group of target consumers to
find out if the concepts have strong consumer appeal.
4) Marketing strategy development
A marketing strategy statement should be produced. This is a statement of the
planned strategy for a new product that outlines the target market, positioning,
market mix and market share, long term sales, profit goals and marketing budget for
the first few years.
5) Business analysis
Review of the sales, costs, and profit projections for a new product to find out
whether these factors satisfy the company’s objectives
6) Product development
Developing the product concept into a physical product in order to ensure that the
product idea can be turned into a workable product
7) Test marketing
The basic purpose is to test the product itself in real markets.
8) Commercialization
Introducing a new product into the market.
Price strategy
When a company launches a new product, it can choose either of following pricing strategies
Market-Penetration Pricing
§ Setting a low price for a new product to attract maximum buyers and a large market share
§ Aim is to build customer demand quickly by offering an attractive price
§ High volume reduces cost per unit
§ Eliminates competition
Market-Skimming Pricing
§ Setting a high price for a new product to “skim” off” customers who are willing to pay
more (probably to have the product sooner than others).
§ Product image must support price
§ Prices are lowered when demand falls
Advantages of price skimming

§ Where a highly innovative product is launched, research and development costs are
likely to be high. In such cases, price-skimming allows for some return on initial costs
§ By charging high prices initially, a company can build a high-quality image for its
product. By contrast, a lower initial price would be difficult to increase subsequently.
§ Skimming can be an effective strategy in segmenting the market.
§ For ‘conspicuous’ or ‘prestige goods’, the practice of price skimming can be
particularly successful, since the buyer tends to be more ‘prestige’ conscious than
price conscious.
Place strategy
§ For many products, customers expect to find products when they visit supermarket.
§ Supermarkets should ensure that the products are always available on its shelves.
§ For consumer goods manufacturers, place strategy will involve developing an adequate
distribution network for its products, so that customers can easily find a retail
§ Some manufacturers might base their place strategy on delivery of the product to the
customer’s home or office.
§ A business entity might seek to sell its product by offering it in a place (through a
distribution channel) that rival companies do not use.
§ Sometimes extensive distribution is important and other times selective works good
Numbers of Distribution Channel Levels

1. Manufacturer – Consumer (Direct Marketing)
2. Manufacturer – Retailer - Consumer
3. Manufacturer – Wholeseller – Retailer - Consumer
4. Manufacturer – Wholeseller – Distributor – Retailer – Consumer
Promotion strategy
IT is concerned with making the customer conscious of a product and wanting to buy it. There
are several different aspects to promotion (i.e. Promotional mix):
Strategy Advantages Disadvantages
Advertising
Advertising can be by several - Easy and quick to reach a - Can be expensive
different media, such as large target market. - Relies on potential customers
television, radio, magazines, reacting proacvtively
newspapers, and billboards. - Impersonal
Sales promotion
Activities designed to - Customers like such - Can be expensive if need to
prompt customers into campaigns penetrate a large target market.
buying a product. - Relatively persuasive in the - May damage brand image
(e.g. discount promotion short-term in encouraging
, buy 1 get 1 free etc) potential new customers
Direct selling
Particularly common for - Highly interactive (between - Costly (employing a sales force
selling to industrial/ the buyer and seller) has many hidden costs)
commercial customers, where - Excellent for complex or - Not suitable if there are
the potential value of sales detailed product features thousands of important buyers
orders might be very high - Relationships can be built
Some entities also use
telephone selling
Sponsorship
Of events (e.g cricket match - Good for brand awareness - Potentially expensive.
or a music show) with their - It also shows involvement - Can be destructive if associated
name appears on visible and giving back to the with the wrong organisatiion or
places to capture attention community activity (e.g. lost match)
Public relations
Public relations is - Can be highly persuasive - Public relations mistakes can
concerned with and effective in managing be harmful and difficult to
attracting favourable awkward relationships. reverse.
media attention to an - Often seen as more credible - Risk of losing control (cannot
entity and its products i.e. message seems to be always control what other
(e.g public servive coming from a third party people write or say about your
message or press (e.g. magazine, newspaper) product)
release) - Cheap way of reaching
Push strategy and pull strategy
§ Push strategy is aimed at getting distributors to buy the product for resale in their
supermarkets or other retail outlets.
- The aim is to ‘push’ the product through the distributor to the end consumer.
- To persuade distributors, an entity will need to use a direct sales force, and use
marketing tools such as low prices and generous credit terms
§ Pull strategy is aimed at getting the end-consumer to want to buy the product, so that they
expect their supermarkets or other retail store to have the product available.
- If consumers demand the product, distributors will be more willing to stock it.
- Advertising and sales promotions are an important element in a ‘pull’ strategy.
Physical environment strategy
§ Physical environment can be an important element for services, including retail services.
§ Customers can be attracted to a sales location by the qualities of the environment
§ With internet shopping, the design and layout of the seller’s website can be a crucial factor
People strategy
§ Customers will be loyal to companies that serve them well and efficiently – in face-to-face
dealings or in dealing with telephone queries by call centre staff.
§ Quality of a service often depends on the dealing of people who provide it
§ Companies might train employees in providing good service
Processes strategy
§ A customer might be attracted or deterred by the processes that he must go through

§ Efficient processes can help to win business.
(e.g. JS Gold finance service providing loan and completing the process in 100 minutes)
§ Processes involved in obtaining service might include receiving reminders, having to
register, annual subscriptions and form filling.
§ Internet technology can help to make these processes much more efficient and convenient.
LIFE CYCLE MODEL
The ‘classical’ product life cycle
§ A ‘life cycle’ is the period from birth or creation of an item to the end of its life.
§ Products, companies and industries all have life cycles.
§ Classical life cycle for a product/industry goes through 4 stages or phases:
Features
Sales Low Rapidly rising Peak sales Declining sales
Per unit Cost High Average Low Low
Profit Negative Rising High profit Declining profit
Customers Innovators Early adopters Middle majority Laggards
Competitors Few Growing Stable Declining number
Strategies
Objectives Create product Maximize market Maximize profit and Reduce
awareness & trial share defend the share expenditure and
milk the brand
Cost Involved Operating costs, Costs of increasing Costs to maintain Close attention to
(Implications) Marketing and capacity, increased manufacturing cost of withdrawal
advertising cost of working capacity, Marketing
capital and enhancement
Product Offer Basic Product extensions Diversify brand and Phase out weak
(See Ch # 8) product model items or Reposition
Price Use cost-plus Price penetration or Price to match or Cut price
(See Ch # 8) skimming beat competitors
Promotion Heavy sales Reduce Increase to Reduce to minimal
(See Ch # 8) promotion (take advantage of encourage brand level
heavy demand) switching
Targeting Early adopters Mass market Stress brand Reduce
(See Ch # 5) (buildawareness) (build awareness) differences&benefits (Try to retain
loyals)
Examples - Smart Glasses - Tabs & Smart Phones - Laptops - Personal

- E-conferencing - Email - Faxes Computers
- Iris-based identity - Smart cards - Credit cards - Handwritten letters
cards - Cheque books
Benefits of Life cycle costing
§ Potential profitability of products can be assessed before its major development

§ Non-profit-making products can be abandoned at early stage before costs are committed.
§ Techniques can be used to reduce costs over the life of the product.
§ Pricing strategy can be determined before the product enters production.
§ Attention can be focused to get the product to market as quickly as possible.
(The longer company can operate without competitors the more revenue can be earned)
§ By monitoring actual performance against plans, lessons can be learnt for future products.
§ Also useful for assessing strategic position and the nature of competition in a market.
Criticism on PLC approach:

§ Relevant only for products where consumer demand is high
§ Underlying stage of PLC is determined by marketing actions.
§ Stages cannot be easily defined.
§ Strategic decisions can change PLC
Timing of market entry and market exit (Relevance to strategic management)
§ Entrepreneurial companies might look for entering a new market during introduction
§ More cautious companies might delay their entry into the market until the growth phase
§ Companies are unlikely to enter a market during maturity phase
(unless they see growth opportunities in a particular part of the market)
§ A company might need to make strategic decision about leaving a market, when product is
in its decline phase. It should be possible to make profits in a declining market, but better
growth opportunities might exist in other markets
Cycle of competition
§ It is another concept for understanding the behaviour of competitors in a market.

§ When a company achieves some success in market, competitors might try to do something
even better in order to gain a competitive advantage.
§ A new initiative by one company will result in a counter-measure from another company.
§ A typical cycle of competition affects prices and quality.
- A rival company might start to sell its product at a lower price to take its share
- Another rival company might improve the quality at same same price as yours
- First company might respond to them by improving its quality and reducing price.
§ In maturity or decline phase
- It becomes more difficult to lower prices without reducing quality.
- Competitors might try to gain a bigger share by selling at a lower price with low quality
- It lead to a ‘spiral’ of falling prices and falling quality and the life cycles comes to an end
§ Concept of the cycle of competition is useful for strategic analysis, because it can help to
explain strategies of companies in a market, and to assess future initiatives of competitors.
Global competition
Why enter overseas market
Push factors for entering

§ Saturation in domestic markets
§ Economic difficulty in domestic
markets
§ Near the end of the product life cycle at
home
§ Excess capacity
§ Risk diversification
Pull factors for entering
§ The attraction of overseas markets
§ Increase sales
§ Enjoy greater economies of scale
§ Extend the product life cycle
§ Exploit a competitive advantage
§ Personal ambition
Constraints and difficulties in entering:

§ Resources
§ Time
§ Market uncertainty
§ Marketing costs
§ Cultural differences
§ Language differences
§ Trade barriers
§ Regulation & administrative procedure
§ Political uncertainties
§ Exchange rates (transactions risks)
§ Problems of financing
§ Working capital problems
§ Cost of insurance
§ Distribution networks
Corporate strategies for international business

Standardisation
§ When entity starts to sell in foreign markets, it will take it as extension of its local market.
§ It will not change its product design for foreign markets, and will sell an identical product
§ Product will be manufactured in the domestic country, and exported to foreign markets.
Adaptation
§ As an entity becomes more committed to its foreign markets, entity will start to recognise
differences between the different foreign markets.
§ Customers in each different market will have slightly different needs and preferences.
§ Entity might therefore alter its products to suit the needs of each local market.
International scale operations, international diversity and globalisation
1) International scale operations

§ A company might decide to sell a standard product in many different countries.
§ To do this, it needs to establish operations on an international scale.
§ Production plants might be established in selected countries, serving a different region
§ Purpose is to benefit from economies of scale, by producing standardised products largely.
§ The products are then distributed to different countries in the region and sold.
§ Operations are usually managed and controlled from a head office in country of origin.
2) International diversity
§ It is also called multi-domestic strategy.

§ Company recognises the differences in customer needs in each different country
§ Company bases its strategy on the view that most or all value-adding activities must be
located in the country where the target national market is located.
§ In each country, product is adapted to suit the unique requirements of the local customers.
§ It is even possible that products be sold under different brand names in each country
3) Globalisation
§ It is similar to an international scale operations strategy

§ However, group operates in every (or most) country rather than having centralised
regional locations.
§ When it adopts a globalisation strategy, the company will become a global company.
An entity with international business operations must decide how to develop its business
operations and which corporate strategy (or strategies) to adopt.
Multinational/International organisations and Global organisations
§ An international company is a company with all or most of its production operations in a

single country. Most of its senior managers are nationals of the country.
§ A global company is a company with operations in a large number of different countries.

Its senior managers are nationals of a variety of different countries.
§ When companies expand their business outside their ‘home country’, they will usually
begin as an international company, but may eventually develop into a global company.
Multinational company Global company

- Management make strategic decisions for - Management develop worldwide
each foreign market individually. strategies for all their markets.
- Products are adapted and designed to the - Company produces core products.
requirements of the local market. - These are standardised for all markets,
with only minimal changes for local
market
- Marketing is adapted in each country to suit - There is a uniform approach to marketing
the local culture. in all countries, with only small variations.
- Countries are selected as a target for - Countries are selected for their ability to
production and sales entirely on the basis of contribute to the integrated global
their potential for profitability. strategy.
- Aim is to optimise the value chain in each - Value chain is broken up, and its different
country of operation. parts are in different countries.
- Aim is to optimise the value chain globally.
- It often has culture of country of head office - It develops a global culture.
WORLD TRADE O RGANISATION
§ An intergovernmental organisation established with aim of regulating international trade.

§ Established in 1994 by signatories from 123 nations
§ It replaced the General Agreement on Trade and Tariffs (GATT)
(a multilateral agreement regulating international trade set up in 1947)
§ WTO promotes the view that reducing barriers to world trade (protectionist measures)
will promote economic growth and prosperity.
§ The aim of the WTO is to encourage countries to:
- Adopt more free trade measures;
- Remove protectionist barriers against imports from other countries; and
- Ban the practice of ‘dumping’ surplus goods
(at a low price on markets of other countries)
It is generally accepted that there is still a long way to go in achieving objective of free trade.
§ Member countries meet regularly and try to come to agreements on trade.
§ WTO encourages direct discussions between particular countries or blocs of countries
§ Agreements are not ‘perfect’ and many protectionist measures still exist.
§ Some of these measures can lead to serious disputes between governments
§ WTO also offer arbitration in those disputes
ASSESSING THE NATURE AND SIZE OF MARKETS (MARKET RESEARCH )
Relevance of market intelligence
Market intelligence
Market intelligence describes information that relates to an organisation’s existing and
potential markets which is gathered and analysed to support strategic decision-making.
(information includes for example market size and market growth rates)
§ Understanding the market size, growth opportunities and profit potential are fundamental
in establishing the right strategy and to answer the following question:
- Is the market big enough to interest us and is it moving in the right direction?
- Should we increase, decrease or maintain investment in particular product or market?
Tolerance levels
§ Preparation of financial information involves balancing the need for speed vs. accuracy.
§ The more time taken to prepare financial information the greater the level of accuracy
§ But more longer time means relevance diminishes gradually
In general, high degrees of accuracy are increasingly necessary when:

§ Investor targets a large market share and plans a significant investment in the market;
§ Investor needs to understand the trends within a market, particularly year on year;
§ It is necessary to understand the dynamics of market segments if following a focus strategy
A wider margin of error is more tolerable when an investment is relatively small
Approaches to market sizing
Top-down approach
§ It involves starting with market-wide information then refining the information down to a
specific target market.
§ Market-wide information might be available from government offices and statisticians,
trade associations and market research firms.
§ Overall market is sometimes referred to as ‘total available market’, or TAM.
§ Some marketers differentiate between ‘available’ and ‘addressable’ markets as follows:
- The ‘addressable’ market is the absolute total revenue opportunity for your product;
- The ‘available’ market represents the portion of the addressable market for which you
can realistically compete based on factors such as geography and resource constraints.
Bottom-up (demand-side) approach
§ It involves engaging consumers and/or distributors of a product.

§ This could involve primary sources such as:
- Focus group discussions
- Interviews and questionnaires
- Field observations.
§ Researcher needs to take care on selection of sample so it can be extrapolated properly
§ Another approach might be to test a product in a pilot market.
Supply-side approach
§ It involves performing research on companies who are active in the chosen target market.
§ Involves adding together the sales of competing companies to establish overall market size
§ Various sources of information exist such as:
- Govt department responsible for receiving annual company accounts (e.g. SECP)
- Published annual reports and other reports found on websites;
- Trade press articles and promotional literature that includes sales figures;
- Specialists who have an accurate oversight of a market (e.g. journalists, researchers)
§ In most cases it will require some kind of refinement based on estimates and assumptions.
Internal sources
Useful internal information for market analysis and research might include:
§ Corporate website statistics such as the number of unique visitors to a website, the number
of visits that convert to orders and the average time spent on each web page
§ Sales information from past and existing customers
Sources of Information for organisations

1. Internal company information (Secondary data)
E.g. sales, orders, customer profiles, stocks, customer service reports etc
2. Marketing intelligence (Secondary data)
§ Information gathered from many sources, including suppliers, customers,
distributors.
§ Marketing intelligence is a catch-all term to include all the everyday information
about developments in the market that helps a business prepare and adjust its
marketing plans.
3. Market research (Primary Data)
§ Management cannot always wait for information to arrive in bits and pieces from
internal sources.
§ Sources of market intelligence also cannot always be relied upon
§ In such circumstances, businesses often need to undertake specific studies (Research)
C OLLABORATION
The nature of collaboration
§ Companies might be able to achieve competitive advantage through collaboration with:

- suppliers or customers in the value network/value system
- other business entities in the value network
- some other competitors.
§ Collaboration with suppliers and customers can create additional value, in areas such as:
- Improving product design
- Improving the reliability and speed of delivery
Collaboration and strategic alliances
§ It is an arrangement in which a number of separate companies share their resources and

activities to pursue a joint strategy.
§ All companies in the alliance are able to offer a better product or service to their customers.
§ Examples of strategic alliances are in the airline industry where groups of airlines might
form alliances in order to offer travellers a better selection of routes and facilities
§ Success depends on members of alliance not being in direct competition with each other.
(They are in the same industry, but serve different markets or market segments.)
Collaboration and joint ventures
§ A joint venture is a formal venture by 2 or more separate entities to develop a business or

an activity jointly.
§ Joint ventures are frequently used for investing in a new business venture where:
- There is considerable risk
- Large amounts of capital are needed
- A mix of skills is essential.
§ It allows the business risk and financing to be shared by the joint venture partners.
§ Partners might be competitors in some markets, but have agreed to collaborate here
§ Partners might also be in different markets not competing with each other directly
§ Sometimes multinational companies expand in another country by establishing a joint
venture with a local company. There are several advantages in this arrangement:
- It might be legal requirement for foreign companies setting up business in that country
- Local company should have a better knowledge of business conditions and practices
- It is easier to succeed with a local company than in competition with local companies.
- Local company might already have customers to which the new joint venture can sell.
§ Difficulties can arise and lead to break-up of partnership. It happen when:
- 1 partner is perceived (by other partners) not to be contributing adequately
- 1 partner wants to withdraw from the venture, or
- Joint-venture companies start to compete with each other instead of collaborating.
Franchising
Franchises are independent businesses that operate a branded product of another business in
exchange for a licence fee and a share of sales. (e.g. KFC, McDonald, Allied Schools etc)
Franchiser: The Actual Business giving rights of their business
Franchisee: The Person/Organisation obtaining rights
Mechanism:
§ Franchiser grants permission.
§ Franchisee pays for permission and assistance.
§ Franchisee is responsible for day to day running of franchise.
§ Franchiser may impose Quality Control Measures to ensure that goodwill is not damaged.
§ Franchisee supplies capital, personal involvement and local market knowledge.
Benefits to Franchiser: Benefits to Franchisee:

§ Franchise fee and continuing profit share § Easy start up
(if agreed) § Technical advice from franchiser
§ Rapid expansion § Common marketing (Gets advantage from
§ Local knowledge. overall marketing of franchiser)
§ Economies of scale. § Standardise Products/Serices (no need to
think for different options)
Problems to Franchiser: Problems to Franchisee:

§ Limited control over quality. § Franchise fee may be too heavy
§ Brand name may be damaged due to § Continuing profit share (if agreed) is
wrong policies of franchisee. annoying
§ Control over records for profit share § Have to follow standards of franchiser
§ Franchisee may become competitor. § Normally no decision making at local level
Licensing
§ Licenses are very similar to Franchising in their financial aspects,
§ Degree of central control and support is usually less.
§ Normally franchise also gives the rights of production however licenses are normally
restricted to distribution or use of patents etc.
Possible problems with collaboration: restricting competition
§ It should not seek to create unfair restrictions on competition.

§ When Government has a policy of encouraging competition in markets, they will seek to
discourage actions by companies that will distort or reduce competition in their industry
§ (Competition Commission of Pakistan - CCP is an example of such anti measures)
Cartels
§ An arrangement between rival firms to operate the same policies on pricing.
§ Firms are able to charge higher prices than if they competed with each other
§ These are sometimes illegal (e.g. in Pakistan CCP have restricted such agreements)
Chapter 16: Financial & Non Financial Performance measurement Page 228
PERFORMANCE MEASUREMENT
§ Performance measurement is a regular financial & non-financial analysis of an organization

that indicates how well an organization is achieving its objectives.
§ These measurements can be used to examine the performance of all aspects of a business,
including accounting, engineering, finance, marketing, materials management, production,
research, sales departments, Strategy and strategic decisions.
§ Performance measures may be divided into two groups.
- Financial performance indicators
- Non-financial performance indicators
Objective of Performance Measurement.
§ Clarify organisation goals, directions and expectation.

§ Organisations should learn how to accomplish goals more effectively.
§ Communicate the priorities of the organisation.
§ Support strategic/business line planning by linking broad direction to specific outputs.
§ Support budgetary planning and resource allocation processes.
§ Monitor the operation of programs and to make continuous improvements.
§ Motivate public servants and to restore pride of making positive contribution
§ Enable citizens to make better informed decisions in the use of public programs.
§ Restore public confidence that they are receiving value for money in public spending.
§ Assess whether the organisation is achieving its goals.
§ Strengthen internal administrative and external political accountability.
Different measures are appropriate for different businesses. Factors to consider:
§ Measurement needs resources: people, equipment and time to collect & analyse information.
§ Performance must be measured in relation to something (objectives)
§ Measures must be relevant
§ Short and long-term achievement should be measured.
§ Measures should be fair by only including factors which managers can control by their
decisions, and for which they can be held responsible.
§ A variety of measures should be used.
§ Realistic estimates may be required for measures to be employed.
§ Measurement needs responses from managers (if they find it useful)
Once suitable performance measures have been selected, they must be monitored on a regular
basis to ensure that they are providing useful information.
FINANCIAL PERFORMANCE INDICATORS (FPIS)
Dimensions of financial performance (Ratio Analysis)
§ A common method of measuring financial performance of an organisation is ratio analysis.

§ The main dimensions of financial performance are usually:
- Profitability;
- Liquidity; and
- Financial risk.
§ Information for measuring financial performance is obtained largely from internal sources –
financial statements produced by the entity and its accounting systems.
Profitability ratios
Annual growth in sales revenue
Sales growth can be a very important measure of financial performance for a number of reasons.
§ Sales growth is usually necessary for achieving a sustained growth in profits over time.
§ The rate of growth (as compared to industry or market as a whole) can be significant.
§ The period of time over which growth is achieved can also be important.
§ Sales growth (or a decline in sales) can usually be attributed to two causes:
- Sales prices and
- Sales volume.
Profit margin
§ Net profit margin is also known as operating profit margin.

§ It is wrong to conclude, without further analysis, that a high profit margin means ‘good
performance’ and a low profit margin means ‘bad performance’.
§ To assess performance, it is necessary to look at the surrounding circumstances
- In some industries profit margins are high, although sales volume may be low.
- Changes in profit margin from one year to the next should be monitored
§ Any change in profit margin from one year to the next will be caused by:
- Changes in selling prices, or
- Changes in costs as a percentage of sales, or
- A combination of both.
§ Profitability may also be measured by cost/sales ratios, such as:
- Ratio of cost of sales/sales
- Ratio of administration costs/sales
- Ratio of sales and distribution costs/sales
- Ratio of total labour costs/sales.
Assets Turnover
§ It is necessary to look at the circumstances in which the profit margin has been achieved.
§ In the following situations, assets turnover ratio will reduce but it will not be the cause of
concern for management:
- Some companies expand their business operations by making investment in fixed assets
and current assets to increase future profitability.
- Sometimes companies revalue their fixed assets and revaluation surplus arises which
leads to increase in the carrying value of assets and capital employed.
Return on assets (ROA) or return on capital employed (ROCE)
§ ROA ratio depends upon two ratios i.e., net profit margin and assets turnover ratio.
§ Increase in ROA can be due to net profit margin or efficient utilisation of assets or both.
Liquidity ratios
§ Liquidity for a business means having enough cash, or having ready access to additional cash
§ Most important sources of liquidity for non-bank companies are:
- Operational cash flows (cash from sales)
- Liquid investments, such as cash held on deposit or readily-marketable shares
- Bank overdraft arrangement or similar readily-available borrowing facility from a bank.
§ Cash may also come from other sources, such as the sale of a valuable noncurrent asset
§ If the entity is unable to settle its liabilities when they fall due, there is a risk that a creditor
will take legal action and this action could lead on to insolvency proceedings.
§ On the other hand a business entity may have too much liquidity, when it is holding much
more cash than it needs, so that the cash is ‘idle’, earning little or no interest.
§ A large fall in cash (or a big increase in the bank overdraft) may be caused by:
- Operating losses
- Increases in working capital (inventory plus receivables, minus trade payables)
- Expenditures on investments, such as purchases of new non-current assets
- Repayments of debt capital (bank loans) or payments of dividends.
Current ratio
§ It is sometimes suggested that there is an ‘ideal’ current ratio of 2.0 times (2:1).
§ It is important to assess a current ratio by considering:
- Changes in the ratio over time
- The liquidity ratios of other companies in the same industry
Quick ratio
§ This ratio is better measurement of liquidity when inventory turnover times are very slow
§ It is sometimes suggested that there is an ‘ideal’ quick ratio of 1.0 times (1:1).
§ Liquidity ratios will deteriorate (i.e. get smaller) when:
- There is an increase in current liabilities without an increase in current assets
- There is a reduction in current assets without a reduction in current liabilities
Financial risk ratios
§ Financial risk is the risk to a business entity that arises for reasons related to its financial
structure or financial arrangements.
§ There are several major sources of financial risk, such as credit risk (the risk of bad debts
because customers who are given credit will fail to pay what they owe) and foreign exchange
§ A significant risk is the risk that could arise through borrowing.
§ The risk is that if an entity borrows very large amounts of money, it might fail to generate
enough cash from its business operations to pay the interest or repay the debt principal.
Gearing ratio (or leverage)
§ A company is said to be high-geared or highly-leveraged when its debt capital exceeds its
share capital and reserves.
§ A company is high geared when the gearing ratio is above either 50% or 100%
§ Gearing ratio can be used to monitor changes in the amount of debt of a company over time.
§ It can also be used to make comparisons with the gearing levels of other, similar companies.
Interest coverage ratio
§ An interest cover ratio of less than 3.0 times is considered very low
§ The risk is that a significant fall in profitability could mean that profits are insufficient to
cover interest charges, and the entity will therefore be at risk from any legal or other action
Limitations of financial ratios
§ They are only useful for trends or changes over 1 year or longer, and not in the short-term.
§ Ratios can only indicate possible strengths or weaknesses in financial performance.
§ They might raise questions about performance, but do not provide answers.
§ Not easy to interpret, and changes in financial ratios over time might not be easy to explain.
§ Using ratios can lead managers to focus on the short-term rather than the long-term success
§ There is a risk that managers may ‘manipulate’ financial performance through ratios
§ Non-financial aspects of performance should also be assessed (other than financial ratios)
Short-run and long-run financial performance
§ DCF methods are forward-looking and long-term in perspective.

§ A problem with other measures is that they are mainly short-term in perspective
§ Rewards to individuals for performance are also short-term focused.
§ Need to find a balance between short-term and long-term financial success has led to the
development of differing views of performance measurement (e.g. balanced scorecard)
Setting financial targets: methods
Engineering-based targets
§ May be used when there is a stable and predictable relationship between inputs to the
forecasting model and outputs.
§ An example is standard costing.
§ By setting a standard cost, it is possible to set a target cost for production of any quantity.
Historical-based targets
§ If it is not possible to identify stable and predictable relationships, it may be appropriate to

establish targets on the basis of either:
- Historical performance, or
- Historical targets that have been used in the past (assuming they are still valid)
§ Past is sometimes not a suitable basis for setting targets for the future:
- Circumstances that applied in the past may no longer apply for the future
- Historical targets used may allow for inefficiencies that need to eliminate in the future.
Negotiated targets
§ Targets may also be agreed as outcome of negotiations between superiors & subordinates.
§ Senior managers may try to impose financial targets on their subordinates
§ Subordinates may argue that the targets are unrealistic and unfair.
§ As a result of negotiations, targets may be agreed that are acceptable to both sides.
§ Such negotiation process helps to bridge the information gap between:
- Senior managers, who can see ‘big picture’ and what entity should be trying to achieve
- Subordinate managers, who understand operational matters at a level of detail
§ Financial targets that are agreed should be achievable, striking a realistic balance between
higher-level objectives and lower-level practical realities.
Making comparisons of financial performance
§ Performance of departments/divisions may be assessed through comparison with other.

§ It is important to be aware of the reasons why their performance might be different.
§ When there are good reasons for differences in performance, the comparison should take
these reasons into consideration.
NON- FINANCIAL PERFORMANCE INDICATORS (NFPIS)
§ Performance measures might be non-financial.

§ Non-financial performance indicators (NFPIs) can be both quantitative and qualitative.
§ Typically, non-performance measures will relate to a CSF in one of the following areas:
- Quality - Efficiency
- Speed (e.g. speed of delivery) - Achieving a specific non-financial target
- Reliability - Meeting customer needs/ satisfaction.
Measurement of Quality
Performance objective Performance measure

Quality - Percentage of items rejected or scrapped
- Average number of defects per unit produced
- Average time between machine breakdowns
- Number of customer complaints
Speed - Average time between receiving order and completing it
- Transport times
Flexibility - Percentage of customer orders met from inventory
- Percentage of orders or items delivered late
- Average delays
Cost - Variances
- Cost per operating hour/per machine hour
- Throughput, contribution
Relationship between qualitative targets and quantitative targets

§ Quantified target provides a specific objective, and actual performance can be measured.
§ Qualitative performance targets may be expressed in general terms, such as being the
‘best’ or ‘better than competitors’, ‘meeting customer needs’ or ‘high quality’ etc.
§ In qualitative targets, assessing performance may be matter of judgement.
§ Where possible, performance targets should be quantified.
§ In many cases, it is possible to convert qualitative targets into quantitative targets.
(e.g. ‘being better than the competition’ can be converted into quantitative targets)
§ In some cases, , it may be difficult to quantify critical performance targets. E.g.:
(E.g. brand recognition, or reputation)
Critical success factors (CSFs) and key performance indicators (KPIs)
§ Critical success factors (CSFs) are factors that are critical to the success of an organisation
and the achievement of its overall objectives.
§ They are the key areas where targeted performance must be achieved.
§ At strategic level, there are usually small number of CSFs. For example:
- Profitability
- Market share
- Development of human resources
§ For each critical success factor, there should be a measure of performance.

§ These performance measures might be called Key Performance Indicators or KPIs.
§ A target should be set for each KPI and actual can be measured against the target.
§ CSFs of a product or service must be related to customer needs.
§ They are features of a product or service that will have main influence on buying decisions
CSFs and key performance indicators (KPIs) – Link with Strategy
§ CSFs should be identified during the process of assessing strategic position.

(Need to understand the main reasons why particular products or services are successful)
§ CSFs are important in the process of making strategic choices.
(Should select strategies that will enable it to achieve a competitive advantage)
§ CSFs are also important for strategy implementation.
(Performance targets should be set for each CSF)
§ Measured targets for CSFs are called key performance indicators (KPIs).
6-step approach to using CSFs (Johnson and Scholes)
Step 1
Identify the success factors that are critical for profitability. These might include ‘low selling
price’, and also aspects of service and quality such as ‘prompt delivery after receipt of orders’.
Step 2
Identify what is necessary (‘critical competencies’) in order to achieve superior performance in
the CSFs. This means identifying what the entity must do to achieve success. For example:
- If CSF is ‘low sales price’, a critical competence might be ‘strict control over costs’.
- If a CSF is ‘low level of sales returns’, a critical competence might be ‘zero defects’
Step 3
The entity should develop the level of critical competence so that it acquires the ability to gain a
competitive advantage in the CSF.
Step 4
Identify appropriate KPIs for each critical competence.
Step 5
Give emphasis to developing critical competencies for each aspect of performance, so that
competitors will find it difficult to achieve a matching level of competence.
Step 6
Monitor firm’s achievement of its target KPIs, and also monitor performance of competitors.
THE BALANCED SCORECARD APPROACH
§ No single measures can give a broad picture of the organisation’s health.

§ Instead of a single measure we should use a scorecard involving a number of measures.
§ Allows managers to look at the business from four important perspectives.

- Financial perspective - how does the firm look to shareholders?
- Customer perspective - how do customers see the firm?
- Internal perspective - how well does it manage its processes?
- Innovation & learning - can firm continue to improve and create value?
§ Provides a balanced picture of overall performance highlighting areas for improvements

§ Combines both qualitative and quantitative measures.
§ Includes measures of efficiency and effectiveness.
Financial perspective Customer perspective
- Market share - Process cost savings - Customer service

- Revenue growth - Increased return on - New products
- Profit ratio assets - New markets
- Return on investment - Profit growth - New customer
- Economic value added - Measures - Customer retention
- ROCE - Cash flow - Customer satisfaction
- Operating cost - Net profitability ratio - Customer loyalty
management - Sales revenue - Fast response
- Operating ratios and - Growth in sales revenue - Responsiveness
loss ratios - Share price - Efficiency
- Corporate goals - Return on shareholder - Reliability
- Survival funds
Innovation & Learning perspective Internal perspective
- Can we continue to improve and create value? - How well the business is performing.
- In which areas must the organisation improve? - Whether the products and services offered
- How can the company continue to improve and create meet customer expectations.
value in the future? - Activities in which the firm excels?
- What should it be doing to make this happen? - And in what must it excel in the future?
- New product development - The internal processes that must be
- Continuous improvement improved if it is to achieve its objectives.
- Technological leadership - Improve core competencies
- HR development - Improvements in technology
- Product diversification - Manufacturing excellence
- Quality performance
- Inventory management
- Quality
- Motivated workforce
THE PERFORMANCE PYRAMID
The concept of a performance pyramid is based on the idea that an organisation operates at
different levels. Each level has different concerns, but these should support each other in
achieving overall business objectives. Performance can therefore be seen as pyramid structure,
with large number of operational performance targets supporting higher-level targets.
The pyramid structure: linking performance targets throughout an organisation
§ The performance pyramid was developed by Lynch and Cross (1991)

§ They argued that traditional performance measurement systems were not as effective as
they should be, because they had a narrow financial focus
§ They argued that in a dynamic business environment, achieving strategic business objectives
depends on good performance with regard to:
- Customer satisfaction (a ‘marketing’ objective: external/market effectiveness)
- Flexibility (relates to both external effectiveness and internal efficiency)
- Productivity (resource utilisation: internal efficiency)
§ Within an organisation, there are different levels of management and each has its own focus.
§ There must be consistency between performance measurement at each management level,
so that performance measures at the operational level support the corporate strategy.
Interpreting the pyramid
§ Objectives and targets are set from top level (corporate vision) down to the operational level.
§ Performance is measured from an operational level upwards.
§ If performance targets are achieved at the operational level, targets should be achieved at
the operating systems level.
§ Achieving targets for operating systems should help to ensure the achievement of marketing
& financial strategy objectives, which in turn should enable to achieve corporate objectives.
§ A key level of performance measurement is at the operating systems level achieving targets
for customer satisfaction, flexibility and productivity.
§ To achieve performance targets at this level, operational targets must be achieved for
quality, delivery, cycle time and waste.
§ With exception of flexibility, which has both an internal and an external aspect, performance
measures within the pyramid (and below the corporate vision level) can be divided between:
- Market measures, or measures of external effectiveness, and
- Financial measures, or measures of internal efficiency.
§ The measures of performance are inter-related, both at the same level within the pyramid
and vertically, between different levels in the pyramid. For example:
- New product development in a business operating system. When a new product is
introduced to the market, success depends on meeting customer needs (customer
satisfaction), adapting customer attitudes and production systems in order to make the
changes (flexibility) and delivering the product to the customer at the lowest cost for the
required quality (productivity).
- Achieving improvements in productivity depends on reducing the cycle time (from
order to delivery) or reducing waste.
§ Performance measures should be a combination of financial and non-financial measures that
are of practical value to managers.
§ Reliable information about performance should be available to managers when needed.
PERFORMANCE MEASUREMENT IN SERVICE INDUSTRIES
The characteristics of services and service industries
There are many examples of service industries: hotels, entertainment, the holiday and travel
industries, professional services, banking, recruitment services, cleaning services, and so on.
Performance measurement for services may differ from performance measurement in

manufacturing in several ways:
§ Simultaneity. With a service, providing the service (‘production’) and receiving the service
(‘consumption’ by the customer) happen at the same time.
§ Perishability. It is impossible to store a service for future consumption: unlike
manufacturing and retailing, there is no stock or inventory of unused services.
§ Heterogeneity. A product can be made to a standard specification. With a service provided
by humans, there is variability in the standard of performance.
§ Intangibility. With a service, there are many intangible elements of service that customer is
given, and that individual customers might value.
Since services differ to some extent from products, should performance setting and performance
measurement be different in all service companies, compared with manufacturing companies?
BUILDING BLOCK MODEL
Controllable performance in service industries: Fitzgerald and Moon
§ Performance management systems have an important role, because they can:

- Show how well / badly organisation has performed in achieving its strategic objectives
- Identify where improvements are needed.
§ Performance management systems have been developed in many organisations that:
- Link performance measures to objectives
- Include external as well as internal measures of performance
- Include non-financial as well as financial performance measures
- Recognise that a compromise is often necessary between different performance targets
§ Performance measures that are used can vary widely between different service industries
§ A framework for analysing performance management systems in service industries has been
provided by Fitzgerald and Moon.
Fitzgerald and Moon: 3 Building Blocks
Fitzgerald and Moon (1996) suggested that a performance management system in a service
organization can be analysed as a combination of three building blocks:
1) Dimensions
§ Dimensions of performance are the aspects of performance that are measured.

§ Research concluded that there are 6 aspects to performance measurement
Dimension Possible measure of performance
Financial - Profitability, performance, growth in profits
Performance - Profit/sales margins.
- Growth in sales, retention rate for customers (or % of customers who
Competitiveness buy regularly: ‘repeat sales’), success rate in converting enquiries
into sales, possibly market share
- Number of complaints, whether rate of complaints is increasing or
Service Quality decreasing, customer satisfaction, as revealed by customer opinion
- Surveys, Number of errors discovered
- Mix of different types of work done by Employees, possibly the speed
Flexibility
in responding to customer requests
Resource - Efficiency/productivity measures utilization, Utilisation rates:
Utilisation percentage of available time utilised in‘productive’ activities
- Number of new services offered, percentage of sales income that
Innovation
comes from services introduced in the last one or two years
Other measures of performance might be appropriate for each dimension, depending on nature of
service industry.
Results of past actions are measured by Financial performance & Competitiveness. The ‘drivers’
of future performance are Quality, Flexibility, Resource utilisation & Innovation.
2) Standards
There are 3 aspects to setting standards of performance:

§ To what extent do individuals feel that they own the standards? Do they accept the
standards, or do they feel that the standards have been imposed by senior management?
- They are more likely to own standards when they have been involved in process of
setting the standards.
- If an individual accepts or ‘owns’ the standards, better performance will be achieved
when the standard is more demanding and difficult to achieve
- Standards of performance that are likely to motivate individuals the most are standards
that will not be achieved successfully all the time.
- Budget targets should therefore be challenging, but not impossible to achieve.
§ Do the individuals held responsible for achieving the standards of performance?
§ Are the standards fair (‘equitable’) for all managers in all business units of the entity?
- Should not be easier to achieve for some managers than others.
- When local conditions for the individual business units can vary, it is often necessary to
assess performance by relying on subjective judgement rather objective measurement
3) Rewards
The structure of the rewards system, and how individuals will be rewarded for the successful
achievement of performance targets. There are 3 aspects to consider in reward system:
§ System of performance targets and reward must be clear to everyone involved.
- Motivation to achieve the targets will be greater when the targets are clear
(and when the managers have participated in the target-setting process).
§ Employees may be motivated to work harder to achieve performance targets when they are
rewarded for successful achievements (for example with the payment of a bonus)
§ Individuals should only be held responsible for aspects of performance that they can control.
- This is a basic principle of responsibility accounting.
- However some costs are incurred for the benefit of several divisions or departments of
the organisation. The costs of these shared services have to be allocated between the
divisions or departments that use them.
- In this case allocation of shared costs between divisions must be fair.
PREDICTING CORPORATE FAILURE
§ Corporate failure occurs when a company becomes insolvent and goes out of business.
§ After a company has failed, it should be possible to analyse the reasons why failure happened
and what went wrong.
§ Corporate failure prediction is concerned with trying to identify companies that are at risk
of failure, before the failure actually happens.
§ There are two differing views about predicting corporate failure.
- Corporate failure is caused by financial problems
- Financial problems are the consequences of other problems (non-financial reasons).
Some indicators of failure
§ Declining sales and loss of market share.

§ Low and declining profits - or losses
§ Worsening cash position
§ Lack of innovation in competitive markets
§ Age of non-current assets. (Without reinvestment, a business will eventually decline)
§ Lack of adequate internal controls. (increasing the probability of fraud or error)
§ High rate of loss of experienced and important personnel, joining more successful rival.
Avoiding failure
Ross and Kami (1973), in an article on ‘why the mighty fall’, recommended 10 Commandments
1 You must have a strategy.
2 You must have controls.
3 The board of directors must participate.
4 You must avoid a system of ‘one man rule’.
5 There must be management in depth.
6 You must keep yourself informed of change and react to it.
7 The customer is king.
8 Do not mis use computers technology.
9 Do not manipulate your accounts.
10 Organise to meet the needs of your employees
Chapter 17: Financial & Non Financial Reporting Page 245
FINANCIAL & NON-FINANCIAL REPORTING (BASIC C ONCEPTS)
§ Objective of financial reporting is to 'provide information about reporting entity that is

useful to all stakeholders like investors, lenders and other creditors in making decisions’.
§ Financial statements provide historic financial information
§ They do not provide a clear picture of how the business/organisation is performing.
§ To help users, it may be helpful to provide information relating to other aspects, such as:
- How the business is being managed?
- Future prospects of business?
- The environmental policy of business?
- Working towards social responsibility?
§ Additional nonfinancial information can be reported in different ways, for example
- IFAC Sustainability framework 2.0 Sustainability Reporting
- Global Reporting Initiative (GRI) -> Triple Bottom Line Reporting
- International Integrated Reporting Council (IIRC) -> Integrated Reporting <IR>
§ GRI has produced guidelines that propose additional disclosures (economic, environmental
and social performance indicators) in addition to standard disclosures required in financials
§ Sustainability reporting and Integrated reporting are discussed in upcoming units.
INTERNATIONAL FEDERATION OF ACCOUNTANTS (IFAC)

SUSTAINABILITY FRAMEWORK 2.0
The overview
§ Global challenge is to ensure that organizations develop sustainably to reverse the previous
erosion of natural resources, and to improve their environmental, social, and financial
performance.
§ This requires radical changes in the way they do business and the way we live our lives.
§ From environmental and social perspective, sustainability issues are transforming the
competitive landscape, forcing organizations to change the way they think about products,
technologies, processes, and business models.
§ From financial perspective, the primacy of shareholders is giving way to an enlightened view
of maximizing wealth creation that incorporates wider stakeholder perspectives.
§ Achieving sustainable future is possible if organizations recognize the role that they should
play.
§ IFAC believes that professional accountants can influence the way entity integrate
sustainability into mission, goals, strategies, management, definitions of success and
stakeholder communication
Role of professional accountants
§ Challenging conventional assumptions of business, identifying risks, and seizing

opportunities;
§ Integrating sustainability issues into strategy, operations, and reporting;
§ Redefining success in the context of achieving sustainable value creation;
§ Establishing appropriate performance goals and targets;
§ Encouraging and rewarding the right behaviors; and
§ Ensuring that the necessary information, analysis, and insights are available for decision
making
The 3 dimensions of sustainability
Sustainability has three important dimensions:

1) Economic viability
2) Social responsibility
3) Environmental responsibility
§ All 3 are interconnected in various ways.

§ Being socially and environmentally responsible, leads to enhanced trust, and, therefore
profitability
§ Social and environmental responsibility also cannot stand in isolation from economic
viability.
Benefits of sustainability reporting
§ Can serve as a differentiator in competitive industries and foster investor confidence and
trust.
§ Analysts often consider sustainability disclosures in assessing management quality and
efficiency
§ This new data obtained for sustainability reporting can also provide firms with knowledge
to reduce their use of natural resources, increase efficiency and improve operational
performance.
Internal benefits:
§ Increased understanding of risks and opportunities

§ Emphasizing the link between financial and non-financial performance
§ Influencing long term management strategy and policy, and business plans
§ Streamlining processes, reducing costs and improving efficiency
§ Benchmarking sustainability performance with respect to laws, norms, performance
standards etc
§ Avoiding being involved in publicized environmental, social and governance failures
§ Comparing performance internally, and between organizations and sectors
External benefits:
§ Mitigating – or reversing – negative environmental, social and governance impacts

§ Improving reputation and brand loyalty
§ Enabling external stakeholders to understand our true value, and tangible and intangible
assets
§ Demonstrating how organization is influenced by expectations about sustainable
development
Establishing the Role of Professional Accountants and the Finance Function
Developing a sustainable organization is a multi-disciplinary responsibility, however finance

function needs to be clear on its role in providing and supporting sustainability leadership for
several reasons:
§ They are well positioned to help organizations interpret sustainability issues in a relevant
way.
§ Can influence behavior and outcomes through incorporating sustainability considerations
into strategies and plans, business cases and capital expenditure decisions etc.
§ Sustainability management involves managing opportunity and risk, measuring and
managing performance, and providing insight and analysis to support decision making.
§ Improving reporting of sustainability information requires the same care as financial
reporting.
§ Materiality, relevance, comparability, accuracy, and completeness are also essential here.
§ They understand how to implement robust systems to capture, maintain, and report
performance.
§ They also have the project management skills needed to put such systems in place
§ Professional accountants will need to understand how sustainability does or might affect
their role
§ Accountants in audit and advisory roles, particularly in SMEs, can consider how they could
embrace sustainability issues (using Framework as a starting point) to add value to client
Using the framework
§ The Framework is divided into 3 parts (one for each perspective)

§ Each part is divided into sections
§ Each section presents a key theme and context.
§ Each section ends with “Key Considerations for Professional Accountants”
1) Business Strategy Perspective
§ Sustainability should be integrated into vision and leadership, strategic planning, objectives,
goals, and targets, as well as into governance, accountability & risk management
§ Professional accountants working at senior management levels might be more focused on
this
Section Key Theme Key Considerations for Professional

Accountants
Business case Establishing an - Create awareness of how finance function can
development understanding of be involved in establishing business case
sustainability. - Ensure clarity on uses of the business case
Developing a strong - Focus business case on linking sustainability
business case to to strategy and impacts on society &
highlight what environment
sustainable - Identifying significant, material, and relevant
development means environmental and social issues
Vision and Integrating a more - It helps to identify competitive strategies
leadership sustainable approach - Values guide behaviors and decisions
into the way an - Requires leadership and ownership within the
organization does governing body and at all management levels
business - Managerial and operational structures
delivers the same and ensure accountability
Stakeholder Failure to identify and - Reinforce importance of such engagement

engagement engage with - Establish a systematic and carefully planned
stakeholders is likely approach to enter a dialogue with
to lead to poor stakeholders
performance by: - Ensure that stakeholder engagement
- Hurting customer initiatives are continuous, dynamic &
perceptions periodically reviewed
- Affecting employee - Build the knowledge and professional skills
motivation needed to deal with challenges of
- Damaging understanding and balancing stakeholder
relationships with expectations
suppliers
- Compromising
reputation
Goals and To develop qualitative - Establish goals, targets, & performance
target setting and quantitative goals measure
and targets to facilitate - Identify outcomes where possible
the delivery of high- - Engage employee involved in executing
level vision and strategy
strategy. - Link to rewards
- Establish benchmarks for comparison
Integration Integrating this into a - Integrate sustainability issues into risk
with risk rigorous and adaptive management and other management systems
management risk management - Gather information and assess cost benefit
approach that allows - Assess potential impact
for the interpretation - Interpreting risk and causation
of opportunities, risk - Dealing with opportunity and risk
factors, and causation.
Engagement Working closely with - Identify the opportunities associated with

of suppliers suppliers to improve sustainable procurement
sustainability - Supplier monitoring and support is ongoing
performance and via periodic meetings and training
procurement - Consider a systematic process for supplier
selection that is clear to all potential and
current suppliers
- Communicate how organization builds
relations and does business with partners and
suppliers
2) Operational Perspective
§ Focuses on how an organization can deliver on its strategy & specific sustainable objectives
§ It presents a full range of management and management accounting activities to support
higher-quality information leading to more-informed decision making
§ It covers how organizations can improve energy efficiency and reduce waste, calculate a
carbon footprint, and implement sustainability and environmental accounting, integrated
management control systems, and performance measurement and KPIs.
§ Accountants working in performance management-related roles (planning, budgeting,
performance measurement etc) may direct their attention to the operational perspective.

Accountants
Cutting costs Clearly understanding Energy efficiency
by the possibilities for - Identifying large costs that could be reduced
minimizing quickly improving - Monetizing procedures for costs, savings, and
waste environmental revenues related to any business activities
performance. - Using measurement and targets
Improving - Spreading awareness
environmental
performance need not Waste and water minimization
just involve complex - Minimizing materials waste
plans and activities - Tracking physical accounting information
requiring significant - Understanding impact of laws regarding waste
investment.
Carbon Foot Using carbon - How to manage carbon emissions data
Printing accounting to calculate - Distinguish between boundaries, in terms of
organizational carbon organizational and product footprints, and
footprint in order to between entities in the supply chain
- Manage GHG - Establish principles of a carbon audit report
emissions and make - Key issues to be disclosed in external reports
reductions over - Greenhouse gas (GHG) inventory audit
time,
- Report the footprint
accurately to
external
stakeholders, and
- Invest in lower
energy technologies
and more efficient
methods of
operating.
Improving Requires information - Identifying, defining, and classifying costs
Information flows to support the - Working across organizational functions
to support strategic and (especially integrating accounting, operations)
Decisions and operational - Accounting for social costs
Reporting management - Valuing social impacts
Information is not - Using environmental and social cost and other
often readily available non-financial information for project appraisal
(doesn’t exist or its
limited availability
only for compliance
purposes)
Integrated Developing integrated - MCSs should incorporate specific activities
Management management and that support sustainability goals & objectives
Control control systems to - MCSs should ideally help to integrate social
Systems ensure alignment with and environmental factors as well
(MCS) organizational - Setting out the role of internal auditing
objectives. - Integrating sustainability factors into financial
processes, such as budgeting and forecasting
Performance Using strategic - Integrate proper sustainability measures
measurement performance - Consider how sector or industry norms can
and KPIs measurement systems, influence KPI selection
performance - Develop and use eco-efficiency indicators to
measures, and KPIs to a) link monetary and physical information and
ensure delivery of b) better understand social impacts
strategic and - Consider how to usefully present metrics and
sustainability-related KPIs in internal and external reporting
objectives.
3) Reporting Perspective
§ It includes key considerations on how accountants can help improve the usefulness and
relevance of their organization’s external communications, including a reporting strategy.
§ Professional accountants can lead the way in developing a reporting and disclosure strategy
to help yield high-quality reports and accounts that provide a more complete picture.
§ It will involve reflecting sustainability impacts in financial statements, improving narrative
reporting, determining materiality, and establishing an approach to external assurance.
§ Professional accountants responsible for preparing business, financial, sustainability, or
integrated reports, or involved in providing audit and assurance, might find reporting
perspective of most use.

Accountants
Developing an A reporting strategy - Determine range of users & their different
Organizational yielding a complete needs
Reporting picture for a range of - Project planning and management
Strategy stakeholders is needed. - Break down functional data to facilitate
This involve using effective integrated reporting
sustainability reporting - Use reporting frameworks and guidelines
frameworks e.g. GRI’s and - Disclosing performance across value chain
ensuring that their use - Meeting stakeholder needs in local
contributes to meaningful markets
reporting.
Reflecting Incorporating - Establishing how to reflect environmental
Sustainability environmental and social costs and liabilities in financial statements
impacts in issues into financial prepared under IFRSs
Financial statements - Determining specific disclosure
Statements requirements under national securities
regulations and Generally Accepted
Accounting Principles(GAAP)
- Considering additional information and
disclosure to improve transparency
- Determining materiality in the context of
what information management believes is
important
Narrative To provide greater - Avoiding over-disclosure and clutter
Reporting for transparency on business - Ensuring a forward-looking orientation
Enhanced performance and - Viewing narrative reporting as a fair
Transparency usability for investors. reflection of the management information
to Investors used internally
Determining Understanding and - In defining report content, materiality
Materiality reconciling approaches to should also be considered
applying materiality to - Materiality thresholds and judgments
sustainability and - Linking materiality to strategy, risk
integrated reporting. management, and sector benchmarks
- Determining a process for resolving
different expectations regarding
materiality
- Where information is reported can help to
(a) reinforce materiality criteria, and
(b) keep length of disclosures manageable
External Establishing approach to - Quality of external assurance is directly
Review and external assurance that linked to stakeholder inclusiveness
Assurance of adds credibility to - Clarifying purpose and scope of assurance
Sustainability reporting and provides - The choice of service provider
Disclosures internal benefits - Establishing the type of engagement
- Enhancing the assurance statement
INTEGRATED REPORTING
Introduction to integrated reporting
§ Financial reports are historical in nature, providing little information on future potential.
§ Corporate sustainability reports help to fill this gap, but are not often linked to a company’s
strategy or financial performance, and provide insufficient information on value creation.
§ Businesses need a reporting environment that allows them to explain how their strategy
drives performance and leads to the creation of value over time.
§ Integrated reporting is a new approach to reporting which tries to do this.
Definition: Integrated report

An integrated report is a concise communication about how an organisation’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. (International Integrated Reporting Council)
International Integrated Reporting Council (IIRC)
§ IIRC is an influential global coalition of regulators, investors, companies, standard setters,

the accounting profession and NGOs who share the view that communication about value
creation should be the next step in the evolution of corporate reporting.
§ The aims of the IIRC are as follows:
- To improve the quality of information available to providers of financial capital;
- To promote a more cohesive and efficient approach to corporate reporting;
- To enhance accountability and stewardship; and
- To support integrated thinking, decision-making and actions that focus on the creation
of value over the short, medium and long term
The IIRC Framework
§ The IIRC has developed and published The International <IR> Framework to provide a
foundation for the development of integrated reports.
§ International framework (like IFRS) contains principles based requirements set out in bold
paragraphs. Other Paragraphs provide guidance to assist in applying the requirements.
Using the framework
§ Any integrated report referring Framework should apply all the bold requirements unless:
- There is an unavailability of reliable information or specific legal prohibitions; or
- Disclosure of material information would cause significant competitive harm.
§ In case of such unavailability or specific legal prohibitions, an integrated report should:
- Indicate the nature of the information that has been omitted;;
- Explain the reason why it has been omitted; and
- Identify the steps being taken to obtain information and expected time frame for so.
§ Integrated report should include statement from those charged with governance including:
- An acknowledgement of their responsibility to ensure integrity of integrated report;
- An acknowledgement that they have applied their collective mind to preparation and
presentation of the integrated report;
- Their opinion about whether integrated report is in accordance with this Framework;
§ An integrated report that does not include such a statement, should explain the:
- Role those charged with governance played in its preparation and presentation;
- Steps being taken to include such a statement in future reports; and
- Time frame for doing so (should be no later than organisation's 3rd integrated report
that references this Framework)
The capitals
Integrated reporting should provide transparency to what the capitals are for an organisation,
how an organisation uses them and its impact on them.
Capital Examples
Financial Cash available for use in the business.
Manufactured Buildings, infrastructure and equipment used in producing goods and
delivering services.
Intellectual Knowledge-based intangibles e.g. protocols, copyright and software etc
Human The skills, experience and motivation needed to innovate.
Social and Relationships and institutions within each stakeholder group and
relationship network that support wellbeing.
Natural Inputs to goods and services such as land, water, minerals and forests.
Guiding principles
Area An Integrated report should

Strategic focus - Provide insight into the organisation's strategy
and future - Explain how that relates to its ability to create value in the short,
orientation medium and long term and to its use of and effects on the capitals.
Connectivity of - Show a holistic picture of combination and dependencies between the
information factors that affect the organisation's ability to create value over time.
Stakeholder - Provide insight into the nature and quality of the relationships with its
relationships key stakeholders
Materiality - Disclose the information about matters that substantively affect the
organisation's ability to create value
Conciseness - Be concise.
Reliability and - Include all material matters, both positive and negative
completeness (in a balanced way and without material error)
Consistency & - Presented on a basis that is consistent over time and in a way that
comparability enables comparison with other organisations
Content elements
An integrated report should answer the following questions:

§ What does the organisation do
§ What are the circumstances under which it operates?
§ How does the organisation's governance structure support its ability to create value in the
short, medium and long term?
§ What is the organisation's business model?
§ What are the specific risks and opportunities that affect organisation's ability to create
value over short, medium and long-term, and how is the organisation dealing with them?
§ Where does the organisation want to go and how does it intend to get there?
§ To what extent has the organisation achieved its strategic objective for the period
§ What are its outcomes in terms of effects on the capitals?
§ What challenges and uncertainties is the organisation likely to encounter in pursuing its
strategy, and what are potential implications for its business model & future performance?
§ How does the organisation determine what matters to include in the integrated report and
how are such matters quantified or evaluated?
Benefits and challenges of integrated reporting
Benefits
§ Improved reputation through greater transparency attracting better investments.

§ Better decision-making due to improved resource allocation & enhanced risk management.
§ Greater trust and engagement with stakeholders (due to availability of information).
§ Improved governance and stewardship given a focus on longer timeframe and the impact
on common resources.
Challenges
§ Lack of clarity and consistency regarding directors’ liabilities for their reporting on the
future and evolving issues.
§ Balancing risk of disclosing valuable competitive information with benefits of embracing
integrated reporting.
§ May not be successful in changing the focus towards long-term rather than short-term.
§ Regulation is not yet standardised between jurisdictions meaning that the rate and level of
implementation remain variable.
Chapter 18: Corporate Social Responsibility Page 256
CORPORATE SOCIAL RESPONSIBILITY
What is Corporate Social Responsibility (CSR)
§ CSR refers to the responsibilities that a company has towards society.

§ A decision-making by a business that is linked to ethical values and respect for individuals,
society and the environment, as well as compliance with legal requirements.
§ It is based on the concept that a company is a citizen of society in which it operates.
§ As a corporate citizen, it owes same responsibilities to society that other citizens owe.
§ Boards of companies are also responsible to general public (in addition to shareholders)
§ Profit maximisation should go with social and environmental responsibilities as well.
§ Pressure on companies to show greater CSR awareness can also come from investors
§ There are some ‘ethical investors’ (including institutions) that choose to invest only in
companies that meet certain minimum standards of social and environmental behaviour.
§ Some companies also express concerns about CSR issues to improve their public relations
image with the public (as a way of marketing their products).
Principles of CSR
1) A company should operate in an ethical way, and with integrity.

- Should have a recognised code of ethics and should expect everyone to follow it
2) A company should treat its employees fairly and with respect.
- It can be assessed by company’s employment policies, such as providing good working
conditions and providing education and training to employees.
3) A company should demonstrate respect for basic human rights (e.g. child labour)
4) A company should be a responsible citizen in its community.
- Might be shown by investing in local communities (e.g. local schools or hospitals)
5) A company should do what it can to sustain the environment for future generations. E.g.:
- Reducing pollution of the air, land or rivers and seas
- Developing a sustainable business for future needs of people as well
- Cutting down use of non-renewable and polluting energy resources (e.g. oil and coal)
and increasing the use of renewable energy sources (e.g. water, wind)
- Re-cycling of waste materials.
The effect of CSR on company strategy
§ If companies fail to respond to growing public concern about social and environmental
issues, they will suffer a damage to their reputation
§ Customers also might be willing to pay more for environment-friendly and ‘healthy food’
Formulating a CSR policy
The following steps might be taken by a company to implement a CSR policy:

§ It should decide its code of ethical values, and possibly publish these as a Code of Ethics.
§ It should establish the company’s current position with regard to its CSR values, and decide
the position it would like to reach in the future.
§ The gap provides a basis for developing CSR strategies.
§ The company should develop realistic targets and strategies for its CSR policies.
§ These strategies should be implemented.
§ Key stakeholders should be identified, whose views the company wishes to influence.
§ CSR achievements should be communicated to the key stakeholders.
§ CSR achievements should be monitored, and actual achievements should be compared with
the targets and CSR achievements of similar companies (including competitors).
CSR reporting
§ In some countries, listed companies may have published annual reports on their CSR
(separately from annual report and accounts) on a voluntary basis.
§ In some countries some reporting on CSR issues is required in annual business review
§ CSR reporting is sometimes called sustainability reporting
(if its main focus is on environmental issues)
§ The purpose of CSR reports is to inform key stakeholders about the CSR policy objectives of
the company and how successful it has been in achieving them.
§ A weakness with many CSR reports was their lack of structure, and (in many cases) a lack
of facts and figures.
Global Reporting Initiative (GRI)
§ GRI is a US-based initiative that encourage companies world-wide to publish sustainability

reports using a common reporting framework.
§ GRI defines sustainability reporting as ‘the practice of measuring, disclosing and being
accountable to internal and external stakeholders for performance towards the goal of
sustainable development (defined in upcoming units)
§ GRI promotes the view that to be a sustainable business in the long-term, companies will
benefit by giving attention to environmental and social issues, as well as financial issues.
§ Sustainability reporting is based on measuring 3 areas of performance, sometimes called
the ‘triple bottom line’ (explained further in upcoming units)
§ Adverse effects and costs should be reported, as well as financial & non-financial benefits.
§ Quantifiable measurements of performance are preferred than the qualitative statements,
so that progress towards ‘sustainability’ can be measured.
(GRI ‘technical protocols’ explains methods for measuring social, environmental & financial
performance. There also deal with measurement problems in specific industry sectors)
S OCIAL AND ENVIRONMENTAL FOOTPRINTS
§ Every economic activity also has an environmental impact and a social effect.
§ That effect is known as environmental or social footprint.
§ The social footprint may be either beneficial or damaging.
§ The environmental footprint is almost inevitably damaging.
Environmental footprint (ecological footprint)
§ Environmental footprint means the impact that an entity has on environment, in terms of:
- Non-renewable resources that it uses to make its products or services
- The quantity of wastes and emissions that it creates in the process.
- Amount of raw materials that it uses to make its products or services, where the raw
materials are running down gradually (e.g. fish, wood timber etc.)
§ In past, it was accepted that companies had to increase environmental footprint for growth.
§ But now the world cannot go on increasing its environmental footprint
§ Many leading companies are looking for ways to reduce the size of their footprint.
§ Reducing footprint involves the development and implementation of policies for:
- More efficient resource management
- ‘Green’ procurement policies
- Waste minimisation and waste management
The measurement of environmental footprint
§ A widely-used method of footprint analysis for the economic activity of nation states is to
identify 4 methods of environmental consumption:
- Energy use
- Built environment (land covered and its connecting infrastructure e.g. roadways)
- Food products
- Forestry products.
§ For each category we can measure the land area used for these activities within country
§ This is then converted into an environmental footprint per head of the population.
Carbon neutrality
§ Effect on environment by individual companies may be measured in terms of emissions of

carbon-based pollutants (e.g. release of carbon dioxide into the atmosphere)
§ Environmentally-conscious companies measure their impact on carbon pollution, and have
a stated environmental policy of being ‘carbon neutral’.
§ Carbon neutrality exists when a company is able to counterbalance use of carbon products
with activities reducing amount of carbon dioxide in air (e.g. growing trees or plants)
§ Some companies have done so by switching to the use of alternate fuel and energy
(that does not involve carbon consumption)
Social footprint
§ A social footprint is the effect of economic activity on society and people.

§ Some companies are much more ‘people-friendly’ than others.
(not abusing child labour and/or paying subsistence-level wages)
§ We can measure the contribution of activities towards society in terms of:
- Total numbers employed or increase in the total number of employees
- The proportion of the total work force employed in different parts of the world
- The proportion of the total work force that is female or from different ethnic groups
- Health and safety at work (e.g. numbers of employees injured each year)
Social ecology
Social ecologists argue that

§ Environmental crisis has been caused by companies seeking growth and profits etc.
§ Companies are still trying to get bigger and more profitable, even though they use
environmental ideology to express their plans and ambitions.
§ Environmental crisis cannot be averted without a radical change in human society.
§ Structure of society and the future of the environment are closely linked.
§ Most environmentalists focus, wrongly, on improving technology to improve environment,
or even on restricting population size. These are focusing on symptoms of the problem, not
its root causes; so they will not find any lasting solution.
§ A truly ‘green’ entrepreneur cannot possibly survive in today’s capitalist culture, because
by they would be at a disadvantage to more brutal rivals who will produce at a lower cost.
Towards the measurement of social and environmental effects
§ To help companies setting targets for achievement there should be measurement.

§ Environmental and social effects should be quantified
§ Some accounting bodies are contributing towards establishing measurement and reporting
systems for social and environmental issues, to complement traditional financial reporting.
§ These initiatives may become linked to the developments in corporate governance and
reporting to shareholders.
§ In some countries listed companies are now required to provide information about social
and environmental risks in an annual business review for shareholders.
Chapter 19: Corporate & Professional Ethics Page 262
PROFESSIONS AND THE PUBLIC INTEREST
The nature of a profession
§ The word ‘professional’ is associated with a highly-qualified group of individuals

§ Examples of professions are doctors, surgeons, dentists, lawyers, actuaries & accountants.
§ Each professional group is organised and regulated by a professional body.
§ In Pakistan, prime objective of regulating profession of accountancy rests with the ICAP
§ ICAP has power to admit new members, award qualifications to individuals achieving a
required competence and expel the members from profession, for unprofessional conduct.
Professionals and their clients

Relationship between professionals and their clients is based on several perceptions.
§ There is a relationship of trust.
- Client can trust the professional to act in a proper way
- In return, professional expects the client to place its trust in him
§ There is an assurance that professional has attained a minimum level of competence. They
- Have passed formal examinations in order to obtain a qualification
- Have relevant work experience and
- Are continuing with professional development and training throughout the career.
§ The professional puts the client before himself.
Acting professionally
Professional behaviour is commonly associated with:

§ Acting with integrity, and being honest and straight-dealing contentious
§ Providing objective opinions and advice, free from bias, influence or conflicts of interest
§ Using specialist knowledge and skill at an appropriate level for the work
§ Confidentiality: respecting the confidentiality of information provided by clients
§ Avoiding any action that brings the reputation of the profession into disrepute
§ Compliance with all relevant laws and regulations.
Acting in the public interest

§ Members of the profession are expected to act in public interest (unlike other businesses)
§ If needs of client/employer seems against public interest; should consider public interest.
§ There is no proper definition but it is usual to associate public interest with matters like:
- Detecting and reporting any serious infringement or crime
- Protecting health and public safety
- Preventing public from being misled by statement/action of an individual/organisation
- Exposing the misuse of public funds and corruption in government
- Revealing the existence of any conflict of interests of those individuals who are in a
position of power or influence.
Influence of the accounting profession in business and government
Financial - Accountants are involved in preparation of financial statements, which are

reporting used by shareholders and other investors
- Financial reports are often used to prepare information about companies
for other interested parties, such as government and employees.
Auditing - Accountants also check financial statements of companies (and
government),
- Shareholders rely on opinion of auditors
Management - Management accountants provide information to management, to assist
accounting managers with decision-making.
- They sometimes also provides strategic as well as shorter-term
management information, and non-financial as well as financial
information.
Tax - Accountants can help corporate clients with tax avoidance schemes.
- Tax avoidance schemes are sometimes also criticized as they enable
wealthy persons to avoid paying tax, shifting the burden on poor members
of society.
Consultancy - Major strategic decisions by government and companies might be
influenced by the advice and recommendations from consultants.
Public sector - Accountants within public sector are responsible for recording transactions
accounting within government departments and government-owned organisations,
and for financial reporting and auditing within the government sector
Public expectations of the accountancy profession
§ Many non-accountants rely on accountants to ensure that financial reporting is reliable and
‘fair’, and that management is not ‘cheating’ by presenting misleading figures in accounts.
§ Auditors are also seen, by many members of the public as a safeguard against fraud.
§ The public continues to believe that the accountancy profession is an ethical profession.
§ A role of the accountancy bodies should be to reinforce this public perception of an ethical
profession. (by issuing and monitoring the compliance of codes of conduct and ethics etc)
Accountants and acting against the public interest
§ A function of professional accountancy bodies is to provide code of conduct and ethics

§ Accountants might not be moral by nature, but they can be taught to think and act ethically.
§ Problems will arise when accountants choose a different rules, or deliberately break rules.
§ The consequences depend on the nature of the rule-breaking.
§ In extreme case (e.g. Enron), breaking rules contribute significantly to collapse of company.
C ORPORATE CODES OF ETHICS
The nature and purpose of a corporate code of ethics
§ A corporate code of ethics is a code of ethical behaviour, issued by the board of directors
§ It should be distributed or made easily available to all employees.
§ Effectiveness of code depends on leadership of company (directors & senior managers)
§ There are 3 reasons why companies might develop a code of ethics.
- Reason 1: Company wants to ensure that all its employees comply with relevant laws
and regulations, and conduct themselves in a way that the public expects.
- Reason 2: Code of ethics can help to improve and develop relations between company
and its stakeholders, by improving the trust that stakeholders have in the company.
- Reason 3: Company might recognise long-term benefits of creating an ethical culture,
and encouraging employees to act and think in a way that is consistent with its values
Global companies might have difficulty in developing and implementing a code of ethics for the
entire organisation world-wide, because of differences in ethical values in different cultures.
The content of a corporate code of ethics

§ Corporate code of ethics is normally quite short, dealing with points in just a few sentences.
§ There is no standard format for code of ethics, but a typical code contain following
1) General statements about ethical conduct
§ Should specify that compliance with local laws is essential.
§ Employees should also comply with the policies and procedures of company.
§ Statement that employee who fails to comply the code will face disciplinary action.
§ Might also contain statements about Co’s values (e.g. integrity, Protecting environment)
2) Dealings with stakeholder groups

§ Employees
- Human rights, including right to join legally-authorised organisations e.g. trade union
- Equal opportunities for all employees, regardless of gender, race, religion or age etc.
- Refusal to tolerate harassment of employees by colleagues or managers
- Concern for the health and safety of employees
- Respect for the privacy of confidential information about each employee
§ Customers
- Fair dealing with customers
- Product safety and/or product quality
- Respect for the privacy of confidential information about each customer
§ Competitors
- Fair dealing with competitors
- The use of techniques for obtaining information about competitors (industrial spying)
§ Shareholders
- Maintain and develop trust and confidence
- Openness and transparency
Breaching a corporate code of ethics

§ If an employee has concerns about a transaction or a plan of action, and thinks that it might
be unethical, he or she should normally report the concern to the supervisor or manager.
§ A problem arises when:
- Employee’s supervisor or manager is involved in illegal or unethical activity, or
- Employee has spoken to supervisor or manager about problem, but they have taken no
action and has ignored the matter, or dismissed it as something that is not important.
§ In these situations, employee would have to report through a different reporting channel.
§ Some companies have established procedures allowing employees to report their concerns.
(These are called ‘whistleblowing’ procedures, or ‘blowing the whistle’)
Whistleblowing
Reporting suspicions of illegal or improper behaviour to person in authority
Employee should think about the following before deciding to actually blow the whistle:
§ Are all the facts correct (Could they have misinterpreted something)
§ Is there sufficient evidence to justify blowing the whistle?
§ Should check they have thought about situation objectively and with neutral emotion
§ Consider discussing events in confidence with an independent confidential third party e.g.
§ Think about the impact that blowing the whistle may have on the whistleblower’s career.
§ Double-check company policy and whistleblowing procedures in the staff handbook.
§ Establish whether there is scope to discuss events confidentially with HR department.
§ Is there an internal audit department who could be made aware of relevant events
§ Consider if there is a legal obligation to report (e.g obligation to report money-laundering)
Problems with whistleblowing

§ When an individual reports concerns about illegal or unethical conduct, the individual is
often victimised, by colleagues and management.
- If the allegations are rejected, individual might find that he does not receive same
salary increases as colleagues, and is overlooked for promotion.
- At work, colleagues and managers might treat the individual with hostility.
§ On other hand, some individuals make baseless allegations about colleagues or managers.
- The allegations might be made for reasons of hatred and dislike
- Malicious allegations about colleagues and managers should not be tolerated.
How to deal with these problems

A corporate code of ethics might include the following statements (for example):
§ Every employee should make known their concerns about illegal or unethical behaviour
§ Employees should speak about their concerns and try to resolve them first by discussion
with colleagues and managers.
§ If there are doubts, employee should ask first as it might be caused by a lack of information.
§ Whistleblowing is correct thing to do, if he does it in good faith and is not being malicious.
§ Whistleblowers will be protected, if they have made their report in good faith.
§ Disciplinary action will be taken against any employee who knowingly makes a false report
CODES OF ETHICS FOR ACCOUNTANTS
§ Every professional accountancy body has issued a code of conduct and code of ethics for its
members and student members.
§ Normally all the codes are similar, because they are based on the IESBA (IFAC) Code
The IESBA (IFAC) Code of Ethics for Professional Accountants
§ The IESBA Code is divided into three parts:

- General principles and application of the code
- Guidelines for accountants in public practice
(they have to deal in an ethical way with issues arising from the client relationship)
- Guidelines for accountants in business.
(have to deal with if they are employees of organisation facing ethical problem)
Principles-based ethics codes and rules-based ethics codes
There are two possible approaches that the professional accountancy bodies could take:
1) A Rules-based approach is to identify each possible ethical problem or ethical dilemma
that could arise in the work of an accountant, and specify what the accountant must do in
each situation.
Weaknesses of Rule Based Approach
§ Circumstances can be complex, and it is impossible to plan for every problem
§ It would be necessary to review and update the rule book regularly.
§ Ethical views differ between countries and cultures.
(A rule book cannot easily make allowances for national and cultural differences)
2) A Principles-based approach is to specify the principles that should be applied when

trying to resolve an ethical problem, offer some general guidelines, but leave it to the
judgement of the accountant to apply the principles sensibly in each particular situation.
ICAP’s Code of Ethics for Chartered Accountants
Code contains similar provisions to IESBA Code of Ethics for Professional Accountants e.g:
§ Both codes are principles-based codes;
§ Both codes are based on the same 5 fundamental ethical principles (see below);
§ Both codes advocate a system of identifying threats to the fundamental ethical principles
and responding to those threats with safeguards;
§ Both codes include guidance for:
- Professional Accountants in Public Practice; and
- Professional Accountants in Business
Fundamental principles
Integrity
§ To be straightforward and honest in all professional and business relationships.
§ Integrity also implies fair dealing and truthfulness.
§ A CA shall not knowingly be associated with reports, returns, communications or other
information where the CA believes that the information:
- Contains a materially false or misleading statement;
- Contains statements or information furnished recklessly; or
- Omits or obscures information required to be included where it would be misleading.
§ On becoming aware, a CA shall take steps to be disassociated from that information.
Objectivity
§ Not to compromise their professional or business judgment because of bias, conflict of
interest or the undue influence of others.
§ A CA shall not perform a professional activity or service if a circumstance or relationship
biases or unduly influences accountant's professional judgment for that service.
Professional Competence and Due Care

§ To maintain professional knowledge and skill at the level required to ensure that clients or
employers receive competent professional service; and
§ To act diligently in accordance with applicable technical and professional standards when
performing professional activities or providing professional services.
§ Diligence encompasses the responsibility to act in accordance with the requirements of an
assignment, carefully, thoroughly and on a timely basis.
Confidentiality
§ A CA shall Refrain from:
- Disclosing outside the firm or employing organization confidential information
acquired as a result of professional and business relationships without proper and
specific authority; and
- Using that confidential information for personal advantage or advantage of 3rd parties.
§ Should also maintain confidentiality in a social environment
§ Confidentiality requirement continue even after end of relationship with client/employer.
Circumstances where CAs can disclose confidential information

§ Disclosure is permitted by law and is authorized by the client or the employer;
§ Disclosure is required by law; and
§ There is a professional duty or right to disclose, when not prohibited by law
Professional Behavior
§ To comply with relevant laws and regulations
§ Avoid any action that the CA knows or should know may discredit the profession.
Chapter 20: Ethical resolution Page 271
E THICAL THREATS AND SAFEGUARDS
Ethical conflict (ethical dilemma)

An ethical conflict is when two ethical principles demand opposite results in the same situation. In
order to resolve the conflict a choice must be made that by definition will leave at least one of the
ethical principles compromised.
§ A key reason behind many ethical conflicts is a conflict of interest between taking decisions
in one’s own self-interest versus making decisions in the best interest of a client.
Rules-based and principles-based approaches to ethical conflicts
There are two possible approaches that the professional accountancy bodies could take:
§ A rules-based approach is to identify each possible ethical problem or ethical dilemma
that could arise in the work of an accountant, and specify what the accountant must do in
each situation.
§ A principles-based approach is to specify the principles that should be applied when
trying to resolve an ethical problem, offer some general guidelines, but leave it to the
judgement of the accountant to apply the principles sensibly in each particular situation.
- IESBA (IFAC) Code (and other including ICAP Code) takes a principles-based approach.
- It is impossible to identify every ethical dilemma that accountants might face, with
differing circumstances in each case.
- Threats needing different safeguards may exist depending on the assignment.
- It is in the public interest, therefore, to have a conceptual framework for accountants
Nature of ethical threats
Self interest threat The threat that a financial or other interest will inappropriately
influence the accountant’s judgment or behavior
Self review threat The threat that an accountant will not appropriately evaluate the
results of a previous judgment made or activity or service performed
by accountant, or by another individual within the accountant 's firm
or employing organization
Advocacy threat The threat that an accountant will promote a client's or employer's
position to the point that the accountant 's objectivity is compromised
Familiarity threat The threat that due to a long or close relationship with a client or
employer, an accountant will be too sympathetic to their interests or
too accepting of their work
Intimidation The threat that an accountant will be deterred from acting objectively
threat because of actual or perceived pressures, including attempts to
exercise undue influence.
Nature of ethical safeguards
Safeguards created by legislation, regulation or the accountancy profession
§ Requirements to have education, training and work experience, as a pre-condition for

membership of the professional body.
§ Continuing Professional Development (CPD) for qualified members
§ Corporate governance regulations (especially for auditing, reporting and internal control)
§ Professional standards (e.g. financial reporting standards and auditing standards)
§ Monitoring procedures and disciplinary procedures.
§ External review by a legally-empowered third party.
Safeguards in the work environment
Safeguards that apply across the entire firm or company:

§ A code of ethics for company/firm and suitable ethical leadership from senior management
§ A sound system of internal control, with strong internal controls
§ Application of appropriate policies and procedures for monitoring quality of work done
§ Policies that limit the reliance of the firm on the fee income from a single client
§ Procedures for identifying personal interests and family relationships between employees
and partners of the firm and key staff in client organisations
§ Whistle blowing procedures for reporting illegal or unethical behaviour.
Safeguards that might be applied to particular jobs or work procedures:

§ Keeping individuals away from work where there might be a threat
§ For audit firms, rotating the audit partner after a specified number of years
(e.g. as per Rule Book of Pakistan Stock Exchange, partner must be rotated after 5 years)
§ Application of strong internal controls
§ Using another accountant to review the work that has been done by a colleague
§ Discussing ethical issues with people in the company who are responsible for governance
(e.g. audit committee, senior non-executive director, or board of directors)
Ethical threats to accountants in business
Accountants might therefore be asked to:

§ Break a law or regulation: illegal activity is always unethical
§ Ignore technical standards, such as financial reporting standards or auditing standards
§ Lie to the external auditors or regulators
§ Issue a report that is misleading and misrepresents the facts.
Finding a solution can be very difficult. The extreme option (or ‘nuclear option’) is resignation,
but this is something that should be avoided where possible. A better solution can often be found.
A MODEL FOR RESOLVING ETHICAL CONFLICTS
A model based on threats and safeguards (ICAP Code of Ethics)
§ Stage 1. Recognise and define the ethical issues.

- They must be able to recognise the ethical issues that exist, or might possibly exist
- An accountant might suspect that an ethical issue exists, but cannot be sure because he
does not have enough facts to inform him about the situation.
§ Stage 2. Identify the threats to compliance.

- What is the nature of the threat.
- How this threaten his ability to comply with requirements for integrity, objectivity,
professional competence & due care, confidentiality and professional behaviour?
§ Stage 3. Assess the significance of the threats.

§ Stage 4. If threats are ‘not insignificant’, consider additional safeguards that could be used.
- Safeguards, or additional safeguards, can be introduced to eliminate or at least reduce
the threats to an insignificant level.
§ Stage 5. Re-assess the threats to compliance after additional safeguards.

- If threats cannot be eliminated or reduced to an insignificant level, more extreme
measures are necessary.
- For accountants in practice, an extreme measure is to decline to work for a client.
- For accountants working in industry and commerce, an extreme measure would be to
become a ‘whistleblower‘, and to report concerns to an appropriate authority.
(In an extreme case, appropriate action might be to resign from job)
- Members of ICAP are also able to obtain confidential advice from ICAP.
§ Stage 6. Make the decision about what to do.
The mirror test
§ When an ethical issue is involved, an accountant should carry out a mirror test.
§ If you choose a course of action, are you able to look yourself in the mirror and see a person
who has acted in a moral and ethical way.
§ Can you justify the decision you have taken from an ethical perspective?
§ Three questions that you can ask when carrying out the mirror test are as follows.
- Is it legal?
(If it is not legal, you should not be doing it)
- What will other people think?
(Think about the opinion of people whose views matter to you, such as close family
members or the media. Are you satisfied with the effect of your action on these people)
- Even if the action is legal, it is ethically correct?
BRIBERY AND CORRUPTION
§ The term corruption covers a large range of illicit or illegal activities.

§ The World Bank defines it as the abuse of public office for private gain.
§ Transparency International has defined corruption as
“Corruption involves behaviour on the part of officials in public and private sectors, in
which they improperly and unlawfully enrich themselves and/or those close to them, or
induce others to do so, by misusing the position in which they are placed”
§ A bribe is a gift bestowed to influence the recipient's conduct (it’s a form of corruption)
Societal impact of bribery
§ Political costs
- Corruption constitutes a major obstacle to democracy and the rule of law.
- Offices and institutions lose their legitimacy when they are misused for advantage.
§ Economic costs
- Scarce public resources might be diverted to high-profile, status projects at expense of
fundamental infrastructure projects (e.g. schools, hospitals and roads, etc)
- Inappropriate spending decisions lead to waste of tax revenues.
- Corruption can hinder development of fair market structures, distorting competition.
§ Social costs
- Corruption undermines people's trust in political system and leads to frustration
- Results in a weak civil society where demanding and paying bribes becomes the norm.
§ Environmental costs
- A blind eye being turned to breach of environmental legislation and health & safety law
- Lack of proper government oversight can lead to careless exploitation of natural
resources and pollution.
Measures to reduce and combat bribery
Bribery will fail to distort the fair running of business and society when there is:
§ A strong sense of fairness in participants in transactions;
§ Fair reward for job performance;
§ Transparency of decision making;
§ Strong leadership;
§ Clear policies and procedures;
§ Strong candidate selection procedures with good education and training processes;
§ Strong and enforceable laws.
Many countries around the world have introduced specific anti-bribery legislation. E.g:
§ UK: the UK Bribery Act 2011
§ USA: the Foreign Corrupt Practices Act
§ Canada: Corruption of Foreign Public Officials Act
OECD AntiBribery convention (Organization for Economic Cooperation & Development)
§ Recent flow of new legislation is about OECD Anti-Bribery Convention, first signed in 1997.
§ To date 34 OECD countries plus seven non-OECD countries have enforced the convention.
§ Pakistan is yet to ratify the convention into legislation.
§ Prime purpose is to combat corruption in developing countries by cutting off the flow of
money from companies operating out of developing countries. Signatories are required to:
- Make it a criminal offence under their local laws to bribe officials of other states.
- Take measures to establish jurisdiction to prosecute its nationals for bribery offences
committed abroad.
Pakistani law relating to bribery and corruption
§ The prevention of Corruption Act 1947.

(The act relates to public servants and in particular the bureaucratic administration)
§ The National Accountability Bureau (NAB) Ordinance 1999.
- NAB was established in 1999 as an autonomous federal institution aimed at
combatting cases of corruption, financial crime and economic terrorism in Pakistan.
§ Anti-Money Laundering Act 2010.

SPM CFAP 3 by Sir Atif Abidi-1

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SPM CFAP 3 by Sir Atif Abidi-1

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Chapter 1: Foundation of Strategy Page 1

DEFINITION OF STRATEGY AND LEVELS OF STRATEGY

From above definitions it can be summarized that strategy is about:

Level of strategy Scope

The elements of corporate strategy are as follows:

§ Deciding the purpose of the entity.

Business strategy (also called competitive strategy)

§ A large group of companies might consist of many subsidiaries.

Functional strategy (also known as operational strategy)

§ Relates to particular functions within an organisation, such as manufacturing, distribution,

Levels of planning (approximately same as levels of strategy)

ELEMENTS OF STRATEGIC MANAGEMENT AND BUSINESS ANALYSIS

Elements of strategic management by Johnson, Scholes and Whittington

Strategic position (Strategic Analysis)

Strategy into action (Strategic Implementation)

There are 3 aspects to strategy implementation:

The scope of business analysis

O RGANISATIONAL PURPOSE AND STRATEGY

A hierarchy of objectives and plans

Overall Purpose • Mission

Action plans and targets • Operational plans & aims

Mission and mission statement

§ Mission is the purpose of an organsation and reason for its existence.

Drucker suggested that it should answer the following fundamental questions:

Relevance of the mission statement (Purposes)

Elements of mission statement:

Components of an effective business vision?

Goals and objectives

S TAKEHOLDERS AND STAKEHOLDER EXPECTATIONS (REVISION OF CAF)

Stakeholder Stake (Interest in Organisation)

Shareholders / Owners - Ownership

Lenders - Repayment of their debt + interest on time

Examples of common interests:

Examples of conflicting interests

Source of power: Examples

- Power comes from an External Source

- Power comes from an Internal Source

Stakeholder Mapping: Mendelow’s power / interest matrix

INTENDED AND EMERGENT STRATEGIES

§ A strategy that is planned in advance through a formal planning process. (Pro-active)

Future-basing involves 3 phases:

§ A compelling vision needs to be established whilst ‘based in the future’.

Achievement Milestone events or actions Date

MODELS FOR ENVIRONMENTAL ANALYSIS

The purpose of environmental analysis

The purpose of the analysis is to

Two models for environmental analysis

§ PESTEL model is used to identify significant factors in the macro-environment of an entity.

Limitations of PESTEL analysis

National competitive advantage

The four elements in Porter’s Diamond

Favourable factor conditions

§ Basic Factors (exists naturally in a country)

Related and supporting industries

Demand conditions in the home market

Firm strategy, structure and rivalry

§ Strategy: => What type of Strategy best suits in that industry.

The role of government in creating competitive advantage

Criticisms of Porter’s Diamond

§ It is more relevant to companies in advanced economies than to companies in countries

COMPETITION AND MARKETS

Customers and markets

Industries and sectors

Generic types of industry (by Porter)