(BPP Learning Media) CIMA - E3 Strategic Management

CIMA Passcards New
Strategic Paper E3 syllabus

Strategic Management 2015
Passcards for exams
in 2015
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Strategic Paper E3
Strategic Management
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Preface Contents
Welcome to BPP Learning Media’s CIMA Passcards for Strategic Paper E3 Strategic Management.
They focus on your exam and save you time.
They incorporate diagrams to kick start your memory.
They follow the overall structure of the BPP Learning Media Study Texts, but BPP Learning Media’s CIMA
Passcards are not just a condensed book. Each card has been separately designed for clear presentation.
Topics are self-contained and can be grasped visually.
CIMA Passcards are still just the right size for pockets, briefcases and bags.
Run through the Passcards as often as you can during your final revision period. The day before the exam, try
to go through the Passcards again! You will then be well on your way to passing your exams.
Good luck!
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Preface Contents
Page Page
1 Fundamentals of strategic management 1 7 Business applications of information and
information technology 87
2 Corporate objectives and stakeholders 19
8 Customers and marketing 99
3 The environment and uncertainty 35
9 Understanding organisational charge 117
4 Resources and capabilities 47
10 Leading and managing charge 135
5 Identifying and evaluating strategic
options 61 11 Strategic performance management 145
6 Information systems and strategy 79 12 Performance measurement 157
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1: Fundamentals of strategic management

Fundamentals of
strategic management
Strategy formulation
Definition of strategy
Approaches to strategy Roles and responsibilities of directors
Resource based Positioning based
Rational Model Emergent strategy Freewheeling

opportunism;
Incrementalism
Role of management accountants

in strategy development
Strategic The rational Other approaches Management accountants Roles and responsibilities
management model to strategy and business strategy of directors
Strategic management involves: Strategy

Strategic analysis is the direction and scope of an organisation over
the long term which achieves advantage in a
Strategic choice changing environment through its configuration of
Implementation of chosen strategies resources and competences with the aim of
fulfilling stakeholder expectations.
Review and control
(Johnson, Scholes & Whittington)

Planning Managing business strategy

is the establishment of Strategy: course of action to achieve a specific
objectives, and the objective
formulation, evaluation and is the Strategic plan: statement of long term goals, and those
selection of the policies, basis for: policies which will ensure their
strategies, tactics and action
achievement
required to achieve those
objectives. Strategic
management: management of the elements involved in
planning and controlling a business
strategy
Tactics: the short term plan for achieving an
entity’s objectives
Page 3 1: Fundamentals of strategic management

Approaches to strategic planning

Accounting led Position based Resource based
Identify key stakeholders Analyse environment Focus on organisation’s

and their objectives (eg using PEST, five forces) core competences and
capabilities
Develop plans to achieve Then set objectives and
those objectives strategy to ensure a good Base strategy on what the
‘fit’ with organisation’s organisation is good at
environment
But... But... But...

Flawed because doesn’t take Can organisations predict the Are the organisation’s
account of market conditions and future with any certainty given competences a source of
the external environment pace of change and dynamism in competitive advantage? Is there
the environment? still a market demand for them?
Advantages and Disadvantages of the rational model
Advantages Disadvantages
Identifies risks Not proven to bring advantage

Forces managers to think May become over-formal and reduce initiative
Forces decision-making Assumes internal politics do not exist
Formal targets enable control Assumes managers know everything
Enforces organisational coherence and Separates planning from doing
co-ordination Cannot cope with shocks and discontinuities

{
The rational model of strategic planning
Mission Vision and strategic
Purpose Products intent
Policies Values
Where the organisation wants to be
Competences Culture
Goals
Strategic analysis
Stakeholder expectations
Objectives
Quantified measures Position audit
Environmental analysis Strengths and weaknesses
Opportunities and threats
PEST/PESTEL
Corporate appraisal Resources, competences
Value chain
Porter's 5 Forces SWOT analysis Systems structure
Scenarios Gap analysis Portfolio analysis
Strategic choice
{
Generating options: Value chain
Scenarios
Strategic choice
Generic strategies Feedback to

Product-market vector (Ansoff) strategic
Acquisition/growth analysis
Evaluating options: Suitability – mission, strategic intent stage
Acceptability – stakeholders
{
Feasibility – resources
Strategic implementation
Strategy implementation REVIEW and

Resource planning CONTROL
Operations plans
Structure
Culture
Change ACTUAL
Functional strategies PERFORMANCE
There have been many proposals for alternatives to the rational model, most emphasising creativity and pragmatism.
Alternatives Bounded rationality They:
Do not consider all options,
Strategic managers’ decision but choose from a restricted
Freewheeling opportunism
making is constrained by the time range
Bounded rationality
and amount of information Make political compromises by
Incrementalism
available to them and by their own partisan mutual adjustment
Emergent strategies
skills, habits and awareness. Satisfice rather than optimise
Freewheeling opportunism Incrementalism This approach avoids major errors by
– ‘seize opportunities as they arise’ the exercise of caution and produces
Flexible and creative? acceptable solutions because it uses
Development by small
Undisciplined and unco- consultation, compromise and
scale extensions of past
ordinated? accommodation.
practices.
Reacting rather than acting? Logical incrementalism combines this
approach with an in-depth review to
establish the broad outlines of strategy.
Final outcome is unclear at the outset

Elements of the strategy develop during its life as the strategy proceeds
Develop out of patterns of behaviour, rather than being imposed in advance by senior management

Plans (or intended Deliberate
Emergent strategies) strategies
Realised
strategies Patterns of
Unrealised
strategies Emergent
strategies
behaviour strategies
Manage stability Mintzberg says strategy must be crafted
Know the Detect A purely deliberate strategy hampers learning

business CRAFTING discontinuity rapidly from experience
STRATEGY
A purely emergent strategy hampers control
Manage emerging Reconcile change
patterns and continuity

Chaos Theory – Stacey

Organisations as systems exhibit bounded instability, operating at the chaotic interface between predictability
and randomness.
They function through self-organising complex responsive processes based on informal interaction rather
than the traditional cybernetic approach.
Cybernetic approach depends on well established objectives and a reasonably predictable environment.
Complex informal approach can respond to new situations by generating rapid, far-reaching change using
spontaneously generated mechanisms such as ad hoc committees and short cuts through inappropriate
procedures. Managers are not external controllers, they are embedded in the system’s ‘self-organising
conversational life’, which is fundamental to the way the organisation works.
Chaos theory also highlights that organisations are likely to oscillate between periods of relative stability and
states of flux (periods of turbulence which will lead to a new order emerging.)
Resource-based strategy
Positioning strategies (eg the rational model) seek to develop and maintain competitive advantage by responding to the
threats and opportunities in the competitive environment.
The resource-based view is that sustainable competitive advantage can only come from the possession of unique
resources (or competences) within an organisation because:
The business environment is too complex and dynamic for effective analysis and response.
Competitors will rapidly imitate any position-based strategy.
Resources
Protected intellectual Scarce raw materials,
property – designs, unique production or
processes, copyrights distribution facilities
Competences
Such as: experience – talent – management – techniques
Johnson, Scholes & Whittington say: Hamel & Prahalad say core competences have three qualities:
Threshold level of competence required in Disproportionate contribution
all activities. to value customer receives actually unique
Core competences out perform ‘Competitively unique’ superior to competitors
competitors and are difficult to imitate. Extendable to new products can be dramatically improved

Focus of management accountant’s role is increasingly on business support and decision support, and not
just on financial control.
Management accountants are an integral part of multi-skilled management teams addressing:
Aspects of management accountants' role
Formulation of policy and setting of corporate objectivs

Formulation of strategic plans based on corporate objectives
Formulation of short-term operational plans
Acquisition and use of finance
Design of systems, recording of information, and management of information systems
Generation, interpretation and communication of financial and non-financial information for management
and other stakeholders
Monitoring performance against plans and benchmarks, and initiating responsive action for performance
improvement
Establishing performance measures (financial and non-financial) for monitoring and control
Strategic management accounting (SMA)

‘A form of management accounting in which emphasis is placed on
information which relates to factors external to the firm as well as
non-financial information and internally generated information.’
Information requirements for SMA Key issues for SMA
Competitors’ costs Effect of acquisitions/ External orientation

Product/customer mergers Future orientation
profitability Capacity expansion Goal congruence
Product pricing Entry or exit decisions
The value of market share Shareholder wealth

The successful SMA system must bridge a gap.
Financial GAP Future

reporting uncertainty
BRIDGE
via:
Success factors
Aid strategic decisions – close the communication gap between accountants and managers
Identify the type of decision – and offer performance measures
Distinguish between economic and managerial performance
Provide relevant information – distinguish committed, discretionary and engineered costs
Use standard costs strategically
Allow for changes over time
Three main purposes for information from management accounting systems

1 Strategic planning
Information about the environment (PESTEL, market size/market growth)
Internal data (eg profitability, cost of funds, investment requirements)
2 Management control Information

All the processes used by managers to ensure that The information required embraces the entire
organisational goals are achieved and procedures organisation and provides a comparison between
adhered to, and that the organisation responds actual results and the plan.
appropriately to changes in the environment.
3 Operational control
Information needed to conduct day-to-day implementation of plans - largely details of individual
transactions

Good corporate governance Role of the board

Leadership Acquisitions/disposals
Risk management and reduction Policy/strategic decisions Capital projects
Internal control Performance assessed Treasury management
Monitoring risks and Effective
Accountability to shareholders and other control systems
stakeholders, and dialogue with them communication of
Monitoring human capital strategic plans
Conducting a business in an ethical/effective
way
Good supervision to enhance performance
But need to consider what aspects of strategy
Applying the spirit of the law development are directors' responsibilities compared to
managers' responsibilities.
Fiduciary responsibility Due diligence

Directors must try to act in a way which is most The care a reasonable person should take before
likely to promote the success of the company for entering into an agreement or a transaction with
the benefit of shareholders another party
Highlights the importance of directors having

adequate, relevant and reliable information on
which to base strategic decisions (eg acquisitions).
Considerations:
Long-term consequences of decisions (as well Directors’ accountability to a range of stakeholders
as short-term ones) highlights the importance of stakeholder
management, and also highlights the importance
Impact of decisions on a company’s reputation
of ethics and CSR in business strategy
Interests of stakeholders other than
shareholders (eg employees; local community)

Notes
2: Corporate objectives and stakeholders

Corporate objectives and
stakeholders
Mission Stakeholders
Objectives Critical success factors Corporate political activity
Key performance indicators
Business Ethics
Corporate Social Responsibility
Sustainability
Mission Goals and Critical success Stakeholder Ethics and social Not for profit and
objectives factors management responsibility the public sector
Mission is the logical starting A formal mission statement may: BUT a mission statement may also:
point of the process of strategy.
Impress customers Be ignored in practice
Mission

Motivate staff
Guide manager’s actions

Be treated cynically as mere PR
Merely rationalise what is done anyway
The entity's fundamental Guide strategic thinking Be the same as everyone else’s
objectives, expressed in general
terms. Resource planning The organisation must know
This involves: what it wants to achieve.
Includes, typically:
Purpose Establishing currently
Basic strategy eg products obtainable resources
Policies and standards of Estimating the resources
behaviour needed
Values and culture Assigning management
– business principles responsibility
– internal relationships Identifying factors affecting
– behaviour resource availability
Mission statements are open-ended, so in order to implement its strategy and manage performance, an
organisation needs to develop some more specific objectives and targets.
Goals and Objectives
Goals and objectives flow from mission. The hierarchy of objectives
They should be: They should be
Specific consistent across the
Measurable organisation so that all Corporate Unit objectives
Achievable (or Agreed) objectives for the determine for individual
pull together
Relevant (or Realistic) firm as a whole departments
Time bound
They should balance:
Long term considerations should take
Short term imperatives Primary Secondary
precedence
Conflicting objectives objectives over objectives
Page 21 2: Corporate objectives and stakeholders

It is not always easy to identify the primary objective.
Short termism
Commercial and financial goals
is a tendency to place pressure and emphasis
on the achievement of results in the near future,
Profitability Dividends rather than in the medium or longer term.
ROCE/ROI Market value of
EPS shares
TRADE OFFS
Most companies pursue several objectives Examples

simultaneously. They might seek innovation, Long term Short term
increased market share, productivity, survival,
quality and customer satisfaction. R&D expenditure Cut it back to increase
needed for company short-term profits
development
(They also need to consider social
responsibility objectives.) Advertising to maintain Sacrifice this spend to
market share preserve liquidity
In a hierarchy of objectives, the highest level of objective for a commercial organisation will always be based
on profitability over the long term, though growth may be regarded as of equal importance.
Secondary objectives include functional and Example
departmental objectives as well as corporate
objectives that support the main objective. Corporate objective: Profit improvement
Supporting objectives: Cut administrative costs
Improve quality
Despatch dept objective: reduce misdeliveries to 3% of total
Conflict between the demands of secondary objectives can be dealt with by:
Rational evaluation
Bargaining between managers
Satisficing ie satisfactory rather than ideal performance
Sequential attention to goals in turn
Priority setting by senior managers
Exercise of power
Critical success factors (CSFs) Linkage between mission, CSFs and KPIs
Mission
are elements of an organisation's activity which are
central to its future success. express fundamental objectives;
what an organisation wants to achieve
Once an organisation has identified its CSFs it then
needs to develop performance standards (key
performance indicators) to measure whether or not it
CSFs
is achieving those CSFs.
building blocks which enable an organisation to
implement its mission and achieve success
KPIs
performance measures which indicate whether
or not the CSFs are being achieved
Stakeholders
Those persons and organisations that have a legitimate interest in the strategy of the organisation.
Stakeholders Possible interests

Managers; employees Careers; salaries, promotion; benefits; job security; job satisfaction
Shareholders Shareholder wealth; capital growth; profitability, dividends
Bankers Repayment of loans; security of loans
Suppliers Profitable sales; payment for goods and services; long term relationship
Customers Value for money; product/services as ordered; quality of service; competitive price
Government Jobs, taxes, impact on local economy/community, national competitiveness
Pressure groups Pollution, human rights, environmental (green) issues
Unions Members' rights

Mendelow's matrix
Level of interest
Low High
Low
Helps an organisation establish A B

its priorities and manage
relationships with stakeholders, Power
by looking at the different levels
C D
of power and interest
stakeholder groups have in High
relation to the organisation A Low power; low interest minimal effort
Low power; high interest little ability to influence
B
strategy. Keep informed only.
High power; low interest keep satisfied; currently
C
passive, but could move to segment D if they become concerned.
High power; high interest key players; strategy must
D be acceptable to them. Key players must have confidence
in the management team; regular communication can help with this.
Exam focus point

Exam questions could require you to:
Identify the stakeholders in a scenario
Identify what their interests are (economic or social focus; local or national focus)
Assess their level of power and influence on a strategy/decision
Recommend how an organisation should manage stakeholders’ expectations or communicate with them
Explain the importance of developing and maintaining relationships with stakeholders
Explain how their varying interests may be reconciled
Remember: If you get a question on stakeholders, always make sure you relate your answer specifically to the
context given in the scenario. Unless you are specifically asked to do so, do not spend time simply describing
(or drawing) Mendelow’s matrix. Rather, apply it to the scenario given.

Organisations have many stakeholders, with lots of different interests. This can lead to stakeholder conflict.
A firm can make strategic gains by managing stakeholder relationships.
Can create positive, productive, long-lasting relationships
BUT, if stakeholders are mis-managed, can damage relationship and cause threats, eg withdrawal of
resources, lost customers, reputational damage
Such opportunities and threats should be analysed in terms of

Impact Time scale
Direction Ability to resolve
The way organisations respond to external pressures is a key part of strategic management.
Corporate political activity, such as lobbying, election funding, petitions and coalition building is potentially an
important aspect of stakeholder management, with government being the stakeholder in question. Corporate
political activity represents attempts to influence government decisions in a way that is favourable to the
economic survival and success of an organisation or an industry.
Corporate social responsibility (CSR) is an organisation's obligation to maximise positive stakeholders benefits
while minimising the negative effects of its actions.
Should businesses actively practise social responsibility?
Examples
The business as fixer of Big business has the resources
Charitable donations
social problems Pollution control to fight inequalities
Community activities
BUT
?
Companies already discharge their responsibilities
by contributing towards tax revenues
The social audit recognises
the expectations on a firm to Pressure groups Environmental screening Long term
promote social responsibility. In Employees Sustainability of resources v
addition, there are ‘green’ Legislation Ecological concerns Short term
pressures.
Environmental concerns
The impact of green issues Sustainability
Sustainable activity uses resources no faster than they can
Demand for environmentally friendly products be replaced, and waste emissions are held down to a level
Public concern and action about pollution, that the environment can absorb.
habitat destruction and global warming Elkington suggests sustainability should be measured by a
Government action through regulation and ‘triple bottom line’
taxation Economic prosperity
Impact of bad publicity (or chance to exploit Environmental quality
environmental friendliness as a marketing tool) Social justice
But Environmental management accounting enhances the
Limit to consumer willingness to change internal control and reporting system to promote both
lifestyles (or to pay more for sustainable economic and environmental efficiency.
products) Life cycle assessments of environmental impact
Cynicism about ‘green’ claims Costs of undesirable outputs such as waste and noise
Public ignorance of actual economic and Risk assessments include environmental impact
environmental impacts of ‘green’ policies Waste minimisation in production processes
Sustainability and strategy: Strategic decision-makers need to incorporate longer-term issues with short-term
ones. If they focus too much on short-term issues this could undermine an
organisation’s longer-term reputation and prospects.
Possible issues relating to sustainability and triple bottom line

Environmental Social justice Economic prosperity
quality
Being seen as an attractive
employer
Resource usage and use of Business relations (eg with banks
Working conditions
renewable resources and shareholders
Labour practices (eg health and
Contamination Relationships with customers and
safety; training; equal
Levels of waste suppliers
opportunities)
CO2 emissions
Human rights Market position
Use of locally sourced inputs to Contribution to local community
reduce carbon footprint Brand name (eg potential
(eg through sponsorships) damage to sales from negative
Relationship with authorities (eg Product responsibility (eg health
to secure planning permission) publicity)
and safety for consumers; ethical
consumerism)

Ethics
Business ethics and CSR are not the same thing – behaving ethically is only one part of the CSR.
But remember the five fundamental principles in CIMA's Ethical code:
1 Integrity
If one or more of these principles is
2 Objectivity threatened in an organisation, this could
create an ethical dilemma for the
3 Professional competence and due care management accountant in that organisation.
A professional accountant may be required to
4 Confidentiality
resolve a conflict in relation to compliance
with the fundamental principles.
5 Professional behaviour
Need to be aware of the potential threats a ... and the safeguards in place to mitigate
management accountant could face ... against those threats
Efficiency is a key objective in ‘not for profit’ and public sector organisations, due to the limited amount of
resources available. These resources often determine the strategy adopted.
Examples of objectives
Revenue maximisation
Charities Service usage

Targeting capacity Statutory bodies maximisation
Leisure
Resource efficiency Health
Cost recovery
Public services
Client satisfaction

Notes
3: The environment and uncertainty

The environment and
uncertainty
The environment and uncertainty
Opportunity & Threats
External environment
Drivers of organisational change
Importance of environmental
analysis
Environmental uncertainty
Real options Forecasting Scenario planning Foresight Game theory
Gap analysis
The organisation Environmental Real Gap Forecasting Scenario Foresight Game

and its environment analysis options analysis planning theory
One important approach to choosing a strategy

is seeking a good fit with the environment.
The impact of uncertainty
Complexity + dynamism = uncertainty:
Complexity
Variety of influences
Interconnectedness of influences
POLITICS TECHNOLOGY
COMPETING
ORGANISATIONS Dynamism
STAKEHOLDERS Goods to
customers
MATERIALS SUPPLIERS
POLLUTION Pace of change
LABOUR Organisation Wage to
labour
CAPITAL
High uncertainty leads to:
Profit to
investors
TA
S K ENV IRONMENT Desire for more information
SOCIETY
ECONOMY (& CULTURE)
G EN E T
Conservative strategy with some emergent
RAL ENVIRO NMEN
strategy
PHY T
SICAL ENVIRO NMEN Shorter planning time horizon
The environment is a source of opportunities and Porter's five forces

threats for an organisation.
Five forces determine the level of profit which
PEST analysis (or LoNGPEST) analysis could be used can be sustained in an industry:
to analyse the macro-environment and to identify
potential opportunities and threats. 1 Threat of new entrants to the industry
2 Threat of substitute products or services
Political Economic Social Technological
3 Bargaining power of customers
Local
4 Bargaining power of suppliers
National 5 Rivalry among existing competitors
Global
(LoNGPEST framework)
Page 37 3: The environment and uncertainty


Opportunities and threats in the environment

could act as drivers of change. Possible
Prioritising drivers of change
examples: Strategic importance
Low High
Changes in the economic cycle (growth; High
recession) Highest
Lower
New laws or regulations priority
priority
(major issues)
New market entrants; mergers/acquisitions
Urgency
in the industry
Changes in product or process technology Other High priority
issues (but not as high
Changes in supply chain or distribution (lowest priority) as major issues)
networks
Changes in customer expectations and Organisations need to analyse major issues in
trends detail and develop strategies to deal with the
Changes in communications media uncertainties highlighted in them

Strategic intelligence
is what a firm needs to know about its environment to enable it to anticipate change and design appropriate
strategies to deal with changing environmental conditions
Creating strategic intelligence

Internal sources External sources
Collected from
Sales force The press
relevant and
Market research Trade associations
meaningful
Trade publications
Management information system sources
Government departments
Databases Internet
Public databases
After the information has been collected, it needs to be organised,

analysed, communicated and finally used as strategic intelligence.


One of the ways organisations can allow for uncertainty in their strategic decision making is by making use of
real options.
The option to make follow-on investments
1
A project may not make a positive return by itself, but it may open up other potentially lucrative projects
which an organisation can then take advantage of.
The option to abandon a project

2
If the actual revenue streams from a project turn out to be lower than expected, the option to abandon a
project would be valuable to an organisation.
The option to wait

3
An organisation's decision making could be improved by waiting and being able to take advantage of
new information which might become available. So, the option to 'wait and see' before making a
decision could be valuable to an organisation.

Gap analysis
is a comparison between desired future position and a forecast based on continuing current activities and
strategies.
The demand gap is the difference between total market

potential and current demand from users.
The distribution gap, product gap and competitive gap
together make up the difference between current demand
and actual sales achieved.
(a) The distribution gap arises from lack of access to or
utilisation of distribution channels.
(b) The product gap arises from product failure or
deliberate product decisions.
(c) The competitive gap arises from failures of pricing or
promotion.


The term is commonly used of a gap in overall performance: that is profitability
The profit gap is the difference Target profit

Profit ($)
between the target profits and the Diversification
forecast profits.
(a) First of all the firm can estimate Product and/or market
development
the effects on the gap of any
projects or strategies in the Market penetration
pipeline. Some of the gap might
be filled by a new project. Efficiency gap: improved profits
of current products and markets
(b) Then, if a gap remains, new Projection (F0 forecast)
strategies have to be considered
to close the gap: Time
Improved efficiency
Growth (new products, new
markets, or both)

Forecast: Consensus forecasts

is 'a prediction of future events and their quantification for Jury forecasts combine a range of expert opinion
planning purposes'. but personality and group dynamics can reduce
their usefulness.
Projection: Delphi technique combines experts’ opinions
anonymously and iteratively to avoid the problems
is 'an expected future trend pattern obtained by
mentioned above.
extrapolation. It is principally concerned with quantitative
factors whereas a forecast includes judgements.' Experts tend to be over-optimistic.
(CIMA Official Terminology)
Think tank: a group of experts is encouraged to
When size and timing of cash flows can be forecast with speculate about future developments in particular
accuracy, NPV can be used areas, and to identify possible causes of action.
Projects repeated several times can be assessed using
expected values and decision trees Brainstorming: a group of people from across an
Time series analysis shows the degree of correlation organisation generate ideas without any initial
between two variables evaluation or criticism of them. Once the list of ideas is
Econometric leading indicators indicate the future, but complete, then they begin to be evaluated.
with uncertain lag


Scenario planning
A scenario is an internally consistent view of what the future might turn out to be based on sets of key drivers for
change. Scenario planning is a way of dealing with possible major or discontinuous changes in the environment.
Macro scenarios Industry scenarios
Developed by global organisations (eg energy Relate to a specific industry

companies) Outline a number of uncertainties
Identify drivers of change - 10 year horizon Identify what causes the uncertainties
Discern patterns and trends and combine into a Make assumptions about each cause
viable framework Combine assumptions into scenario
Create mini scenarios (say, 7-10) Predict industry structure in each scenario
Group into 2 or 3 wider scenarios Identify sources of competitive advantage
Debate and test for coherence and probability Identify competitive behaviour in each scenario
and the competences or capabilities needed to be
Identify critical issues arising successful in each scenario.

Jury forecasts, the Delphi technique and scenario planning are all ways management can attempt to get insights into the
future and prepare for some of the opportunities and threats which may arise. (Remember foresight and forecasting are very
different concepts though).
Foresight
the art and science of anticipating the future. It does not attempt to predict the future, but to identify a range of possible
outcomes.
4 stages of a foresight project Possible foresight techniques
Monitoring – identifying relevant current trends Scenario planning Visioning

Analysis – understanding drivers of change Delphi technique Opportunity mapping
Projection – anticipating what might happen in the Cross-impact analysis Trend extrapolation
future
Morphological analysis Role-playing
Transformation – drawing implications for the
business of the possible projected futures
Remember, one of the disadvantages of foresight is that it relies on the future being shaped by actions which can be
imagined now.


The whole logic of scenario planning and foresight reminds us that the future is uncertain. Part of this
uncertainty comes from not knowing how competitors will react to new strategies introduced by an
organisation.
Game theory shows that an organisation cannot develop its own strategy without considering the possible
reactions of its competitors. Competitors’ reactions may mean the outcomes of a strategy are very different to
that intended, such that the strategy may benefit neither the firm nor its competitors.
Strategy should be treated as an interaction between the firm and its competitors.
Organisation Competitors
Current position in environment STRATEGY How will they react?

Internal resources
Game theory also suggests that it may benefit firms to co-operate and negotiate with others in the search for
optimal solutions rather than working alone and competing with all the other players in a market. This helps
explain the rationale for strategic alliances or joint ventures.
4: Resources and capabilities

Resources and
capabilities
Resource audit
Value chain Portfolio analysis
Product life cycle BCG matrix
Supply chain management
Benchmarking
Resources Value drivers Value chain Supply chain The product New product Benchmarking
and capabilities analysis management portfolio development
Position audit
is the part of the planning process which examines
the current state of the organisation in respect of:
1 Resources (assets and finance)
2 Products, brands and markets
3 Operating systems
4 Internal organisation
5 Current results
6 Returns to shareholders
Resource Audit
A resource audit is an internal review of all aspects of the resources the organisation uses
Resources are only of value if they are
Typical resources (9Ms)
properly organised: management and
organisation are vital resources.
Materials – costs, security of supply
Men and women (staff) – skills, number, morale
Management – skills, capacity Some resources are easy to define,
Machinery – age, efficiency, capacity identify and measure (eg plant and
Money – sources, gearing, cashflow machinery, finance). Others are more
Markets – products, customers problematic (such as management
Make-up – culture and structure, brands, patents skills, technical competence and
Methods – structure, outsourcing, JIT culture.)
Management information – ideas, innovation,
information systems, performance measurement
Page 49 4: Resources and capabilities

Value drivers Rappaport: seven value drivers in relation to

creating value for shareholders
the crucial organisational capabilities which create t 1 Increase sales growth

value for an organisation and help it generate
competitive advantage. 2 Increase operating profit margin
Many value drivers are intangible: 3 Reduce cash tax rate
Superior management 4 Reduce incremental investment in capital

Employees' skills and knowledge expenditure
Brand and reputation 5 Reduce investment in working capital
Intellectual property
Network relationships and linkages 6 Increase time period of competitive
Quality management advantage
First mover advantage 7 Reduce cost of capital
The value chain can be used to help identify the A firm’s value chain is connected to what Porter calls a
activities which create value for an organisation’s value system.
customers.
FIRM INFRASTRUCTURE
SUPPORT ACTIVITIES
HUMAN RESOURCE MANAGEMENT
MA
RG
IN
TECHNOLOGY DEVELOPMENT
Distributor/retailer
PROCUREMENT value chains
Customer
Organisation’s value
INBOUND OUTBOUND MARKETING value chains
MA
OPERATIONS SERVICE chain
RG
LOGISTICS LOGISTICS & SALES
IN
Supplier
value
PRIMARY ACTIVITIES chains
Note: The value chain was designed for use in a manufacturing context, and can be difficult to apply to service
organisations. Stabell & Fjeldstad developed an alternative model – the value shop – in relation to service
organisations. The value shop highlights the importance of utilising expertise in order to create value for customers.

The margin is the excess the customer is Traditional costing Value chain cost analysis:
prepared to pay over the cost to the firm of systems an alternative
obtaining resource inputs and providing
Focus Manufacturing operations Customers
value activities. It represents the value
Value perceptions
created by the value activities themselves
and by the management of the linkages Cost objects Products Value-creating activities
between them. Linkages connect the Functions Product attributes
activities in the value chain. The activities Expense heads
affect one another and therefore must be co-
ordinated. Organisational Cost and responsibility Strategic business units
focus centres Value creating activities
Using the value chain. A firm can secure
Linkages 1 Largely ignored Recognised and
competitive advantage in several ways.
2 Cost allocations and maximised
Invent new or better ways to do activities transfer prices reflect
Combine activities in new or better ways interdependencies
Manage the linkages in its own value
Cost drivers Simple volume measures Strategic decisions
chain
Manage the linkages in the value system Accuracy High apparent precision Low precision
Indicative answers
Strategic importance of the distribution Factors affecting physical distribution

channel
Involves contractual arrangements Perishability

Substantial physical infrastructure After sales service
Hard to change in the short term Customer shopping habits
Outsourcing often used Number of sales outlets
Influences marketing communications Quality image
Cost (transport, warehousing, packaging)
CHOICE
Will the product be P U L L E D B Y T H E Consumer OR

PUSHED TO THE
Manufacturer Retailer ?

Supply chain management Three key themes
A network, rather than a pipeline, of close Responsiveness – speed of supplying customers

links and greater co-operation, by which the Reliability – on time; correct quantities; quality
firm aims to manage the chain from the input Relationships – mutual understanding and trust between
of resources to delivery to the customer. members of the supply chain
This can be achieved via
Reduction in number of suppliers

Reduction in number of customers
Suppliers

Price and inventory co-ordination
Linked computer systems Customers
Supplier involvement in product
development
Logistics design
Joint problem solving
Supplier representation on site
The company’s offerings to the market are

fundamental to its success. They must be kept
Product life cycle
under review so that there is a suitable mix. The
product life cycle is an important concept, and
strategies must be appropriate to stage in life
cycle. But product life cycle must be applied with
care. We can distinguish three aspects of
‘product’.
Product class (or generic product)

– A broad category
Introduction: development, marketing and production costs high; sales
volume low; loss maker; negative cash flow.
Product form Growth: sales volumes accelerate, profits rise, but cash flow likely to
– Type within the category remain negative; competitors enter the market but overall market sales
grow. High advertising costs. Additional features added to product.
Maturity: longest period; no market growth but profits good, and cash flow
Brand positive. High levels of competition so price becomes more sensitive.
– The specific product Decline: product superceded; sales fall, over-capacity in industry; some
players leave market. Those that remain try to find niches.

Portfolio analysis is applicable to products, market segments and SBUs. There are four basic strategies:
Build Hold Harvest Divest
Invest for market share Maintain current Manage for profit in the Release resources for use
growth position short term elsewhere
The BCG Matrix Problems with the BCG matrix
High Low Rather simplistic
Strong brand may give competitive strength despite
Market High Star Question mark relatively low market share
growth Ignores innovation
Low Cash cow Dog
Dogs and question marks may be needed to
Relative market share complete a range
Stars – build High market growth assumed to be attractive. But
will require significant investment which may not be
Cash cows – hold or harvest
available.
Question marks – build or harvest
Ignores competitors other than market leader
Dogs – divest or hold
Does not indicate overall best mix or how to build
stars and question marks.
The development of new products (innovation) is an important aspect of a firm’s strategy. New products can
overcome entry barriers and help give a company a balanced portfolio.
How are they new? How is it approached?
The management accountant

New to the world Leader strategy: high cost of R&D,
potential high reward, high risk can help by analysing the
New product line
cost components of the new
Additions to product line
Follower strategy: lower cost, less product. This may lead to the
Repositioning
R&D expertise needed, lower risk, removal of superfluous
Improvements/revisions
reduced reward features.
Cost reductions
New product development should be controlled by subjecting projects to a

series of gates, (or review meetings) to decide whether they have made the
required progress and to determine what must be achieved to pass the next gate.

Benchmarking involves establishing targets and comparators against which to compare performance. It provides management with
a means of identifying how well areas of an organisation are performing, with a view to improving the performance of those areas
which are currently underperforming.
Process for benchmarking The questions to ask
1 Ensure senior management commitment (Johnson, Scholes & Whittington)
2 Determine areas for study and set objectives

3 Understand process and identify key measures Why are these products or services provided at all?
Why are they provided in that particular way?
4 Select organisations to benchmark against
What are the examples of best practice elsewhere?
5 Measure own and others' performance
How should activities be reshaped in the light of
6 Compare performance and discuss results the best practice comparisons?
7 Design and implement improvements

8 Monitor improvements
Problems with benchmarking

Benchmarking can produce improvements in the value system but this is not guaranteed.
It tends to improve the efficiency with which systems work rather than the effectiveness of their outputs.
Concentrates on 'doing things right' rather than necessarily 'doing the right thing'.
Comparison with similar systems ignores the emergence of substitutes.
It is only ever a catching-up exercise rather than the development of anything new.
It does not indicate how competitors may be overtaken.
It has significant costs, not least in management time.
It can be a threat to commercial security.

Notes
5: Identifying and evaluating strategic

options
Identifying and evaluating
strategic options
How to compete Where to compete Method of growth
Organic growth
Porter’s generic strategies Ansoff’s product
market matrix
Home country or abroad
Acquisition
Bowman’s strategy clock
Joint methods
Divestment and
rationalisation
Strategic choice
Strategic Generic competitive Product-market Organic growth, International

options strategies strategies mergers and acquisitions expansion
Three categories of strategic choice
Competitive STRATEGIC Institutional

strategies CHOICE strategies
How to compete Method of growth –
acquisition or organic
Porter's generic strategies
Product market
strategies
Where to compete
Direction of growth
Ansoff's Matrix

The purpose of competitive strategy is to create a position within an industry which copes successfully with the five
competitive forces and thereby yields a superior return on investment for the firm and a sustainable competitive
advantage. A firm can use its value chain to help design its competitive strategy.
Cost leadership Differentiation Focus
Aim to be the lowest cost producer Aim to exploit a product or service perceived Activity is restricted to
in the industry as a whole as unique within the industry as a whole a particular segment of
the market. Either cost
Aspects of cost Aspects of differentiation leadership or
differentiation strategy
is then pursued. Such
Economies of scale Breakthrough products – radical
performance advantage concentrated effort can
Use the newest production
technology be more effective, but
Improved products – more cost-effective
the segment may be
Learning curve effect Competitive products – unique
attacked by a larger
Productivity improvement combinations of features
Minimisation of overheads Brand image firm.
Favourable access to inputs Special product features
Unique combination of value activities
Use IT to monitor costs
Page 63 5: Identifying and evaluating strategic options


Generic strategies and the five competitive forces

Competitive Advantages Disadvantages
force Cost leadership Differentiation Cost leadership Differentiation
New Economies of scale raise entry Brand loyalty and perceived
entrants barriers uniqueness are entry barriers
Firm not as vulnerable to the Customer loyalty is a weapon
Substitutes threat of substitutes as its less against substitutes
cost-effective competitors
Customers cannot drive down Customers have no comparable Very internally focused. Ignores Customers may no longer need the
Customers prices further than the next most alternative customers’ needs differentiating factor
efficient competitor Brand loyalty should reduce price Sooner or later, customers become
sensitivity and prevent price wars price sensitive
Flexibility to deal with cost Higher margins can offset Increase in input costs can
Suppliers increases vulnerability to supplier price reduce price advantages
rises
Firm remains profitable when Unique features reduce direct Technological change will require Imitation narrows differentiation
Industry rivals collapse through excessive competition capital investment, or make
rivalry price competition production cheaper for competitors Differentiating factors may be
Competitors learn via imitation undermined if rivals develop
significantly better technology
Cost concerns ignore product
design or marketing issues
Advantages of a focus strategy Drawbacks of a focus strategy
A niche may be more secure so a firm can Economies of scale which could be gained by
insulate itself from competition serving a wider market may be sacrificed
A firm can specialise in one particular area of Market segment may not be large enough to
expertise and not spread its resources too secure sufficient returns to satisfy investors in
thinly the long run
Because the segment is smaller than the Risk of larger competitors, with greater
market as a whole, a firm will need less resources, moving into the market segment
investment in marketing operations than if it Segment may become less distinct from the
was competing across the whole market main market meaning it is no longer an
identifiable niche


Porter argues that if a firm does not Importantly, many companies actually pursue 'stuck-in-the-middle'
follow one of the three generic strategies strategies quite successfully. Porter's model no longer reflects the full
it will be 'stuck in the middle' and can range of competitive strategies an organisation can choose from, and
only make low profits. underplays the role the customer plays in defining value for money.
But there are problems with Porter's Strategy clock
model (and perhaps with strategic (Bowman)
models more generally):
What does cost leadership actually
mean? It is not necessarily the
same as 'low price'.
Does differentiation necessarily
mean 'higher price'?
How is the 'industry' defined?
Is strategy determined at SBU or
corporate level?

Ansoff described four possible growth strategies in his growth vector matrix.
PRODUCT
Existing New
Existing Market penetration Product development
Maintain or increase market share Launch new products
Dominate growth markets May require new competences
Drive out competition from mature Forces competitors to follow suit
markets Discourages newcomers
Increase usage by existing customers
MARKET
Market development Diversification
New markets for current products
New geographic areas - export Related Unrelated
New package sizes (conglomerate)
Vertical Horizontal
New distribution channels
Differential pricing to suit new Forward Backward
New segments New competences will be required


Horizontal integration Vertical integration
Development into activities that are competitive with,

or complementary to, present activities; eg, electricity The organisation becomes its own supplier
(backward vertical integration) or its own distributor
companies selling gas. Offers economies of scale.
(forward vertical integration).
Secures supplies
Conglomerate diversification Stronger relationship with end-users
Profits from all parts of value system
Creates barriers to entry
Spreads risk
However:
May obtain synergy (eg utilising distribution
channels, pooling R+D.) Increases reliance on a particular aspect of
economic demand
However:
Does not offer significant economies of scale
Unfamiliarity with new segments increases risk
Increases ratio of fixed costs vs variable costs
More opportunities to go wrong
Risk of internal inefficiencies, in the absence of
Cultural and management integration
mismatches open market transactions in the supply chain.

We can summarise possible expansion methods by looking at whether they are internal or external, and
whether they take place in a firm's home country or internationally. (Lynch – Expansion method matrix)
GROWTH
Internal External
Organic growth Merger
Home country
Acquisition
Joint venture
Alliance
Franchise
Licence
LOCATION
Exporting Merger
Overseas offices Acquisition
International
Overseas manufacturing plants Joint venture

Establish multi-national operation Alliance
Franchise
Global operation
Licence
Contract manufacturing


Organic growth Mergers and acquisitions
Provides access to a variety of resources:

The development of internal resources
products; managers; suppliers; production
Supports learning and is supported by it facilities; technology and skills; distribution
Encourages innovation as source of growth facilities; marketing advantages; cash; tax losses
Consistent culture and management style Can overcome barriers to entry
Provides economies of scale Can spread risk
Ease of control Can defend against predators
However: However, many acquisitions fail to enhance
Can be slow shareholder value.
Not good for dealing with barriers to entry Cost: the price is often too high
Cultural problems, especially in management
Firm has to bear all risks internally
Top management egos can warp judgement
Professional advisers drive the market
Customers may be disturbed by changes

Key decisions for international expansion
1 Whether to expand abroad 2 Which markets to enter?

3 Mode of entry?
at all?
Advantages Market attractiveness Exporting Foreign

Higher sales and profits Competitive advantage divisions or
Life cycle extended possessed subsidiaries
Seasonality Contract
Risk (political, business)
Spread risk manufacture; licence
Disadvantages Any CSR implications?
Less control
Costly
Before getting involved, the company must consider both strategic
Adaptations needed
(‘Does it fit?’) and tactical (‘Can we do it?’) issues.

Joint ventures, alliances Divestment and Evaluating Strategic Risk and cost Decision
and franchising rationalisation Options behaviour techniques
Joint ventures are Advantages However, there can be

arrangements between firms major conflicts of interest,
to pool their interests on a and disagreements over:
project. The mechanism is to Coverage of a larger number of markets
create a new firm under joint Reduced risk of government intervention Profit sharing
control. Closer control over operations Investment levels
Local knowledge Management
Alliances tend to be longer Spreading of risk and costs Marketing strategy
term and aim to complement Learning from partners
technology, geography,
markets and so on.
Other arrangements include co-operative methods such as:
1 Licensing – the licenser provides rights, advice and know how in return for a royalty
2 Franchising – the franchiser provides expertise and brand; the franchisee provides capital and is
responsible for day-to-day operations
3 Sub-contracting – enhanced access to resources, reduce overheads
On occasions, rather than looking to grow, firms may divest themselves of non-core activities or businesses in
declining sectors.
Reasons for divestment
To rationalise a business and concentrate resources on core activities

(especially if current business combination is destroying value rather
than creating it)
To sell off subsidiaries at a profit
To make a profit by buying and selling companies
To get out while the going is good
To raise funds to invest elsewhere
Demergers and management buyouts have become more common as conglomerates go out of fashion.

Rationalisation
Organisations may want to reduce costs and overheads without
actually selling off (divesting) any parts of the business.
Cost rationalisation Product rationalisation
Review spending, identify possible cuts Reduce the number of products in the portfolio
(eg job cuts) and focus on the ones which generate the
But need to be careful not to cut back too far most profit
in the short term because this could weaken But need to consider joint purchases (do
competitive position in the longer term consumers buy an unprofitable one in
conjunction with a profitable one?)
Basic tests of strategy Some firms set target returns in NPV terms, using an
appropriate cost of capital. The cost of capital may be
1 Suitability – relates to organisation's based upon:
strategic logic; fit with circumstances?
The weighted average cost of capital (WACC)
2 Feasibility – can it be done/paid for? The marginal cost of capital
The opportunity cost of capital
3 Acceptability – will it suit different Adjustments to allow for the risks of a particular project
stakeholders? A return based upon the capital asset pricing model
Strategic uncertainties
Ultimately, investment decisions for
companies are supposed to increase
Trends in the industry shareholder value
Competitors’ activities
Valuing intangibles such as brands Shareholder value analysis
Evaluating marketing expenditure Economic value added
Product interrelationships

If you need to 'evaluate a strategy' in your exam, you should consider its suitability, acceptability and feasibility. Always
consider suitability first: there is no point assessing whether a strategy is acceptable or feasible if it is not suitable
for the situation in hand.
Suitability Acceptability Feasibility
Exploits strengths or Needs to be acceptable to Can the strategy be implemented?

competences stakeholders:
Rectifies weaknesses Enough money?
Seizes opportunities Shareholders (shareholder Skills available?
wealth) Access to technology
Helps overcome threats
Satisfies organisation's goals Customers Access to materials or other
and objectives Management resources if required
Fills a gap (gap analysis) Staff Management skills to lead
Suppliers strategy
Generates/maintains
competitive advantage Banks Sufficient time to implement
Does not involve undue risk Government/local government Will competitors' reactions
Local communities make the strategy unworkable?
Fits with corporate culture
Fits with existing strategies Interest/pressure groups
Classification of risk Different stakeholders have different perceptions of risk. Risk

can be managed, however:
Business Political
Economic Exchange rate A strategy which is simply too risky will not be followed
Financial Physical Some risks can be dealt with by insurance or
Competitors contingency plans
An allowance for risk can be built into the target return
An investor will want higher returns to for the project
compensate for higher risk. With a portfolio, risks can be balanced against each
other
Return
Operational gearing (the ratio of fixed to variable costs) is an
important indicator of risk. Businesses with high fixed costs
and low variable costs may have high breakeven levels.
Risk

Quantitative and non quantitative methods can be employed to help appraise strategic decisions.
Cost/benefit analysis Ranking and scoring

Especially relevant to the public Objectives are weighted according to their
sector importance, and strategies scored according
to which objectives they achieve
Decision trees Decision matrix Sensitivity analysis

Used to arrive at expected Analyses the payoff for any Quantifies the sensitivity of a
values of mutually given action strategy to external
exclusive choices circumstances
But remember: strategic decisions often have a long time scale and involve data which may be unreliable, so a
firm cannot guarantee to always make the 'correct' decision.
6: Information systems and strategy

Information systems and
strategy
Strategic information
systems
Strategic importance of Level of information

IS/IT strategy
Importance to different
organisations
Impact of IS/IT on
corporate strategy
Developing a strategy
Strategic Information
information systems strategy
Strategic information is used to plan the

objectives of the organisation and to assess
whether those objectives are being met in
practice.
Strategic information is:

Derived from internal and external sources
Summarised at a high level
Relevant to the long term
Concerned with the whole organisation
The Anthony hierarchy

Both quantitative and qualitative
Uncertain
Types of strategic information system

Executive information system (EIS) helps senior managers take strategic decisions.
Management information system (MIS) provides operational reports on existing operations.

Decision Support System (DSS) has high levels of analytical power and aids decisions on issues subject
to high levels of uncertainty.
Value added networks facilitate the adding of value to products by the strategic use of information. They
can link organisations and may be businesses in their own right. Examples are airline booking systems and
EDI systems between suppliers and manufacturers.
Page 81 6: Information systems and strategy

The information systems (IS) strategy is the long-term plan for systems to exploit information in order to support business
strategies or create new strategic options.
The information technology (IT) strategy is concerned with selecting, operating and managing the technological element
(the hardware and the software) necessary to implement the IS strategy.
The information management (IM) strategy deals with the roles of the people involved in the use of IT assets, the
relationships between them and design of the management processes needed to exploit IT and to control it.
Strategic information systems are systems at any level of an organisation that change goals, processes, products,
services or environmental relationships with the aim of gaining competitive advantage.
A strategic approach is needed because IS/IT:
Involve high costs
Are critical to the success of many organisations
Are now used as part of the commercial strategy in the battle for competitive advantage
Have an impact on customer service
Affect all levels of management and staff
May lead to structural changes in an organisation
Affect the way management information is created and presented
Require effective management to obtain the maximum benefit
Involve many stakeholders inside and outside the organisation
IT and corporate strategy

Porter and Millar: Ways IT can influence the value chain
IT transforms the value chain and the product Support Firm Enterprise Resource Planning Intranets Extranets
Products have increasingly large information activities infrastructure (ERPS)
Human resource Automated personnel scheduling
content. management
IT changes industry structure via the five forces

Technology Computer aided design Intranets Extranets
development e-business e-commerce capabilities
IT enhances competitive advantage by reducing Procurement Online procurement of parts (e-procurement) Extranets
costs and making differentiation easier. Automated

warehouse
Flexible Automated
manufacturing order
Electronic
marketing
Remote
servicing of
– RFID and processing equipment
IT as a competitive necessity tagging Computer CRM
systems aided Online
manufacturing Vehicle EPOS scheduling of
tracking
Although in some cases IT is a source of competitive Electronic
data Customer
service and
repairs
interchange databeses
advantage, in many cases IT is a competitive (EDI) FAQs on
website
necessity. An organisation could not continue in Inventory
control
business without its IT systems, but those systems
are not a source of competitive advantage in their Inbound
logistics
Operations Outbound
logistics
Marketing
and sales
Service
own right (eg self-service check-in kiosks for airlines) Primary

activities Margin

IT and corporate strategy

Developing an IT strategy (Earl) Three leg analysis (Earl)
Continuing development of the IT strategy requires: Three ways in which IS strategies develop:
Constant reference to the overall business Business led, starting with overall objectives
strategy Infrastructure led, starting with business-
Attention to compatibility of technologies critical transaction processing systems
Consideration of wider implications Mixed, organisation encourages ideas to
Proper planning of significant charges, exploit existing IS and IT resources.
perhaps using SSADM
Critical success factors (CSFs) can help to determine the information requirements of an organisation: they
are the key operational goals.
Managers should focus on a small number of objectives, and information systems should focus on providing
information (KPIs) to enable managers to monitor these.
Rockart identifies four sources of CSFs. The industry
The company itself
The external environment
Temporal organisational factors
Information audit aims to establish the information Earl’s grid analyses an organisation’s use of IS
needs of users and how they can be met.
1 Information needs assessment, usually High Renew Maintain, enhance
through interviews and questionnaires. Business
Value
2 Information analysis examines the information Low Divest Reassess
provided by the current system.
Low High
3 Gap analysis compares needs from stage 1 with
Technical Quality
what is provided (stage 2)

Strategic grid Applications portfolio

McFarlan and McKenney devised a matrix to show Peppard developed the strategic grid into the
four levels of dependence on IS/IT in an organisa- applications portfolio to show the potential impact of
tion. current individual applications.
Strategic Strategic
High Turnaround Strategic High High potential Strategic
importance of importance of
planned individual
information applications in the
Low Support Factory Low Support Key operational
systems predicted future
competitive
Low High environment Low High
Strategic importance of current Strategic importance of individual applications
information systems in the current competitive environment
7: Business applications of information and

information technology
Business applications of information
and information technology
Importance of information
Knowledge management Databases E-commerce
Learning organisations Big Data Web 2.0 technologies
Knowledge-based
organisations
Need for Knowledge Databases Big Data E-commerce Web 2.0 The IT
information management department
Managers need information: Information can be:
Internal – from accounting

records; from
For effective To control To co-ordinate operational systems
decision-making activities activities External – eg from customers,
suppliers; from trade
Control process press; internet.
Establish measurable standards of

performance (eg budgets; KPIs)
Measure actual performance
Compare actual performance against
targets or standards
Evaluate results and take corrective
action where necessary
Knowledge management Knowledge management and competitive

advantage
The systematic process of finding, selecting, organising, distilling and
presenting information so as to improve comprehension of specific Fast, efficient exchange of information
areas of interest. Specific activities help focus the organisation on Efficient use of information to improve process,
acquiring, storing and utilising knowledge for such things as problem productivity and performance
solving, dynamic learning, strategic planning and decision making. Identify opportunities to meet customer needs
better than competitors
(CIMA Official Termninology) Promote creativity and innovation
To
Classifications of knowledge Tacit Knowledge Explicit Knowledge
Tacit knowledge is personal, specific to context and hard to Tacit Knowledge Socialisation Externalisation
articulate
Explicit knowledge is codified and easy to transmit in formal terms From
Individual knowledge is held by an individual

Explicit Knowledge Internalisation Combination
Organisational knowledge is the collective co-ordination of pieces of
knowledge or skill within an organisation
[Nonaka & Takeuchi]
Page 89 7: Business application of information and information technology

Learning organisations Features of learning organisations

Organisations where people continually expand their
capacity to create the result they truly desire, where new People are not blamed for taking calculated risks
and expansive patterns of thinking are nurtured, where even if they do not work out
collective aspiration is set free, and where people are
Workloads are managed so that people have time to
continually learning to see the whole together
try out new ideas and to reflect on their experiences
(Peter Senge) Knowledge is transferred quickly and efficiently
throughout the organisation
Organisational learning is viewed as a core
Learning and development is seen as the
competence and a source of competitive advantage
responsibility of all departments (not just the HR
Emphasise sharing of information and knowledge both
department)
up and down normal communication channels (eg
Staff are provided with continuous learning
between manager and employee) and through social
opportunities (eg training)
networks and interest groups
Learning activities are linked with other aspects of
Learning organisations are inherently capable of
performance management in reward systems and
change, and they are continuously aware of, and
appraisals.
interact with, their environments
The progression from data to knowledge

Data Information Knowledge
Nature Facts Relationships between Patterns discerned in
processed facts information
Importance Total Some Context independent
of context
Importance Mundane Probably useful for May be strategically useful
to business management
Relevant IT Office automation Groupware Data mining
systems Data warehouse Expert systems Intranet
Report writing software Expert systems
Intranet
The aim of knowledge management is to capture, organise and make widely available all the knowledge that
the organisation possesses. However, successful knowledge management requires a culture of knowledge
sharing to be developed, not just an IT infrastructure which allows knowledge to be shared.
A database A database management system (DBMS)

is a collection of data organised is the software that centralises data and manages access to
to service many applications. The the database. It is a system which allows numerous
database provides convenient applications to extract the data they need without the need
access to data for a wide variety for separate files.
of users and user needs.
Characteristics of a database Advantages Disadvantages

system Security/privacy issues
Avoids duplication
Shared Accuracy issues
Multi-user
Controls to preserve integrity High development costs
Consistent
Flexibility Intensive programming
Multi-purpose
Big Data The value of Big Data

High volume, high velocity and high variety information Transparency – making data accessible on a timely basis can
assets that demand cost-effective, innovative forms of reveal insights which were previously unidentified
information processes for enhanced insight and decision- (eg because data was too costly or complex to process)
making. Performance improvement – having accurate and detailed
performance information in real time enables variations in
(Gartner)
3 Vs of Big Data
performance to be analysed and managed more quickly
Decision-making – analytics tools which uncover trends in
1 Volume – big data analytics process very large amounts data can help decision-making
of information. The bigger the data, the more potential Market segmentation and customisation – volume and
insights it can provide into trends, patterns and customer variety of data enables organisations to create highly specific
requirements. segments for targeted marketing
Velocity – the increasing speed with which data flows New products and services – data about social trends and
2 into an organisation and with which it is processed in the customer behaviours can help create new products or
organisation services which meet customers’ needs.
3 Variety – diversity of source data, with much of it being Big Data analytics – aims to extract insights from
unstructured. Organisations need to find ways of unstructured data or from large volumes of data.
capturing, storing and processing unstructured data.

The internet and business operations An e-commerce strategy

Challenge to traditional business models Suitability
including new intermediaries and direct interaction E-commerce may constitute the whole strategy: suitability
with customers depends on matching Internet opportunities to business
Transparency of pricing strengths.
Much information becomes free to view including E-commerce as an extension of existing operations must
many publications be consistent with existing sales and marketing effort.
Extremely rapid communication at much reduced Acceptability
cost The main concern is likely to be the effect on any
Work can be done remotely, hence the virtual established distributors
corporation Feasibility
The nature of work is changing Depends on cash and skilled labour
World-wide potential markets Introducing a new strategy should involve:
Sophisticated market segmentation opportunities – setting of objectives
Cost and management/specialist effort required – study of costs and benefits
to set up and run an e-commerce operation – detailed budget
Knowledge as a strategic asset – consideration of technical requirements
Web 2.0 allows users/potential customers to create, share and evaluate content.
Web-based communities Social networks, blogs, wikis, instant messaging
Features of Knowledge sharing Tagging, Mashups, collective intelligence
Web 2.0 User generated content Capture, create and share, eg Youtube
Consumer generated content Product review sites
Applications for business Ethical / legal implications
Locate partners, collaborators, customers and Security

suppliers
Data protection
Advertising and marketing (eg viral marketing)
Copyright
Customer feedback
Employment policies (eg on use of social
Market intelligence networking sites during office hours)
Customer-focused approach via contribution to
product development

Centralise or decentralised? In-house or outsourced?

Outsourcing IT services
Timeshare of external system reduces cost, Service level agreement
retains managerial responsibility.
Service level: information/assistance response
Service buy in (eg payroll) increases efficiency, time; downtime limit; task deadlines; penalties if
reduces managerial effort.
service levels not met
Facility management is long-term strategic
Exit route (eg move to another supplier, back in-
approach to improve service and access
house)
expertise.
Contract duration
What to outsource? Employment issues: migration of staff
Functions with limited interfaces (eg payroll) Software issues: ownership, licensing, security
Do not outsource core competences or Dependencies: dealing with related services
strategically vital functions.
Outsourcing IT services
Establishes costs with some certainty May prevent development of strategic capability
Encourages planning Loss of confidentiality
Exploits contractor’s economies of scale Risk of lock-in to unsatisfactory contract
Provides greater skill and knowledge than a Loss of awareness and appreciation of
small in-house operation capabilities, limitations, costs and benefits of IT
Resources easily scaled up or down according
to demand

Notes
8: Customers and marketing
Customers and
marketing
Importance of marketing Relationships with

customers
Product view
Customer view
Database marketing
Marketing audit
Digital marketing
Marketing Marketing Branding Buyer Relationship The customer Databases Digital

audit behaviour marketing portfolio and marketing marketing
The marketing concept is the idea that the organisation’s key task is to find out the needs, wants and values of
a target market and to adapt the organisation to delivering them.
Marketing
is the management process which The organisation must decide
identifies, anticipates and supplies
customer requirements profitably. What target markets should be selected for development
How to offer its product or service
The organisation must commit itself
to supplying what customers need. How to establish a marketing system and organisation
This is called a marketing How to develop, implement and control a marketing plan
orientation.
The marketing mix (4 Ps)
summarises the variables that need
to be considered in marketing.

MARKETING
Key part of business strategy
Can be a source of competitive advantage
Two approaches – product-led or customer-led
PRODUCT-LED APPROACH CUSTOMER-LED APPROACH

Products are the source of profits Customers are the source of profits
Direct product profitability (DPP) Customer profitability analysis (CPA)
Brand strategies Life cycle costing (LCC)
Customer relationship marketing (CRM)
Five steps for creating a marketing strategy:
1 Define the market
2 Determine performance differentials in terms of competitors, products and customers
3 Get to know the competitors' products and markets
4 Profile competitors' strategies
5 Determine the strategic marketing strategy
Page 101 8: Customers and marketing

Marketing audit Market sensing

is a systematic examination of a business’s How people within an entity understand and react to
marketing environment, objectives, strategies, and the external market-place and the way it is changing.
activities, with a view to identifying key strategic
issues, problem areas and opportunities
(Jobber)
Elements of market analysis
Five marketing aspects of a marketing audit:
1 Marketing analysis Market size and growth
Customer analysis and buyer behaviour
2 Strategic issues analysis
Competitor analysis
3 Review of marketing mix effectiveness
Distribution channels
4 Marketing structure Supplier and supply chain analysis
5 Marketing systems

Reasons for branding Name Logo
Product differentiation Elements of a

Product identification BRAND
Increased acceptance (wholesalers/retailers)
Reduces importance of price differentials
Encourage brand loyalty Colour scheme Associations
Strong brands form barriers to entry (e.g. celebrities)
Brands have longer lifecycles than products
Faster/less risky entry to new markets or
introduction of new products Branding strategies
Simplified analysis of costs/revenues
Facilitate self-selection and easier for manufacture
to obtain optimum display space in shops Line extension New brands
Brand extensions Co-branding
Multi-branding


Marketing managers need to assess why

buyers purchase their goods or services, to
Market segmentation
help determine the marketing strategy used Market segmentation recognises that every market consists
for different goods or services: of potential buyers with different needs and different buying
Physiological needs behaviour. This could be particularly relevant for an
organisation following a focus strategy.
Safety needs
Key implications of market segmentation:
Social needs
Identifies groups of people (or organisations) with
Status/ego needs common needs and preferences who might therefore
Self-fulfilment needs react to ‘market stimuli’ in much the same way.
Each market segment can become a target market for
The type of ‘need’ which a product or service an organisation, and will require its own unique
addresses could influence the marketing marketing mix if the organisation is to exploit it
strategy an entity uses for selling it. successfully.
Markets will also be affected by the range of different buyers in them:

Industrial markets
Consumer markets Demand for industrial goods is derived
(consumer goods) from the consumer goods they are used to
produce.
Export Industrial markets
markets (industrial goods) Industrial buyers (B2B markets) are more
Purchasing
rational in their decision-making than are
decisions many consumers. They are motivated by:
– Quality and reliability
– Price
Reseller Government markets (eg
markets – Delivery date
defence, health care)
– Credit terms
– After-sales service
– Purchasing procedures


Relationship marketing Three phases of CRM

is the use of marketing resources to maintain and Acquisition
exploit an entity’s existing customers, rather than
using marketing resources solely to attract new
customers.
Retention
Customer relationship management (CRM)
is the establishment, development, maintenance
and optimisation of long-term, mutually valuable
relationships between organisations and their
customers. Extension
Customers vary significantly Customer Repeat buyers

Don’t need to be persuaded
Frequency and volume of purchases retention Don’t need special deals
Reasons for buying Need less sales staff
Will they come
Sensitivity to price changes Account already set up
back for more?
Reaction to sales promotions
Front line staff
Overall attitude to company/product
are vital. Key account management
Concentrate effort on the most
valuable customers
Relationship management
Relationship management enhances Transactional marketing Relationship marketing
satisfaction by meeting individual Importance of single sale Importance of customer relations
customer needs Importance of product features Importance of customer benefits
Build customer database Short time scale Longer time scale
Customer-oriented service systems Less emphasis on service High customer service
More direct customer contact Quality is concern of production Quality is concern of all
Competitive commitment High customer commitment
Persuasive communication Regular communication


The need for customer relationship Customer relationship management

management strategies
Customers can easily switch suppliers (particularly Customer focused staff incentive schemes
with internet price and product comparison sites) Consistent standards
Retaining customers is cheaper than attracting new Obtain detailed customer information
ones
Monitor relationships and understand
Need to retain customers to be able to widen customer behaviour
product range
Encourage loyalty (eg reward cards)
Hard to attract new customers to mature markets
Six markets model (Payne)

Relationship marketing extends beyond the customer
Superior customer value can only be delivered if there are suitable relationships in all six markets
1 Customer markets 3 Supplier markets 5 Influence markets
2 Referral markets 4 Recruitment markets 6 Internal markets

Tools for analysing the customer portfolio

 Marketing audit  Key customer analysis  Customer profitability analysis
To establish: Who are the key customers? This varies from customer to customer
Size of customer base What is the relationship of because of customer specific costs
Order sizes customer to product? such as discounts, distribution costs,
Product profitability How important are they in complexity of orders and credit given.
Market segment profitability relation to total market?
Market share Attitudes and behaviour of Use it to identify your most profitable/
Growth and prospects customer most expensive customers
Demand
Financial performance But remember customers often buy a
Competition/substitutes
Profitability of their orders range of products not a single product
The customer lifecycle And remember customer profitability

may change over customer lifecycle
Promotional expense is front-loaded; sales grow with time
Consumer incomes rise with time; early purchases are likely to be basic – may be more differentiated later

Database marketing
Data warehouses provide a single point for storing a
is the analysis and use of customer databases in
coherent, non-volatile set of information which can be
communication and other relationship-building
used across an organisation for management analysis
contacts with customers.
and decision-making.
Data warehouses improve data quality by reducing the
Offers significant benefits to a business: risk of different people using different data during a
Identify the best customers (recency of last decision-making process. They also improve the speed
purchase, frequency of purchase, monetary of responses to business queries.
value of purchases)
Data warehouses are primarily used for storing data
Tailor e-marketing messages based on rather than analysing data. By contrast, data mining
customer usage, so can target customers more is primarily concerned with analysing data and
effectively identifying patterns and relationships in that data.
Cross-sell related and complementary
products.
A data warehouse consists of a database, containing data from various operational systems, and reporting and
query tools.
Data mining software looks for hidden patterns and relationships in large pools of data, using statistical
analysis tools and intelligence techniques. Data mining can give organisations a better insight into customer
behaviours.

E-marketing has been defined as ‘the application of the Internet and related digital technologies to achieve
marketing objectives’ (Chaffey).
Functions of internet marketing Specific benefits of internet marketing
Creating company and product awareness Global reach

Branding via website advertising Lower cost
Offering incentives Ability to track and measure results
Lead generation via interaction 24 hour marketing
Customer service Personalisation/‘one to one’
Email databases More interesting campaigns
Driving online transactions Better conversion rate
Any online e-communication must be consistent with the overall marketing goals and current marketing
efforts of the organisation.
Social media marketing Potential limitations of social media
is the process of acquiring customers and Much of the information people ‘share’ is
attracting the attention of potential customers non-commercial, so how much real value does it
through social media sites have for businesses?
How much expenditure has actually been
Social media sites and other Web 2.0 technologies, generated through social media? (eg if someone
allow users to provide information about themselves. ‘likes’ a product on Facebook, does that mean
This information can be valuable to marketers. they will buy it?)
Marketers can target relevant marketing messages to Threats to brands – customers can
narrowly defined market segments based on data transmit/share messages which companies do
they have gathered about the likes and interests of not want to be transmitted (eg complaints;
customers and potential customers. negative feedback)
Social media increases consumers’ power over
the marketing process and disrupts an
organisation’s ability to control that process.


E-marketing planning
Competitor analysis Scan competitor websites; benchmark e-commerce services
Intermediary analysis Search portals for new approaches; research competitor intermediary policy; identify
and compare intermediaries.
Marketing audit Measurement: acquisition costs, leads, sales, ROI. Use web analytics to measure
impact of leads; sales and brand effects delivered over the Internet; create online
CRM capability.
Objective setting Online revenue contribution
Strategy Online value proposition; identify target online segments
Tactics Use Internet to vary the extended product
Consider new channel structures
Automate processes: auto-responder, FAQs, virtual assistants
Online branding
Online marketing communications, eg email selling, search engine advertising
Characteristics of the media of e-marketing – the 6 Is

Plans should accommodate and exploit the 6 ‘I’ characteristics
Independence of Global reach of electronic products and services opens previously inaccessible
location markets for exploitation
Industry structure Redesign of business processes; new market boundaries and segments; IT-
enabled services
Integration Widespread, effective use of detailed customer information throughout business
enables value added through product configuration, pricing, delivery and so on.
Interactivity Customers can participate in a marketing dialogue; communications and
responses can be specifically targeted.
Individualisation Tailored products, services and communications
Intelligence Detailed customer information can be collected via interactivity


E-marketing and the marketing mix (7Ps)

1 Product interactivity, more information, opportunities to customise and augment the product
2 Price the Internet has made pricing very competitive; increased price transparency and the
ability to ‘shop around’
3 Place new market places and channel structures. Since the Internet has global reach,
customer convenience is very important.
4 Promotion reach more customers; target more specifically; use of email; banner advertising
5 People people can be replaced with automated processes, such as ‘FAQ’ pages on web
6 Process new processes are required for online marketing, linking to other operational systems
7 Physical evidence customers’ experience such as ease of use of website, navigation, availability and
overall performance. Responsiveness to email enquiries is a key aspect.
Might also include user generated content (eg product reviews), or samples (eg
extracts from books on Amazon).
9: Understanding organisational change
Understanding
organisational change
Triggers for change Context and culture
Type of change required
Process of change
Resistance to change
The change Triggers for Types of Context of Culture Stage models

process change change change and change of change
Change management is ‘the continuous process of aligning an organisation with its marketplace and doing so more
responsively and effectively than competitors.’ (Berger)
The change process Change flow chart

Trigger identifies Tentative plans and, 1 Analyse competitive position
Why and
the need / desire where possible, a range 2 Determine type of change needed what
to change of alternatives
3 Identify desired future state
4 Analyse the change context
Establish timetable
for implementing Select preferred solution 5 Identify the critical change features
the change 6 Determine the design choices
How
7 Design the transition process – levers
and mechanisms
Communicate the Implement change 8 Manage the transition
plan for change 9 Evaluate the change outcomes

An organisation may have to make a strategic change for lots of different reasons.
Environmental factors Rationalisation and cost-cutting

Level / intensity of competition Concerns about market conditions and
competitiveness may force organisations to
Domestic or international economic conditions downsize, rationalise or cut costs.
Government legislation
Customer expectations / tastes Mergers and acquisitions
Technology (product or process) Visible changes to name and signage, but also
Communications media and e-business deeper changes to an organisation:
Supply chains or distribution networks Culture Staff numbers
Globalisation Structure Management systems
Concern for natural environment Job roles Integration issues
Workplace structure
External factors can be opportunities for change, not
Social / demographic changes just threats.
Page 119 9: Understanding organisational change


Internally generated change is likely to be managed more proactively, effectively and efficiently than externally
generated change, due to clear ownership, prior knowledge/understanding of the change, and the ability to
control the nature and timing of the change.
Internal factors Internal triggers can cause reorganisation and

restructure:
Changes in goals / activities of organisation, Efficiency/effectiveness
(eg new product lines; expansion into new Centralisation/decentralisation
markets) Flattening of organisational hierarchy
New organisation structure
New senior managers; change in leadership Operational change
Questioning authority / accepted ways Organisations also have to manage change at
Influence of entrepreneurs or innovators technical and operational levels.
Acquisition of new knowledge / skills Business Process Re-engineering (BPR)
Poor performance Continuous improvement culture
Total Quality Management (TQM)
Change may also accompany organisational growth. Greiner suggested growing companies tend to have long periods
of evolution (in which organisational practices remain relatively constant) interspersed by periods of revolution (in
which there is substantial turmoil and change).


Links between triggers: triggers do not exist in isolation

Leavitt’s organisational system:
TASK Whatever the trigger for change, managers must
consider the impact on the change on the four inter-
PEOPLE TECHNOLOGY related variables and therefore the organisation as a
whole.
STRUCTURE
Burke and Litwin: 12 variables to analyse the factors of organisational change
1 Mission and strategy 7 Working environment
2 Structure 8 Motivation
3 Task requirements and individual skills / abilities 9 Individual and organisational performance
4 External environment 10 Organisational culture
5 Leadership 11 Systems (policies and procedures)
6 Management practices 12 Individual needs / values
Regardless of the type of change, it is important to clearly identify the problem or the reason for change before
undertaking a change programme.

Organisations need to analyse the nature of change in order to identify the most appropriate way of managing
the change.
Two key issues:
Extent of change required
Speed with which change needs to be introduced
Balogun and Hope Hailey Johnson, Scholes and Whittington
Scope of change Nature of change
Realignment Transformation Incremental Transformational
Nature
of Incremental Adaptation Evolution Management Proactive Tuning Planned
change ‘Big bang’ Reconstruction Revolution role Reactive Adaptation Forced
Hard/soft changes
Hard mechanistic. Suitable where difficulties are easily identified.
Soft people based. Suitable when harder to define the problem.


Balogun and Hope Hailey – change kaleidoscope

Time available –
Scope – Preservation –
How much time is available
How extensive are the changes to implement the change? What organisational characteristics
which are required? should be preserved?
Power – Change Diversity –

Is there sufficient power to
implement the change and
management How diverse are people’s
experiences and opinions?
overcome any resistence to it? approach
Readiness – Capability –
Capacity –
Is the workforce ready to Are the organisation and its
accept change? Are the necessary resources (eg managers capable of managing
financial; IT; time; management skills) and implementing change?
available to undertake the change?
As well as the eight contextual features, the change kaleidoscope also identifies six design choices which affect
the way change is implemented
6 design choices
1 Change path – Type of change (nature and scope) required
2 Change start point – Where is change initiated and developed? Top-down; bottom up?
Pilot site or rolled out across the whole organisation immediately?
3 Change style – Management style (eg collaborative or coercive)
4 Change target – What organisational level does change relate to? Tactical or operational?
5 Change roles – Who is responsible for leading and implementing the changes?
6 Change interventions – Changes to structures and systems; changes to organisational culture;
communications to staff, education and training for staff.
Continuous/discontinuous change
Continuous: Small scale, incremental changes
Doesn’t alter paradigm or underlying strategy
Minimises resistance
Discontinuous: Radical change in firms environment/operations
Can either be a sudden one-off change, or the result of a series of incremental changes
Very significant in the 'unfreeze' process

Top-down and bottom-up change

Features Advantages Disadvantages
Top down Determined / Fast to Unlikely to encourage
implemented by implement ownership or commitment to
senior management Clarity of the planned changes
May need to be objectives
imposed
Bottom up Responsibility for Employees Slow to implement

change not solely with senior have a sense Unpredictable
management of ownership of the consequences
Consultation with staff change programme Reduced senior
Employees contribute ideas management control

Balogun and Hope Bailey: the cultural web McKinsey 7 ‘S’ model
Shows:
Link between organisation's behaviour and
behaviour of individuals
Shows cultural aspects to be considered when Change affects both organisations as a whole
managing change. and individual people and functions within it
Cultural incompatibility is a key reason where mergers/acquisitions fail. Existing cultures should be considered at
the start of the deal.

Lewin’s 3 stage “ice cube” model

UNFREEZE CHANGE REFREEZE
Remove individuals from Learn new concepts Embed new behaviours

accustomed routines
Encourage staff participation / Establish new standards
Consult team members involvement
Habituation effects
Confront perceptions / Identification with new role models
Positive reinforcement (eg
emotions
Internalisation of new behaviours rewards/bonus scheme)
Positive re-inforcement
Problems with the three stage model:
1 Assumes change is a structured process rather than a continuous or multi-directional process.
2 Danger that managers may interpret it as 'plan implement review'
3 Underplays the fundamental issue that people will only change if they feel and appreciate the need to do so
Other models Force field Resistance

of change analysis to change
Gemini 4 R’s Framework Biological models (Morgan)

Organisation is a biological organism, constantly
Reframe Restructuring
changing.
Create desire to change Remove elements of Two factors required to get maximum benefit from
Set corporate vision business that do not add change:
value 1 Readiness/ability to change
Revitalising Renewal 2 Ability to maintain sense of continuity
Find new products/markets Ensure people in Managing stability is as important as managing
Ensure good fit with organisation support the change.
competitive environment change and acquire
necessary skills


Bullock and Batten, planned change

Exploration Planning Action Integration
Verify need for Identify current position Complete in line with Formalise changes and
change and plan for change plan. Feedback if align with organisation
plans go off track
Problems: 1 Assumes change can be defined
2 Simplified approach, good for isolated issues, but not complex changes
Kotter – 8 step model for managing change

1 Establish sense 4 Communicate the vision 7 Consolidate improvements and
of urgency produce more change
5 Empower others to act
2 Form powerful guiding on the vision 8 Institutionalise new approaches
coalition
6 Plan for, and create,
3 Create a vision short term wins
Beer and Nohria –Theory E & Theory O

Two underlying approaches to change:
Theory E – purpose of change is to increase economic value. Change is a top-down process, and the
focus of change is on formal structure and systems.
Theory O – purpose of change is to develop an organisation’s human capability to implement strategy.
Change is an emergent process, and the focus of change is on culture and cultural
adjustment.
In practice, organisations need to combine elements of both Theory E and Theory O. So managers need
to integrate E and O in a way which resolves the inherent tension between the two.


Force field analysis: identifying the factors that promote or hinder change.
For change to be successfully implemented:
Exploit promoting forces
so that driving forces outweigh resisting forces
Reduce hindering forces
The status quo
Forces driving change Forces holding back change
Improving quality Individual concerns, eg:
Improving efficiency – Fear of the unknown
Potential savings – Dislike of uncertainty
Legislation/legal requirements – Potential loss of power
– Potential loss of rewards
– Potential lack or loss of skills
Cost/budget constraints
Existing system sufficient
Forcefield analysis doesn’t give any detail about how to manage change, or how to overcome the resistance
to change. Also it presumes that all change is desirable. But on some occasions change should be resisted (if it
is undesirable for the organisation’s competitive advantage.)

People resist change due to to fear of the unknown:

Confronts apathy / forces people out of comfort Can result in restructure (job changes / losses)
zones May present technological challenges
Reduces stability
Do not trust change leaders or their motives for
change
Kotter and Schlesinger’s six approaches to resistance:
1 Education and communication Relative high degree of
collaboration expected from staff.
2 Participation and involvement
3 Facilitation and support Underlying theme:
communication is critical
4 Negotiation and agreement in overcoming resistance to
5 Manipulation and co-optation change.
Relatively high degree of conflict
6 Coercion, implicit and explicit expected from staff.

Notes
10: Leading and managing change
Leading and
managing change
Importance of leadership
Leadership styles
Communication Change aspects Teams
Practical issues with

communication
Ethics
Change and Styles of change Reasons for Leading Building Change management
communication management success / failure change teams and strategy
Effective communication is vital to the success of

organisational change initiatives.
4 Ps of transition
Communications need to address the following points:
Issues to consider when planning communications about
change: 1 Purpose – why is change necessary?
How are people used to receiving communications? 2 Picture – where will change lead; what will the
Are you using appropriate communication channels? future position look and feel like once
it is reached?
What impact will the changes have on different
stakeholders? 3 Plan – steps to be taken to reach the future
Is there a clear, consistent message which is goal; how the organisation can reach
meaningful to stakeholders? that goal
When should you communicate? 4 Part – what each person needs to do to
What are the objectives of the communications? contribute to achieving the future
goal.
Resistance to change can occur if reasons/triggers for changes are not communicated properly:
Appropriate method Feedback opportunities provided
Appropriate timing Redundancy programmes handled with care
Change phase Communication purpose
Unfreeze Create readiness for, and understanding of, the need for change
Move Explain changes, reduce uncertainty of impact of change, and enable staff to change
Refreeze Keep staff informed of progress
Johnson, Scholes and Whittington identify five styles for managing change.
1 Education and communication 4 Direction
2 Collaboration / participation 5 Coercion/edict
3 Intervention
Page 137 10: Leading and managing change

Common factors that contribute to the success of Why does change fail?
change management programmes:
Effective support from senior management
Not enough sense of urgency
Buy-in from front line managers and employees
Failure to create powerful support base
Continuous and targeted communication
Vision not clearly developed
Experienced and credible change management
Vision poorly communicated
team
Obstacles block the vision
Well-planned, well-organised approach
Failure to create short-term wins
To buy-in to the change, employees need to hear about
Systems, policies and skills not aligned
the change from two people:
Failure to anchor changes in corporate culture
(i) The most senior person involved in the change
Lack of change management / implementation
(ii) Their own line manager
skills or expertise
Mentoring and coaching Benefits of coaching and mentoring in

Lack of experience and expertise among the senior management
team can be a factor which threatens the success of a change
relation to leading change
management progamme. Explaining issues to a coach helps a leader clarify
One option is to use external change agents to provide the their own thinking
necessary expertise. An alternative is to develop management’s Having ideas challenged in a constructive way
capabilities, through mentoring and coaching. helps a leader develop their ideas further
‘GROW’ model for coaching sessions: The coach or mentor’s questions can encourage
the leader to think critically about a change
Goals – Identify what the learner wants to achieve from the programme as a whole
session
External coaches or mentors are not affected by
Reality – What is the learner’s current position; what is the internal politics or power struggles within an
gap between this current position and where they organisation
want to be?
An external coach, with experience from working
Options – What can the learner do to help achieve their with other leaders, can bring in new ideas from
objectives? outside the organisation
What – What is the learner going to do?
When? What additional support will they need?

Change agent Skills for a change agent:

'an individual or group that helps to bring Encourage participation among those affected by change
about strategic change in an organisation.'
Reduce uncertainty; encourage positive action
Role might include See the strategic picture
Understand the relevant processes
Defining the change problem Think creatively, but avoid getting bogged down in detail
Examining causes of the problem Can exploit triggers for change
and considering how this can be Communication – across all levels of staff in the
overcome organisation
Suggesting possible solutions Networking skills
Selecting and implementing a Negotiating skills (with key stakeholders) and awareness of
solution organisational politics
Communicating information about Sensitivity – in dealing with different stakeholders
the change throughout the Financial analysis skills – to assess financial impacts of
organisation proposed changes
Whetten and Cameron: Leadership skills in managing change

Five key steps for a leader to encourage those involved
to be positive about the change:
1 Establish climate of positivity Building vision
2 Create ‘readiness’ for change Goal setting
3 Articulate a vision Communicating vision
Building coalitions
4 Generate commitment to the vision
Networking
5 Institutionalising the change Monitoring and controlling
Coaching and supporting
Negotiating
Facilitating
Dealing with conflict

Building blocks for building effective teams (Woodcock)
Leadership
Individuals Membership
Interpersonal Objectives
relations Effective
Communication
teams Achievement
Review and Work

control Creativity methods
Characteristics of effective teams Teams and accountability

The team as a whole is accountable for its performance
Sense of identity and belonging which encourages and results, not specific individuals.
loyalty Reward systems need to reward the performance of the
Commitment to achieving team goals team rather than focussing solely on individual
Sharing skills, information and ideas performance.
Individuals are encouraged to participate and But ... teams can only be held accountable for those
contribute
aspects of performance that they can control.
Good ideas are followed up
Goodwill, trust and respect are built up between
team members
Team leaders
Adair: three core management responsibilities of
Constructive feedback is encouraged as a way of
action-centered leadership:
developing individual and team performance
Teams understand their role in the organisation Achieving the task
and have a positive attitude towards changes Managing the team
which support their purpose and goals Managing individuals

The key role of change management in strategy implementation can be illustrated by looking at the key
elements of strategic management.
Strategic change is the pro-active management of change in an organisation to achieve clearly identified
strategic options.
11: Strategic performance management
Strategic performance
management
Critical success factors
Multi-dimensional
performance measures
Balanced scorecard Performance pyramid Building blocks model
Targets and rewards

Control Financial and The balanced The performance Building Targets and
systems non-financial measures scorecard pyramid block model rewards
A major function of organisation structure is the provision Performance measurement

of a mechanism through which control can be exercised.
A feedback or cybernetic control system works like this. is the process of assessing the proficiency
with which a reporting entity succeeds, by the
economic acquisition of resources and their
efficient and effective development, in
achieving its objectives. Performance
measures may be based on non-financial as
well as financial information.
(CIMA Official Terminology)
Purpose of performance measurement (Neely)

1 Check position
2 Communicate position
3 Confirm priorities
4 Compel progress
Objectives, critical success factors (CSFs) and key performance indicators (KPIs)
Goals and objectives
CFSs are the key factors and processes an organisational needs to

CSFs
excel at in order to achieve its objectives
KPIs KPIs measure how well an organisation is performing in relation to

its CSFs.
Impact on information systems

CSFs highlight the aspects of performance which managers need information about. It is important that an
organisation’s information systems can provide manages with this information (eg the systems can provide
information needed for KPIs).
Page 147 11: Strategic performance management

What measures Objectives Costs and

What the
organisation
Points of reference
to use? and mission benefits
does We can measure:
This depends on: 1 PROFITABILITY (income/costs)
What do
managers 2 ACTIVITY LEVELS (absolute)
want? 3 PRODUCTIVITY (relative)
Qualitative or quantitative Budgeted figures

Standards
Financial (eg profit, turnover, Trends/historical data
TYPES OF MEASURE
costs, share price, cash flow)
MEASURE AGAINST Other parts of the business
External competitors
Absolutes, ratios or percentages
Future potential
If organisations focus solely on financial performance indicators,

In practice, managers should look at a
other important goals and factors may get overlooked.
combination of financial and non-financial
Non-financial measures can deal more directly with customer indicators.
requirements, competitors and other longer-term strategic
goals than measures looking at financial performance. Two approaches which explicitly combine
Examples of non-financial performance measures: financial and non-financial performance
indicators are:
Area Example
1 Balanced scorecard – (financial;
Service quality Number of complaints customer; internal business; learning
Number of repeat bookings perspectives)
Production Output per employee 2 Results and determinants analysis
Number of defects requiring reworking (Building block model):
Marketing Trends in market share – Results (competitive performance;
effectiveness Number of customers financial performance)
Brand awareness – Determinants (quality of service;
Personnel Staff turnover flexibility; resource utilisation;
Training time per employee innovation)

Traditional accounting measures are inadequate for assessing overall progress. Other matters must be
considered, especially as financial reporting is heavily retrospective in focus. The balanced scorecard covers
most of the angles with its four perspectives. Note that individual measures are company specific.
Financial perspective Customer perspective

‘How do we create value for shareholders?’ This is the ‘How should we appear to customers?’ This
traditional reporting perspective, but must not be perspective concentrates on customers’ concern with
overlooked. Market share and sales growth are time, quality, performance and service. Example
included here. Modern measures like value-added measures would be percentage of on-time deliveries
and shareholder value analysis should be included. and customer rejection rates.
Internal business perspective Innovation and learning perspective

‘What must we excel at?’ This perspective focuses ‘Can we continue to improve and create value?’ This
on what the company must be internally to meet its perspective is forward looking and concentrates on
customers’ expectations. Control measures will focus what the company must do to satisfy future needs.
on core competences, skills, productivity and cost, Performance measures include time-to-market for new
for example. products and percentage of revenue from them.
Possible indicators for balanced scorecard categories:

Financial perspective Customer perspective
Market share
Turnover or operating profit
Number of new customers attracted
Asset utilisation
Number of recommendations or referrals
Market share
Customer satisfaction ratings
ROI; EVA
Customer retention rates
Cashflow
Levels of refunds/returns
% of deliveries on time
Internal business perspective Innovation and learning
Reduced inventory levels New products/processes developed

Reduced lead times Time to market for new products
Delivery dates of new products in line with plan % of sales from new products
Minimise wastage/errors Number of new products developed (vs competitors)
Reliability and usability (of websites) Ideas from employees
Security of transactions and credit card handling Reward and recognition structure for staff

Implementing the balanced scorecard Words of warning

Kaplan & Norton recommend a four stage approach: Possible problems when applying the scorecard:
Some measures may conflict – how do you
1 Express organisation's mission in a way that has
clear operational meaning for each employee. determine the balance which achieves the best
results?
2 Link mission to departmental or individual Have to select measures which add value, not just
objectives, (not confined to short-term financial those that are easy to measure
goals).
Measures have to be developed by someone who
3 Use scorecard to prioritise objectives and understands the business processes involved.
allocate resources so as to make best progress Will management be able to interpret the figures,
towards strategic goals. or will they just be swamped in a mass of figures?
4 Use feedback on performance to promote To be useful, measurement needs to initiate action
progress against the four perspectives. to improve performance.
There will be a cost involved in measuring the
performance of additional processes to those that
are currently measured.
The performance pyramid

The performance pyramid links the overall strategic
view of management with day to day operations.
Corporate
Vision
At corporate level, financial and market
1 objectives are set and actioned by ...
Market Financial
measures
... strategies developed at the strategic satisfaction
2 business unit level, which in turn are
supported by ... Customer Flexibility Productivity
satisfaction
... specific criteria at the operational level
3
Quality Delivery Process
Waste
time
Objectives for external effectiveness and Operations

internal efficiency are achieved through
measures at the three levels. External effectiveness Internal efficiency

Building block model

Performance
measurement in service
businesses can be difficult
Dimensions
Improvement of
due to characteristics of: Quality of service determinants
Resource utilisation leads to …
Simultaneity Flexibility*
Perishability Innovation
Heterogenity Financial performance
Intangibility … improvement of
Competitive performance results
No transfer of
ownership
Standards Rewards
Building block model was
devised as a way of Ownership Clarity
measuring performance Achievability Motivation
in service businesses. Equity Controllability
*: Three aspects of flexibility: speed of delivery; response to customer specifications; coping with demand
Setting performance targets and managing rewards plays a

key role in the overall performance management and
Targets
control of an organisation. Targets must be achievable, but they must also
be challenging in order to improve performance.
Human resource management (HRM) follows a similar
control model to overall strategic control: Stretch targets: Targets which cannot be
achieved simply by working a little bit harder. To
1 Goals (targets) are set achieve stretch targets people have to devise new
2 Performance is measured and compared with targets ways of working or develop new strategies.
3 Control measures are undertaken to control any Stretch targets are deliberately challenging, on the
shortfall basis that employees will rise to the standard set
when they are faced with a challenge.
4 Goals are adjusted in the light of experience

Reward schemes Potential problems with reward schemes

Performance-related pay
Profit-related pay May encourage dysfunctional behaviour
Share options Profit-related pay, in particular, may lead to a
focus on short term performance rather than
longer-term success
Employees will concentrate on what is being
Benefits of linking reward schemes and
measured ('What gets measured, gets done')
performance
Provide an incentive to achieve good

performance
Attract and retain valuable employees
Share shemes motivate managers to act in
organisation’s long-term interests (to increase
market value)
12: Performance measurement
Performance
measurement
Role of Management Financial performance

Accountant measures
Profit-based measures Value-based management
ROI RI SVA EVA

Role of management ROI and RI Comparing Value-based International Transfer Divisional Strategic
accountant performance management subsidiaries pricing performance management styles
Role of the management accountant

Generation, communication and interpretation of
financial and non-financial information for
management and other stakeholders The mangement accountant’s role is
Provision of information and analysis on which central to performance measurement,
decisions are based and to the ‘review and control’ aspects of
Monitoring outcomes against plans and other the strategic management process.
benchmarks, and initiating responsive action for Financial aspects of performance remain
performance improvement important (especially in relation to
Derivation of performance measures and measuring whether an entity is creating
benchmarks, financial and non-financial, value for its shareholders.)
quantitative and qualitative for monitoring and
control.
Return on investment (ROI) Profit before interest and tax

__________________________________ × 100
This is a form of return on capital employed Operations management capital employed
Easy to prepare Vulnerable to manipulation

Takes many aspects into account Does not look at cash flow
Shows percentage rather than absolute value, Managers have an incentive not to invest, so
so can compare divisions of different sizes. may encourage short-termism
More suited to mature product-market phase
Residual income (RI)

This is a measure of the centre’s profits after deducting an imputed interest cost. RI will increase when
investments are made that have returns higher than the firm’s cost of capital. Cost of capital can be varied
according to the risk characteristics of different investments.
Page 159 12: Performance measurement
eg for benchmarking, or
Comparing profit centres Interfirm comparisons comparing subsidiaries
Problems Problems
They do not always pursue goal congruence Assessing capital employed

They share resources Accounting policies
They often work with and for each other Different ways of financing growth
How are overheads to be absorbed? Tax rates
Measures of performance Measures

Solution?
Contribution Treat them as Normal accounting ratios
Controllable profit investment Information about cost structures
Controllable margin centres and levy Profitability
Net profit, after a charge a management Financial structure
Added value charge Cash flows
A shareholder value approach to performance measurement moves the focus away from short term
profits to a longer term view of value creation.
Different shareholders will value different aspects of performance, although they will generally prioritise
financial returns.
Shareholder value analysis (SVA) The development of SVA has been driven by:
Rappaport's seven value drivers Wider share ownership
More knowledgeable investors
Sales growth rate Desire to get away from a short term outlook
Operating profit margin Discrediting of profit as the sole performance
Cash tax rate all drive measure
Fixed capital investment rate cash
Working capital investment rate generation
The planning period We need to ask the question: How well is the
The cost of capital business performing for the shareholder?
Shareholder value = (business value – debt)

where business value equals PV of free cashflows from operations plus the value of any marketable assets held
Value based management Three elements:

1 Strategy for value creation (ie to maximise future
A managerial process which links strategy, value for an organisation)
measurement and operational processes to
the end of creating shareholder value 2 Measurement – performance measures need to
include forward-looking indicators as well as
historical returns
Developed in response to criticisms of 3 Management – how governance, remuneration,
profit-based measures such as ROI or RI organisational structure, culture, and stakeholder
Management decisions designed to relationships contribute to creating shareholder
increase profit (especially in the value.
short term) do not necessarily create value Importance of relations with the market
for shareholders.
Effective communication can help ensure a company’s
value-creating policies are incorporated in its share
price. (Although this does not mean attempting to
manipulate the market.)
Economic value management

A figure for capital employed which is a more
This hinges on the calculation of economic accurate reflection of:
profit (EP), which avoids the immediate
write-off of value-building expenditure such as produces 1 Basis for shareholders’ returns
R&D or training. This produces a figure for 2 Cash yield generated from recurring business
economic value added or destroyed. activities
3 Investment in assets
Other measures
Market value added: the difference between a company’s
market value and the book value of capital employed
Total shareholder return:
Dividend per share + Movement in share price
_______________________________________
Share price at the start of the period

Economic value added (EVA) Key differences between EVA and RI

EVA, like RI, produces an absolute performance
measure calculated by subtracting an imputed EVA is based on economic profit which is not
charged from the profit earned. the same as accounting profit:
EVA = net operating profit after tax (NOPAT) – – Value-building expenditure (eg advertising,
(adjusted invested capital × imputed research and development) is added back to
rate of interest) profit
– Non-cash items are eliminated
NOPAT vs accounting profit: – One-off, unusual items are excluded
Profits calculated in accordance with Charge for accounting depreciation is added back
accounting standards do not accurately to profit (under EVA) and a charge for economic
reflect the wealth that has been created. depreciation is made instead.
EVA looks to measure specifically how well Capital charge uses different bases for net assets.
companies are maximising the wealth of EVA uses replacement cost of assets.
their shareholders.
Setting objectives within a multinational is a complex task. There are particular difficulties with performance
measurement when operations and functions are located in various parts of the world.
Problems to be resolved
Capital structure and interest rates

Cost structure Difficult to
Accounting policies set realistic
Government policy (eg tax rates) standards for
Transfer prices comparison
Exchange rate fluctuations
Risk
Domestic competition
Economic conditions/infrastructure
Management control and staffing
Cultural differences

Transfer prices are made to account for the transfers of goods/services between one department
or division to another.
Principles Uses
Ensure goal congruence Track the cost of work in progress
Do not use as penalty/reward Allocate profits to internal departments
Approaches Negotiations needed when:

Marginal cost The best price cannot be calculated
Full cost with mark-up There is an element of risk
Market price Authority is decentralised and disputes
Negotiated price arise
Eccles says the method of setting transfer prices should reflect the organisation’s degree of
diversification and vertical integration.
An important principle to remember here is that managers should only be assesed on what they can control.

Division’s performance Manager’s performance
Example: A company has three operating divisions and a head office.

In order to evaluate the performance of the three divisional managers, the share of indirect costs
re-apportioned from the head office should not be included – because the divisional manager cannot
control them.
But, in order to evaluate the division’s overall performance, it is appropriate to include a share of
head office costs. If the divisions were independent companies they would have to incur the cost of
those services currently provided through the head office (eg finance and HR costs).

3 main roles for the corporate centre Strategic management styles (Goold & Campbell)
1 Determination of overall strategy and Strategic planning style: Centre heavily involved in
allocation of resources strategic planning: lots of dialogue between centre and
2 Controlling divisional performance divisions. Centre less involved in control than planning,
and does not impose rigid targets on divisions.
3 Providing central services (eg HR, legal) Performance targets focus on longer-term strategic
objectives.
Strategic control: Fairly low amount of planning influence
from centre but tight control.
Financial control: Centre takes little interest in strategy
and strategic decisions, and company will not have a
formal long-term strategy. Strategic discussions revolve
around annual budget process, and corporate centre
exercises control through budgets and profit targets.
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CIMA Passcards New

Strategic Paper E3 syllabus

CME3PC15.indd 1 14/07/2014 12:45

1: Fundamentals of strategic management

Approaches to strategy Roles and responsibilities of directors

Resource based Positioning based

Rational Model Emergent strategy Freewheeling

Role of management accountants

Strategic management involves: Strategy

(Johnson, Scholes & Whittington)

Planning Managing business strategy

Page 3 1: Fundamentals of strategic management

Approaches to strategic planning

Identify key stakeholders Analyse environment Focus on organisation’s

But... But... But...

Advantages and Disadvantages of the rational model

Identifies risks Not proven to bring advantage

Page 5 1: Fundamentals of strategic management

Generic strategies Feedback to

Strategy implementation REVIEW and

Final outcome is unclear at the outset

Know the Detect A purely deliberate strategy hampers learning

Page 9 1: Fundamentals of strategic management

Chaos Theory – Stacey

Page 11 1: Fundamentals of strategic management

Aspects of management accountants' role

Formulation of policy and setting of corporate objectivs

Strategic management accounting (SMA)

Information requirements for SMA Key issues for SMA

Competitors’ costs Effect of acquisitions/ External orientation

Page 13 1: Fundamentals of strategic management

The successful SMA system must bridge a gap.

Financial GAP Future

Three main purposes for information from management accounting systems

2 Management control Information

Page 15 1: Fundamentals of strategic management

Good corporate governance Role of the board

Fiduciary responsibility Due diligence

Highlights the importance of directors having

Page 17 1: Fundamentals of strategic management

2: Corporate objectives and stakeholders

Objectives Critical success factors Corporate political activity

Key performance indicators

Corporate Social Responsibility

Page 21 2: Corporate objectives and stakeholders

It is not always easy to identify the primary objective.

Most companies pursue several objectives Examples

Stakeholders Possible interests

Page 25 2: Corporate objectives and stakeholders

Helps an organisation establish A B

Exam focus point

Page 27 2: Corporate objectives and stakeholders

Such opportunities and threats should be analysed in terms of

Possible issues relating to sustainability and triple bottom line

Page 31 2: Corporate objectives and stakeholders

Charities Service usage

Page 33 2: Corporate objectives and stakeholders