P3 All notes

An Introduction to Strategy
Strategy the basics
What is Strategy?

The Strategic Position

What is strategy?

Long Term Direction

This “long term” will depend upon the different organisations and the different industries. It is not the same for all.
However, it will be at least a year and is difficult to change once the path has been chosen.

The direction will depend upon the desired position within their environment. NIche? Traditional?

This, in turn, will depend upon the external conditions of the organisation

Gives an Advantage to the stakeholders

Meaning it builds upon what the organisation is good at and utilises its strengths. However, this all must be in a direction
that is agreeable and acceptable to its stakeholders. Their influence is very important in deciding upon strategy.

This, therefore, is looking within, rather than outside as above, the organisation.

Let’s now quickly look at some words you need to get used from the very beginning…

Strategic Fit

Tailoring the strategy to take advantage of the environment’s opportunites

Strategic stretch

Stretching competencies to create new opportunities eg Apple - computers to music to phones to iPads to TVs?

Strategic architecture

Logistics of buying and servicing - Ikea buildings and processes, Amazon ease of purchase
Strategies require:

1. Major resource control

2. Operational changes - different markets and cultures

3. Beliefs of those with most influence

3 Levels of Strategy

The purpose and scope of business to meet owners’ expectations

There are 3 levels...

Corporate

This is the top level - and involves decisions such as whether to continue with the division

Examples
How many countries should RCA open up in? What about IKEA?
Why is there no Apple store in Malta yet there is in Belfast?

Should Samsung concentrate on phones? Should Google create computer hardware?

Heavily influenced by shareholders and the stock market - in fact this could be the mission statement of the
company

Strategic Business Unit

Part of the organisation with its own, individual external market

How is this different to a division?

iPads may be a division at Apple but the strategy for selling them may be different in China compared to UK. These distinct
markets require different strategies so are different SBUs

An SBU in the public sector is when there’s a distinct client group

 It is a unit for strategy making purposes only.

Corporate strategy = whole organisation

SBU = distinct market

SBU Strategy

How to compete in a particular market - look at:

1. Competitive advantage

2. Create new opportunities in the market

3. Meet customer needs

Operational

How the business components (resources, processes and people) deliver the Corporate and SBU strategy direction

Eg. Apple stores are meticulously planned and their function is not just to sell products there. They are to convey the
ethos of the business as a whole in physical terms.

The integration of operational decisions and strategy is vital therefore

Vocabulary of Strategy

Just a little section to get you used to some terms..

Terms and Meanings

Mission
 Main Purpose - must be in line with stakeholders' values

Vision

The aspiration of the company

Goal

A general aim

Objective

Quantification of a Goal

Core Competencies

Resources which give a competitive advantage

Strategy

Long term direction

Strategic Architecture

Combination of Resources

Control

Monitoring of Actions

Strategy Management
Strategic Management

Dealing with NON-ROUTINE situations with organisation wide

implications

This can be problematic for many managers who struggle to see beyond their specific area - eg Accountants tend to see things in
financial terms only

Concepts rather than detailed analysis

It has 3 parts:

Strategic Analysis (Position)

Strategic Choice (Courses of Action)

Strategy implementation (Managing the Change)

Now look at this diagram:

It is not linear, as all 3 parts are interlinked.

Eg. A choice may only be possible after some implementation

Eg. Strategy analysis is ongoing so overlaps with implementation

So, please do not see these as 3 separate neat & tidy steps
Strategic Analysis

This is understanding where the organisation stands in its environment

It also involves:

Understanding the internal resources and key competencies available

Understanding the level of stakeholder influence

The sort of questions to be asked here include:

 1. What changes are happening in the environment?

2. How will they affect us?

3. Do we have any special advantages?

4. Can we make new opportunities with what we currently have?

5. How will any changes be viewed by the stakeholders?

So it is basically looking at what the key influences are now (and near future), and what opportunities do our current resources
and the environmental changes offer us

Let’s look at that last paragraph in a bit more detail and break it down…

Environment (External)

The organisation lives in a complex PESTEL and cultural world. Some organisations are more affected than others - look at
historical effects and potential changes

These changes offer both OPPORTUNITIES and THREATS (though it’s impossible to list and analyse each and every one)

Resources and Key Competencies (Internal)

Resources + Key Competencies = Strategic Capability

This can be broken down into STRENGTHS and WEAKNESSES (or competitive advantages and disadvantages)

eg Management, Financial Structure, PPE, Products

Core Competencies
Skills / Know-how that others would find difficult to imitate (eg Tutors). An understanding of these may lead to new
opportunities
All of the above are not just to be ‘fitted in’ to the current opportunities the environment provides but also
‘stretched’ to create new ones

Influences
Corporate governance and cultural aspects are to be considered here, especially in terms of which stakeholder is to be
taken most notice of. (Think of Mendelow in P1)
Strategic Choice

Understanding the bases guiding future strategy

Strategic Choice (Courses of Action)

Understanding how strategy options are generated

Understanding how the options are evaluated

Identifying the bases

Look at stakeholder influence

Look at the competitive advantages

Generating options

3 options:

1. Which geographical areas to concentrate upon?

2. How to structure the business?

3. Organic or acquisition growth?

The key point here is that the most obvious ‘next step’ for a business might not necessarily be the best and so creating options is
worthwhile

Evaluating the options

Which builds on STRENGTHS?

Which overcomes WEAKNESSES?

Which takes advantage of OPPORTUNITIES while minimising THREATS

Does it “fit” the current environment?

Can resources be ‘stretched’ for the new option?

Acceptable to stakeholders?

Ultimately there is unlikely to be a clear winner and so much judgement is required.

Neither is the process likely to be totally objective with manager managers having vested interests

Strategy implementation

Strategy implementation (Managing the Change)

These are

1. Strategy into action by the structure of the organisation

2. Strategy into action by the planning of resources

3. Strategy into action by the management of the change

All of the above components need to be integrated so that they become core competencies themselves (which others find
difficult to match)

Typical Questions

Who is responsible?

What organisation structure changes are needed?

Which management systems need to change?

What information systems are needed to monitor progress?

What are the KEY tasks?

How much re-training is required?

Are new staff required?

Managing change also requires overcoming resistance to change and dealing with routine matters

Strategic fit & Stretch

Strategic fit & Stretch

Strategic fit (environment led)

Managers trying to develop strategies by identifying opportunities in the environment, and adapting their resources to take
advantage

It is trying to meet the market needs.

Eg. FirstIntuition opening up in London and Bristol

Those locations are very attractive for ACCA providers.

However, there is little evidence to suggest that companies operating in attractive markets perform better than those which
seem less attractive
Strategic “stretch” (resource led)

In fact, success was the result of managers identifying strategies on the basis of “stretching” competencies to provide
advantages

“Stretching” is using resources to yield new opportunities eg aCOWtancy.com

A small business might try and change the “rules of the game” to suit its own competencies eg Apple 10 years ago

Strategy in different contexts

Small Business

Limited number of markets and limited number of products

Scope of Operation = less of a strategic issue

Analysis and research = no departments, all performed by the owners often

Competitive strategy = VERY important

Strategy choice = often limited (depends greatly on owner) but

financing issues will become key

Multinationals

Diverse products and geography

Issues of structure and control = very important (Does HQ add or detract value?)

At SBU level - very similar to small business above

How to allocate resources = very important

Co-ordination of operations is a big strategic issue

Manufacturing and Service

Competitive strategy for a service firm = wider aspects of the organisation eg. Swiftness of service, ambience, staff attitude etc
Competitive advantage of a manufacturing firm = the product itself (though many customers believe products to be similar so
again the differentation comes from the wider aspects of the organisation)

Nationalised Companies

Strategy influenced greatly from external sources eg. Government

Greater tendency towards centralised control and reporting

Public Service Organisations (eg Health and Bus Services)

Often struggle to create surpluses to re-invest

This can lead to mediocrity of service

Allocation of resource becomes very important

The 3 Lenses of Strategy

The 3 Lenses of Strategy

Strategy as Design

This is where strategy comes about as part of a rational, logical and planned (designed) process

Suited to a hierarchical structure where strategy is delivered from the top down

Strategy as Experience
 This is where strategy is said to come from the culture of an organisation, future strategies come from past experience

Here, strategies come about by adapting the current strategy.

They will be incremental and the result of compromise between managers

They will be heavily influenced by the company culture and its history, “it’s the way we have always done things and has
been successful so far”

Strategy as Ideas

This is where strategy is said to come from ideas that pop up at different levels of the organisation and at different times,
not in a logical or planned out manner

Many different ideas will compete with each other here. The development of these ideas should be allowed to flourish and
so not too much management control is required
It is what is known as an “emergent strategy”

Using the Lenses

Looking through one lens only can be short-sighted and miss potential opportunities and threats

Strategic Position
External Analysis
PESTEL Analysis

Introduction to Understanding the Environment

Well this brings up 3 difficulties:

1. There’s so much going on that even identifying the influences still may not paint an overall picture of the important influences

2. Speed of change in these influences is growing ever more rapid

3. Managers are just people.

They oversimplify - by concentrating on what has historically been a key influence

So frameworks have been developed to try and cope with the complexity and challenge natural managerial thinking

PESTEL Analysis

Limitations:

This framework identifies the factors in the categories.

However it’s pretty useless as just a list, so models later on in the course are used to inform and guide analysis
It cannot quantify effects

Porters Diamond

Framework 2: PORTER’s DIAMOND

This framework is particularly important in GLOBAL competition contexts

This model suggests there are inherent reasons why some nations & some industries are more competitive than others

For firm strategy it also includes:

Local rivalry can really push the industry in that nation

“High status” industries eg Investment banking in UK can lead to a competitive advantage

How has the Diamond been used?

1. National Level

Encouragement of competition by governments, rather than being protected from outside competition

Governments trying to foster high standards amongst its population

2. Organisational Level

Building on their countries advantages eg Benetton in Italy

Criticisms of the Diamond

More relevant to developed nations

Does not consider multinational companies

In the Exam

Be careful of companies who do well locally - due to the local conditions - this may well not transfer abroad if that is the
strategy

Also, if you are a company competing in an industry which has no local advantages, be careful of competitors growing in
countries where they have a natural advantage

The examiner will make it quite clear when he wants you to use this as he will be explicitly giving you the local resources /
structure / supporting industries / local demand

All you have to do, then, is plug them into the model
It is a fairly specialised model and so won’t be as prominent in the exam as, say, the 5 forces model

Learn more list

Silicon Valley in London?

Good example of the diamond in action?

Industry, Sector and Convergence

Types of Industry

Type Explanation Example

Fragmented Small firms to small portions of market Dry Cleaners; Hairdressers

Emerging Just starting to develop Space travel

Mature Latter stages of lifecycle Car manufacturers

Declining Less firms, less sales Coal mining

 Global Worldwide marketplace Professional footballers

Convergence

This is where 2 or more industries come together and serve the same marketplace

When this happens, there is a huge impact on the industry

Apple went from producing computers, then to iPods then to iPhones.

In the latter they effectively converged the phone, mobile computing and music sales industry together in some aspects

Apple are now seemingly headed in the direction of Televisions, this could have an enormous effect not only on the TV
manufacturers but also the broadcasters, as different industries converge

In doing so - new markets emerge also eg The app store and the ability to “rent” TV and music.

The renting of music is still an emerging industry and one which looks set to dominate the marketplace

1. Demand - led Convergence

Customers bring the industries together. eg Designers and developers.

Here the geek and the stylish are merging into one - as this is what the customer wants.

He doesn’t want to deal with 2 separate people when creating his website

2. Supply - led Convergence

Suppliers bring the industries together.

This happens a lot in the technology industries (see Apple example earlier) as they are aware of the possibilities before the
consumer

Convergence of Markets

This is increasing worldwide, consumer needs are becoming more similar.

 Not only that they are changing in line with each other (across nations).

Consumers then become global consumers and may look for global suppliers

This means that brands, marketing etc can all be developed globally, with cost advantages in doing so

Cost Advantages of Globalisation

The obvious economies of scale where large volume, standardised products are required

Efficiences from getting the lowest global cost suppliers (however think of recent move back from outsourcing customer
service to highly skilled, cheap labour in India)

Government Policy towards globalisation

Technical standardisation between products due to freer markets and trade between countries, such as in the airline industry

Some countries actively encourage global operators into their markets eg The gaming industry in Malta

Porter's 5 Forces

Porter's 5 Forces

Porter proposed this as a means of examining the competition at the SBU level

(if this was performed at a more general level the variety of influences would be so big, it would reduce the value of the analysis)
Porter's 5 Forces

Threat of Entry

This becomes a problem to a company when:

1. No economies of scale exist currently

2. Little capital is required to set up

3. Competitors expect very little retaliation

4. There are few Legal restraints to get into the industry

5. No differentiation of your own product

These barriers to entry differ in different markets, in the exam you need to look for:

What barriers exist & how powerful are they

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Power of Buyers / Customers

This is a problem to the company when:

1. Suppliers are small and many

2. Many alternative suppliers (we have a lack of differentation)

3. The Item sold to the customer is high % of their total cost (this makes buyers shop around and “squeeze” suppliers)

4. Switching suppliers is cheap and easy

5. Backward integration is possible (buyer acquires a supplier)

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Power of Suppliers

This is a problem to the company when:

1. There are few suppliers (eg NHS or BBC in UK)

2. Switching is expensive and difficult

3. The supplier has an excellent brand

4. Forwards integration is possible

5. Customers are fragmented

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Some organisations (eg RCA) do not supply tangible goods but a service.

The availability of skilled staff is therefore crucial and a strong differentiator

A big problem in creating a strategy is how the power can be enhanced and make sure that in the “buyer-seller”
relationship both win…

Threat of Substitutes

Higher when:

1. Substitution of Product easy (eg Email v postal service)

 2. Substitution of Need easy(Phone made ipod unnecessary for some)

3. Generic substitution of Need (Car v Holiday)

4. Substitution of Need for Nothing (eg Cigarettes)

Key points to look for in the exam:

Does the substitute make our product obsolete?

Does the substitute bring a higher perceived benefit?

Can the buyer easily switch to the substitute?

Can the risk of substitution be reduced by building in “switching costs”

I read an interview with the head of Evernote about making its product free and then charging for a premium service if required.

His thoughts were counter-intuitive but backs up the switching costs theory - he said that to grow the number of users who
transfer to the premium package - you need to make the free package even better!

(Mailchimp did a similar thing and reported equal success in their premium service takeup)

The idea is that the free service becomes so useful that “switching” to another provider is unthinkable as you have used this one
so long and have spent time organising your account (think facebook).

Therefore switching costs are now very high (if only in terms of time) and so now when you need something more you look to
that brands premium service rather than elsewhere

Competitive Rivalry

Is the rivalry going to intensify and how can it be influenced?

A problem to the company when:

1. The competition is of similar size

2. There are more global customers in market

3. There are high fixed costs (thus making turnover vital and can lead to price wars)

4. Extra capacity only available in large increments

5. Weaker companies are being acquired

6. There are high exit barriers (eg specialised plant bought or redundancy costs)

Lifecycle and Competition

Lifecycle and Competition

Lifecycle

1. At the Intro stage = Few Competitors

2. At the Growth stage = Fight for market share is strong

3. At the Maturity stage = The weakest competitors die /Price-cutting for volume then emphasis on low costs

4. At the Decline stage = The exit of some competitors

Lifecycle Model & Costing implications

At each phase, the sales and costs spent will be different, both in terms of volume and price

Stage Cost Type

Development R&D and set-up

Introduction Marketing and Advertising

Growth Costs to increase capacity; Learning effect and Economies of Scale; Working capital increases

Maturity Marketing and product enhancement

Decline Restructuring costs

The product lifecycle will help:

1. Decide when to enter / leave market

2. New products - see costs and sales over all its life

3. Existing products - assess where it is in the lifecycle and what the future prospects are

Cycle of Competition

This again tries to help understand competitors behaviour

“New initiative - copied and bettered by competition expected”

Effect

In a growing market - prices fall and quality improves

 In the maturity phase - lower prices only at expense of quality (so lower quality)

In the decline phase - lower prices to the point of no profitability

Opportunities & Threats

Opportunities & Threats

SWOT analysis

S = Internal resource STRENGTHS

W = Internal resource WEAKNESSES
O = Environmental OPPORTUNITIES to increase competitive advantage
T = Environmental THREATS to decrease your competitive advantage

Notice how S&W are internal; O&T are external

Here we are concentrating on the opportunities and threats in the competitive environment

How can they be identified?

1. Look for changes in the environment

2. Look for strategic spaces (gaps in the market)

3. Use the PESTEL framework to ensure you’ve searched for O&T in the full environment

After the identification, the next step is to

Consider the competition

Think of how the 5 forces may change

Think of which area of the lifecycle the market is in - is it about to change area?

Is there an opportunity for a new market segment?

Forecasting Techniques
Scenario Planning

Scenario Planning

The Use of Scenarios

After identifying the different factors and drivers, they can be usefully built into scenarios

Scenario Planning

Particularly useful when preparing a long term view (minimum 5 years) with:

Few Key influences

High uncertainty surrounding them

eg Oil Industry (raw material availability, price and demand)

 This will result in a limited number of logically consistent, but different scenarios to be compared

Benefits

Sensitivity analysis of different strategies (what happens if…)

Challenges the status quo - promoting more innovative approaches

How are scenarios prepared?

1. Step 1

Identify high impact, high uncertainty key Factors (PESTEL analysis) - keep the numbers low

2. Step 2

Identify Different Possible futures in each factor

3. Step 3

Build scenarios of plausible configurations

Linear Regression

Linear Regression

This models how dependent one variable is on another.

For example cost (X) and volume (Y).

These variables are called the dependent and independent variables.

The Dependent variable’ value depends on the value of the other variable.

E.g. Sales may be dependent on marketing spend

You would then need to determine the strength of the relationship between these two variables in order to forecast sales.

For example, if the marketing budget increases by 1%, how much will your sales increase?

Regression Equation


This helps us predict the variable we require. 


The formula for a simple linear regression is as follows:

Y = a + bx

where:

Y is the value we are trying to forecast (dependent)

“b” is the slope of the regression,

“x” is the value of our independent value, and

“a” represents the y-intercept. (the value we are trying to

forecast when the independent value is 0)

A simpler way to picture this might be thinking of variable costs and fixed costs.

We are trying to forecast TOTAL COSTS

So
Y = Total costs
b = Variable cost per unit
a = Fixed Costs
x = Amount of units produced

In this graph, the dots represent the actual date.

Linear regression attempts to estimate a line that best fits the data, and the equation of that line results in the regression
equation
Once a linear relationship is identified and quantified using linear regression analysis, values for (a) and (b) are obtained and
these can be used to make a forecast for the budget such as a sales budget or cost estimate for the budgeted level of activity

Covariance

Covariance shows the direction of the relationship between 2 variables as well as its relative strength.


If one variable increases and the other variable tends to also increase, then we experience positive covariance.

If one variable increases and the other tends to decrease, then the covariance would be negative.

Correlation

This is concerned with establishing how strong the relationship is:

1. Perfect Correlation

refers to a correlation where all pairs of values lie on a straight line and there is an exact linear relationship between the
two variables.

2. Partial Correlation

refers to a correlation where there is not an exact relationship, but low values of (x) tend to be associated with low
values of (y), and high values of (x) tend to be associated with high values of (y).

They may also have low values of (x) associated with high values of (y) and vice versa (negative correlation)

3. No Correlation

refers to a situation where the two variables seem to be completely unconnected

Correlation Coefficient

The correlation calculation simply takes the covariance and divides it by the product of the standard deviation of the
two variables.

The degree of correlation can be measured (r).

This gives a value of -1 and +1. A correlation of +1 can be interpreted to suggest that both variables move perfectly
positively with each other, and a -1 implies they are perfectly negatively correlated.


Coefficient of Determination (r2)

 This measures how good the estimated regression equation is and is designated as r2 and has the range of values between
0 and 1. The higher the r2, the more confidence in the equation.

Limitations of Simple Linear Regression Analysis

Assumes a linear relationship between variables;

Measures only the relationship between two variables where in reality many variables exist;

Assumes that the historical behaviour of the data continues into the foreseeable future;

Interpolated predictions are only reliable if there is a significant correlation between the data.

Time Series Analysis

Time Series Analysis

Any data collected over time (eg sales volumes) can be used here

Time series forecasting methods are based on the assumption that past patterns in data, such as seasonality, can be used to
forecast future data points.

Such patterns allow for more curved than linear predictions.

Let’s take a simple example.

Over the past 6 years, a particular company has noticed that on month 12 the sales are usually 30% higher than typical monthly
volumes.

Thus it makes sense to forecast that month 12 for the forthcoming year will follow a similar pattern
This graph shows a scenario where linear regression has predicted an increase in sales of roughly €4M per quarter

However Time series has taken into account past trends which suggest that Q1 sales are usually €4M below trend, Q2 are €4M
above and Q3 are €4M below.

In time series analysis, the trend line itself may also be curved.

Indeed it would only be linear as the above example, if the favourable and adverse seasonal affects cancel each other out

Time Series Analysis Components

Time Series Analysis is made up of three main components used in different ways to produce future forecasts:

Average

the mean of the observations over time

Trend

a gradual increase or decrease in the average over time

 a gradual increase or decrease in the average over time

Seasonal influence

predictable short-term cycling behaviour due to time of day, week, month, year, season and so on

Forecast data might also be affected by cyclical movement (unpredictable long-term cycling behaviour due to the business
cycle or product/service lifecycle) and random error (remaining variation that cannot be explained by the other four
components)

Variations of time series analysis

Time Series Analysis offers 2 main variations:

Moving Averages

The forecast is based on an arithmetic average of a given number of past data points.

This should make the trend become more obvious.

Let us take a simple example by considering the following data:

Period 1 2 3 4 5 6 7 8 9 10 11 12

Sales €M 47 50 51 48 48 52 52 49 50 52 54 50

It is difficult to immediately spot the trend as the figures appear to be constantly increasing and decreasing.

However, a moving average (average sales from periods 1-4, 2-5, 3-6 etc) of this data using 4 period averaging would give
the following result.

Moving Average 49.00 49.25 49.75 50.00 50.25 50.75 50.75 51.25 51.50
Exponential Smoothing

A type of weighted moving average that allows inclusion of trends etc. This gives greater weighting to more recent
data in order to reflect the more recent trend.

An exponential smoothing (average calculated by taking 4 times the 4th period, 3 times the 3rd period, 2 times the
2nd period and 1 times the 1st period and then dividing by a total of 10) of the data would present a similar picture

Exponential Smoothing 49.20 48.80 49.90 50.80 50.40 50.30 50.80 52.10 51.60

Advantages and Disadvantages

Advantages Disadvantages

Identifies seasonal variations Complicated

Can be non-linear ‘Seasons’ may change

Accurate Based on historical data

Less useful in the long term

Conclusion

Linear regression is most relevant when there is a linear relationship between the variables.

On the other hand, time series analysis is most appropriate when seasonal variations causes curved forecasts.

The reliability of a forecasting method can be established over time.

If the forecasts used, turn out to be inaccurate, management might decide to use alternative methods of forecasting.

On the other hand, if forecasts prove to be accurate and successful, providing management with key data for decision making,
then it is more likely that management will continue to use the same forecasting methods.

Marketing and Value of Staff

Benchmarking

Benchmarking looks at the relative performance of an organisation.

Increasingly companies benchmark themselves against their industry rather than against their historical performance.

Benchmarking against competitors can be problematic because of choosing what sector to compare it with.

It is possible to make comparisons, using published government statistics, however, these figures have to be treated with care.

Is the same criteria used?

The shortcomings of industry norm comparisons have encouraged organisations to seek best practice wherever it can be found.

Johnson, Scholes and Whittington comment that ‘the real power of this approach is ... shaking managers out of the mindset that
improvements in performance will be gradual as a result of incremental changes in resources or competencies’ .

They give an example of a police force studying a call centre as a way of improving their response to emergency telephone calls.
Benchmarking Limitations

1. You sometimes get what you measure, this can be a problem

If the original strategy and benchmark is flawed, then the benchmarking will encourage the organisation to continue, perhaps even
accelerate, in the wrong direction.

2. It doesn't give reasons

Benchmarking compares inputs, outputs or outcomes, but not the reasons for poor performance

3. The benchmark does not directly compare competencies

As mentioned earlier, improvements may be due to external environmental factors, not directly linked to what the organisation is
striving to achieve.

Different Approaches

Approach Description Example

Internal One internal unit to another All divisions to best performing

division

Operational One operation to that in a different industry How to process online clothes
orders against Amazon

Competitive Own performance to most successful competitor (unlike the others McDonalds v Burger King
must not let the other party know)

Customer Against what customers expect

Methods of Competitor Benchmarking

As most competitors will not produce more information than they need to - the FINANCIAL STATEMENTS are often used..to
compare
Financial performance (including segment analysis)

KPIs such as ROCE, GP etc

Then significant differences investigated and competitors products reverse engineered

CSF's & KPI's

Critical Success Factors & Key performance Indicators for

products/services

CSF = Means vital to excel in, in order to out-perform the competition

Identifying CSFs and setting KPIs for them is crucial

CSFs must be matched to customer needs

A 6 step approach to using CSFs

1. Step
Identify CSFs (Use marketing mix and customer needs to help here)

2. Step
Identify critical competencies (what makes better performance in the CSFs)

3. Step
Develop the critical competency to gain a competitive advantage

4. Step
Identify KPIs for the critical competencies

5. Step
Develop the criticial competencies to prevent competition catching up

6. Step
Monitor KPIs (including competition performance)
The 4 Ps

Much business strategy is based on the marketing approach.

The approach needs to appeal to customer needs such as:

1. Quality

2. Design

3. Availability

4. Ease of purchase

Different types (consumer, commercial customers & government) of customer have different needs

The Marketing Mix (4Ps)

1. Promotion - Including direct sales

This will depend on market segmentation to an extent.

The company will decide on whether it is just pushing its features out to the customer through advertising, or whether it is trying
to get more indirect promotion by creating a great product that customers come to you (what is known as ‘pull’ (by the customer)
promotion)

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2. Product - Design & quality; Delivery & service

Customers are segmented according to their needs, so products can be developed to meet those needs. The closer the needs are
met, the higher quality the product.

Augmenting the product is a way of meeting these needs, or creating new needs.

3. Place - The channel of distribution

This is all about convenience to the customer. How easy is it to buy the product. Obviously the internet helps here, but many
products people like to actually go and browse or trial

4. Price - including discounts

This affected by costs, economy and competition.

It also depends on where you position your product (high or low end), or where the product is in its lifecycle.

Market penetration for example would mean a lower cost.

There are also practical issues such as loss leadership.

3 more P’s are sometimes added to the mix (particularly for services):

1. People

2. Processes

3. Physical Evidence
Internal Analysis
Culture

The Cultural Context

Culture affects all aspects of a business.

It is their basic assumptions, beliefs and guides its attitude towards stakeholders

The assumptions are ‘taught’ to employees joining through training and experience

Edgar Schein: 3 Levels of Culture

1. Outer Skin (or Values)

What an visitor sees when visiting the company.

The building design, the way the employees dress and the manner in which they interact

This can be a very ‘general’ ethical stance and is often seen in the mission statement

2. Inner Layer (or Beliefs)

Common views on specific issues shared by employees.

This is far less ‘general’ than the outer skin, as it refers to SPECIFIC issues eg:

Trading with politically oppressive countries?

Trade with companies with poor environmental records?

3. The Heart (or Paradigm)

The taken for granted assumptions and so rarely discussed.

The ‘core’ culture of the organisation

Not written down like in mission statements and ethical codes

Changing corporate culture is very difficult.

With effort the outer skin can be changed but it is very difficult to change the heart
The Cultural Web (Johnson and Scholes)
 Stories What core beliefs do they show? Do the beliefs go through all levels? Do they relate to strengths
or weaknesses?

Routines & Rituals Which are emphasised? Which would look odd if changed? What behavior do they encourage?

Organisational How organic & informal is it? How flat is it?

Structure

Control Systems What is most closely controlled? Is the emphasis on punishment or reward?

Power What are the core beliefs of the leaders? How strongly held are the beliefs? What prevents
change?

Symbols What jargon is used? What strategy is highlighted publicly? What status symbols are there?

Overall What is the dominant culture? How easy is this to change?

Communication of Core Values

Mission Statement

A general statement of the overall purpose of the firm

Good mission statements:

Have Vision (likely to persist for a while)

Show main intentions and why firm exists

Show main activity and position it wishes to attain

Show key values

Are capable of being lived up to

Often criticized as being bland and generic, but they need to be to ensure most stakeholders can subscribe to it
 The role of the mission statement

This depends on who drives the strategy largely and what their ethical stance is..the range can be as follows…

Strategy Drivers Legal Minimum Ideological

Internal Managers Secretive Evangelical

External Stakeholders Regulations Political

Communicating values

Leadership example

Conscious effort to change all aspects of the cultural web

Formally via codes or in house magazines

Through a reward / punishment structure

Learn more list

Don't fuck your culture up

It's more important than anything

The Mendelow Framework

Understanding the Influence of each Stakeholder (MENDELOW)

This framework is used to attempt to understand the influence that each stakeholder has over an organisation’s strategy.

The idea is to establish which stakeholders have the most influence by estimating each stakeholder’s individual power over – and
interest in – the organisation’s affairs.

The stakeholders with the highest combination of power and interest are likely to be those with the most actual influence over
objectives.

The Mendelow Framework

Power
Is the stakeholder’s ability to influence objectives

Interest
is how much the stakeholders care

Influence
= Power x Interest

However it is very hard to effectively measuring each stakeholder’s power and interest.

The ‘map’ is not static; changing events can mean that stakeholders can move around the map
Mendelow Framework - explanation

1. A) Low power, low Interest - Minimal effort

These can be largely ignored, although this does not take into account any moral or ethical considerations.

It is simply the stance to take if strategic positioning is the most important objective

2. B) Low power, high interest - Keep informed

Can increase their overall influence by forming coalitions with other stakeholders in order to exert a greater pressure and thereby
make themselves more powerful.

The management strategy for dealing with these stakeholders is to ‘keep informed’

3. C) High power, low interest - Keep satisfied

All these stakeholders need to do to become influential is to re-awaken their interest.

This will move them across to the right and into the high influence sector, and so the management strategy for these stakeholders
is to ‘keep satisfied’.

4. D) High power, high interest - Key players

Those with the highest influence.

The question here is how many competing stakeholders reside in that quadrant of the map.
 If there is only one (eg management) then there is unlikely to be any conflict in a given decision-making situation.

If there are several and they disagree on the way forward, there are likely to be difficulties in decision making and strategic
direction

Value Chain Analysis

Value Chain Analysis

Looks at the activities of a firm to see those which form a competitive strength

Primary Activities

1. Inbound

This is the receiving and storage of goods

2. Operations

This transforms the goods or service

3. Outbound

The distribution of the product to the customer

4. Marketing and Sales

5. Customer Service

Support Activities

These support the primary activities above..

Procurement

The purchasing of goods

 Human Resources

Recruitment, training and rewarding of staff

Infrastructure

Systems and routines including Quality control

It is rare for 1 company to do all the value activities itself. Normally specialisation occurs and the company is just a part of a
wider value system

In fact much of the value is created in the supply and distribution channels

Management should look at adding more value at each stage of the value chain

How to Add Value

1. More features

2. Less features but more user friendly

3. Making a purchase easier

4. Promotion of brand

5. Speed of delivery

6. Reliable service

7. Innovation

Using Value Chain Analysis

Creating value for customers ultimately leads to creating value for shareholders

In your exam the model is used to provide a strategic assessment of performance

Assess each link in the chain by asking yourself the following:

How (if any) is value added here?

 Is the value greater than those created by the competition?

Have added value techniques failed?

If there are no core competencies in the one area then consider outsourcing

Learn more list

People Tree
Where ethics is a resource

Resources & Competencies

STRATEGIC CAPABILITY

Using core competences to create a competitive advantage

Competitive advantage comes from the correct management of competences and resources

Resources

1. Threshold Resources

Without these an entity cant survive in the market

2. Unique Resources

Competitors don’t have these and would find it difficult to acquire them.

Therefore they can form a competitive advantage

However, be careful as these can disappear over time (eg Lose key employee, patent expires)
Competencies

1. Threshold Competencies

The ability to provide a threshold product. Same competencies as competitors (or v easy to imitate)

2. Core Competencies

Ability to meet CSFs and so give competitive advantage

3. Sustainable Core Competencies

Keeping the core competencies long enough to achieve strategic objectives.

So must be difficult to imitate

Competitive advantage

A competitive advantage is something that..

Creates value that customers are willing to pay more for

Creates same value as competitor but at lower cost

Capabilities

The co-ordinating of resources and competencies to create competitive advantage.

They are unique to each business

Dynamic capabilities

Create new capabilities by adapting and innovating

Cost Efficiency and Strategic Capability

Cost Efficiency

The level of resources needed to create value

Costs can be lowered by:

1. Economies of scale

2. Economies of scope
 producing more products with the same materials

3. Process design

4. Experience

Organisations should expect real costs per unit to decline over time - thus they must attempt to continue to produce value
for money

Corporate knowledge and Strategic Capability

‘Know how’ can form a competitive advantage, if it cannot be easily replicated.

It comes from a combo of unique resources and core competences eg

Experience of industry

Employee knowledge

Management of people to encourage innovation

Management of IT systems

Analysing Strengths and Weaknesses

This can be done in 3 ways:

1. Value chain Analysis

2. Capability Profile

An assessment of the key processes needed to consistently add value

3. SWOT analysis
 Management need a thorough understanding of the resources to perform a SWOT analysis

Preparing a SWOT analysis in the exam

In the exam , simply think “strategically” and write out the 4 lists from information in the case. Then you need to interpret it. This
involves ranking the list in terms of priority.

SW - concerned with the core competencies

OT - concerned with environmental factors

Valuing Resources

The resources could then be valued using the VIRO approach

Value

does the resource provide a competitive advantage

Imitable

How costly to imitate it

Rarity

how unique is the resource

Organisation

does the organisation utilise the resource fully

Learn more list

Hole & Cornerstone

Using a passion as a competitive advantage
Strategic Options
What Options does the Company Have?
Ansoff

Strategic Choice

Ok so we've looked at the environment - and called this strategic position (or strategic analysis).

This will almost always Question 1 part a)

Now our attention turns to Strategic Choice

This will tend to be question 1b) or c)

So, due to our studies so far, we now understand our environment and our SWOT.

So what should we do now - what options do we have that maximise our strengths &
opportunities and minimise our weaknesses and threats?

In the exam something will probably be going wrong, or things are happening in the environment that mean we need to change
somehow

Now this causes us a problem.

In Question 1a) we will have been looking at the environment USING THE CASE given to us - and just slotting the info into maybe
PESTEL or 5 FORCES and saying why they are important

Here, though things are completely different - the examiner is now saying SUGGEST a strategic option - which means you need
to think of something yourselves (eek!)

Well before you run off and hide in the corner, I have some good news for you..

Ansoff has created a really useful model to help you in the exam.....
So to grow, the company must:

1. sell more in its existing markets (try to make its existing markets bigger)

2. sell new products in its existing markets

3. sell existing products in new markets or new market segments (for example in other countries)

4. sell new products in new markets

These are strategic directions that Ansoff described in his growth sector matrix above

Although you won't have to do all of these in the exam (often you don't need any model at all), I thought I'd show you how
useful Ansoff is by showing where all the other models in this section fit into it..

1. Market Penetration

A sensible choice in a growing market. This would mean a bigger potential demand as time goes by.

Equally, not so good in a declining / mature market

How to do it

Persuade existing customers to buy more, through more use and marketing
Persuade customers who have not bought your product before to buy it now.

Maybe by advertising or special promotional offers.

Persuade customers to switch from competitors.

(notice how 1 and 2 increase total demand whereas 3 just takes a bigger share)

2. Market Development

How to do it

Start selling in new geographical markets (through regional, national or international expansion).
Offer slightly differentiated versions of existing products, or by making them available through different distribution
channels.

3. Product Development
 Why choose this strategy?

You have a strong brand and can extend the goodwill to new products.
You have a strong research and development department or a strong product design team.
To respond to a new product by a major competitor
To respond to changing customer needs / tastes or just making use of new technologies now available

4. Diversification
Concentric diversification

(also called related or horizontal diversification), means that the new product-market area is related in some way to the
entity’s existing products and markets
Conglomerate diversification

which means that the new product-market area is not related in any way to the entity’s existing products and markets.

These could both be achieved by (most likely) acquiring existing companies abroad or at least entering into JVs and
franchises etc or it could also be done by simple organic growth - though this would be far harder and slower (though
the returns may be greater)

Porter's Generic Strategy

Porter’s Generic Strategies

This deals with HOW to change your competitive edge and gives 3 possible options:

Cost Leadership

This means being the cheapest across the range of products and can be achieved through:

1. Cheapest suppliers

2. Economies of Scale

3. Technology use
The problem here is that only 1 company can be the cost leader and this is very difficult to continually achieve and maintain
threshold competencies

Differentiate your Product

This can be achieved through:

1. Brand building

2. More features

3. Less features (but great usability)

4. Ease of ordering

The problem here is that companies copy and become even better very quickly

Focus on a niche area

This is where you concentrate on one particular market segment and focus all your activities upon them.

You become very well known in that area, and are the natural “goto” choice.

The problem here is that growth beyond this niche is difficult

Strategic Clock

So far, when looking at strategic choice, we have seen that sustainable

advantage is created by adding value to customers greater than the
competition.

It is the customers perception of “Value for money”

This can come from:

1. A low price

2. Great product features

3. A combination of the two

Of course as this is due to customer perception - what one views as good value another doesn’t.

To help create a strategy based on the different variations of price and quality, may I introduce you to a model called...

The Strategic Clock

The different positions on the clock represent generic strategies for competitive advantage (5 succeed, the other 3 fail as shown
in the diagram)

Using the Clock

In the exam, use this when asked to suggest a suitable business strategy from a case study

Successful Strategy Description Example

Low Price, Low Features

No frills Low Cost Airlines
Good for price conscious customers

Low Price, Average Features

Low Price Supermarkets own brand
Still needs to be least cost producer

Different through features or quality

Differentiation Innocent Smoothies
Prices slightly above average

Richard Clarke Academy

 Hybrid Higher than average benefits at a lower than average cost
aCOWtancy.com

Jaguar
Above average benefits for above average price
Focussed Differentiation Apple
Needs a strong brand
Hilton Hotels

The failing strategies on the clock - allow the competition to adopt the same strategy and beat you

It is crucial to understand the CSFs for each position on the clock and remember that benefits/features can be perceived
(due to advertising etc) and not real.

They can also be relating to the service and not the product itself (e.g. Amazon booksellers)

Strategy Development

This can be done INTERNALLY, through ACQUISITIONS or via an ALLIANCE

Internal Development

Often called 'Organic growth'

1. Build on company's core competencies

2. Suits a Risk-averse culture

3. Easier to Control & Manage

4. Slow

5. Growth restricted by own competencies

6. Better for growth at home rather than abroad

Acquisition & Mergers

1. Fast to new markets

2. Gains new competencies

3. High risk due to initial costs

4. Funding problems of initial costs

5. Problems with cultural fit

Strategic Alliances

2+ businesses share resources to pursue a strategy

1. No large initial costs

2. No cultural fit problems

3. Specialise on each businesses own competencies

Types of STRATEGIC ALLIANCE

Joint Venture

A new organisation is set up

Both venturers put in resources

Formal & slow

Licence agreement

Allow others to use your resources in a new market

Less Control
 If successful the other venturer may then develop their own and thus not need the licence

Needs little initial costs

Needs trust and cope ration

Develop or Divest SBUs?

Parent's & SBUs

Parent's & SBUs

Shareholders can either own SBUs directly or Indirectly via a parent company who then owns all the SBUs.

In order for the indirect structure to be of benefit then the parent company must add value or else it is just another centre

So, how can the Parent add value?

Role Function

Manage SBUs manage themselves. They are simply investments for the parent, who must manage them better
the than shareholders could themselves directly
Portfolio

Manage Economies of scale and sharing of knowledge, therefore the SBUs cannot be widely
Synergies diversified. Persuading the SBUs to cooperate can be tricky

Develop Parent teaches the SBU. Good where the SBU is not fulfilling potential or P has specialist knowledge
 the SBUs

How can the Parent destroy value?

Role Dys-Function

Manage the The Parent's choices of SBU are actually worse than if the shareholders had chosen them
Portfolio directly

Manage Synergies Not enough synergies realised

Develop the SBUs The knowledge didn’t benefit sufficiently as there wasn’t a good enough ‘fit’ between P and
SBU

SBUs as a portfolio

The aim here is to have a range of SBUs and those that succeed outweigh those that fail.

Choosing the SBU to invest in (or which to sell) depends on the different markets in which they exist and what our strategic
position in those markets is

The next section looks at this in more detail...

Shareholders can either own SBUs directly or Indirectly via a parent company who then owns all the SBUs.

In order for the indirect structure to be of benefit then the parent company must add value or else it is just another centre

BCG Matrix
Boston Consulting Group Matrix

This allows a company to select the best strategy for SBUs whilst also staying in line with overall corporate strategy.

The objective of the matrix is to assist with the allocation of funds to different products or business units.

Market Growth

Above 10% = high

Below 10% = low
Market Share

Sales as % of biggest competitor’s sales

Weaknesses of the BCG

Assumes that a small market share is not a sustainable situation - Porsche might disagree!

There are other factors to consider apart from market size and share - such as strength of the competition, brand strength
etc

Difficult to calculate exactly what the market size and share is

High and low market share is difficult to define

Growth rates around 10% become problematic - fall below or inch above and suggested treatments are massively different

Shell Directional Policy

Shell Directional Policy Matrix (attractiveness matrix)

 Competitive Abilities Sector prospects

Market Share Profitability

Managerial Ability Growth

Low Cost Base Size

Innovative Strength of Competition

Know How Opportunities & Threats

Brand Entry Barriers

The strategic decision about what to do with the product in the future is guided by the position of the product in the grid.

How to use the matrix​​

The matrix can be used as a guide to the direction of future strategy:

Leave the market when the industry or sector attractiveness is low and the entity has a weak position in the market.
 However, a phased withdrawal may be better to maintain the company's reputation.

When the position is strong in its market, then look to maintain or improve the position.

However, if future prospects for the business sector are poor, the entity should probably treat its product as a ‘cash cow’.

When the position is average, but the sector is attractive, its strategy should be aimed at competing more effectively.

When the position is average, and so is the sector, then proceed with care due to the risks involved

When the position is weak in a sector with strong growth prospects, the you should invest heavily or get out (like a ? in the
NCG)

Withdraw Phased Withdrawal Maintain / Improve

Weak position in unattractive market To keep reputation Good future market prospects

If not loss making Or treat as cash cow

Parenting (Ashridge Portfolio) Matrix

Parents can add value (synergies, expertise, risk management) or destroy

value (extra costs, red tape and delays) for SBUs.

It depends how good the ‘fit’ is between the Parent and the SBU
 Ashridge Portfolio

Category Description Treatment

Heartlands Parent can add value without risk of harming Core of the future corporate strategy
SBU

Distractions Parent understands SBU well but can do little Needs a light touch from the parent
/ Ballasts to add value
SBU obtains little value from being in the
group

Value Traps Parent can add value but may do more harm Only focus if can be moved to heartlands
than good To do this - Parent must be willing to learn SBU
business - not a ‘we know best’ attitude
 Aliens The misfits. Parent has poor fit with the SBU Dispose of them
and can do little to help anyway

So this matrix, in the exam, indicates which companies should be got rid of and why.

This is called "disinvestment" and the potential disinvestments would be:

1. Aliens

they would achieve more in another group

2. Value Traps

the lack of 'fit' makes a potential loss in value likely

3. Ballasts

May do better elsewhere as parent has little to offer

Public Sector Portfolio Matrix

Public Sector Portfolio Matrix

Meeting the needs of the public is obviously subjective and so is a major weakness of the model.

Also effectiveness may simply be dependent on level of funding - and this funding level the only difference between the political
hot boxes and the public sector stars
So what this model tries to do is look to see if:

1. The Service can be provided effectively and

2. How desirable is the service

Category Description Treatment

 Public High public need and well funded. Keep funding
Sector Attractive also to the public Examples difficult to find due to
Stars differing views of the public

Political Very popular but ineffectively run - perhaps due to being Difficult decision as whether to fund
Hot Boxes new or inadequately resourced more
Some NHS services

Golden Low need, but well resourced and effective Viewed as over staffed - at risk of future
Fleece budget cuts

Back Ineffective, no public or political support Dispose of them

drawer
issues

Go Global?
International Expansion

International Expansion

Why expand abroad?

1. Economies of scale can be achieved more easily

2. Markets are converging - enabling a standard product to be sold in many markets

3. Avoiding currency risk by setting up businesses abroad, thereby matching income and expenses in the same currency

4. Using home countries natural competitive advantage (Porters Diamond) and transferring skills abroad

5. To compete with other players following an international strategy

6. To overcome import/export regulations

So these are some of the reasons why businesses should look to expand abroad, though of course this does not guarantee
success.

A lot of thought has to go into how to expand.

Should you open up a direct subsidiary or go into a joint venture with a local business, should you license or franchise your goods
etc

Equally thought needs to be given to the local market. What works well in one country may not in another and so a
product/service may need to be altered in some way - though again not always, many standard aproduct also sell well in many
different countries and cultures

How to Expand Abroad

Strategy

International Standard product made in selected countries. Thus getting economies of scale and minimising
Scale Operations distribution costs. Head office probably in home country

International Value is added in the different countries. Therefore may be branded differently there. Local
Diversity variations made. No attempt at global recognition

Globalisation Standard product and brand name, but produced in the various different countries. Nothing
centralised

So, which is best?

Neither, probably a mix. The aim is to minimise the costs of variation, while maximizing the economies of scale

Multinationals v Global companies

 Multinational Global

Strategy For each foreign market separately Worldwide strategies

Products Adapted for each market Standard with minimal variations

Marketing Adapted to each culture Uniform with minimal variations

Locations Based on individual potential profitability Based on ability to contribute to global strategy

Culture Often that of the head office country Globalised. Management from different countries

Assessing the options

SAF Model

Johnson & Scholes SAF Model

A successful strategy needs to be:

1. Suitable (fit)

2. Acceptable (to stakeholders)

3. Feasible (resources available)

These 3 tests can be applied to any strategy decision!

 Suitable Acceptable Feasible

Uses Strengths Effect on shareholder wealth M - word model (see below)

Overcomes weaknesses Cost / benefit

Meet objectives (profit, more control etc) Effect on gearing

M achinery - sufficient spare capacity?

M anagement - Sufficient skills?
M oney - How much needed? Cashflows likely?
M anpower - Amount and skills of employees needed?
M arkets - Current brand strong enough or new one required? What share is critical?
Materials - Quality? New suppliers needed?
M ake-up - Does the org structure need changing?
M oo-able - Does the new strategy moo like a heifer - sorry got carried away..

Achieving Competitive Advantage

Different Approaches
Lock-in Strategy

Lock in Strategy

The idea behind this is that when a customer purchases once from the company they are effectively “locked in” to
buying from them in the future
Eg Microsoft Office package
 Eg Apple iTunes

It often means being the ‘industry standard’

These type of strategies are now less of a stronghold as they once were.

Only a few years ago the Microsoft “Windows” operating system would have been a great example but it is now quickly losing
its grip on the market.

The same can be said of iTunes for Apple

Another form of lock in is the purchase of an item with a long UEL.

This effectively ensures that all repairs and servicing is through that company too

Evernote

The idea here is that customers become locked in, using the product for free.

They have no desire to use another similar system because all their old usage is all in the Evernote system.

Similar to Microsoft Office and Apple i-tunes etc

Strategy under Hypercompetition

Strategy under Hypercompetition

This is when competitors make regular, aggressive and big changes.

It creates an environment of rapid change.

Cost advantages and differentiation here are far harder to sustain

Assumptions and methods are constantly and aggressively being questioned

Eg Book publishing and sales; Mobile phones (how Nokia got left behind so quickly); Music Industry

In such situations any competitive advantages are temporary, competitors always looking for ways of competing on different
bases

The long term must become a series of short term initiatives

Possible Strategies

1. Shorter product lifecycles

(e.g. iPhones updated every 6-12m) - This gives the competition less time to catch up and imitate.

2. Imitate competitors (to remove their advantage)

This can be done by reverse engineering, looking at their product and working back to see how they made it so well / cheaply

3. Respond quickly to changes

This is vital, any lagging behind and you will be perceived as being old fashioned very quickly and also competitors begin to get
customers more "locked in" to their product

4. Concentrate on niche areas

This is effectively a way of getting out of the main competition. Instead you look for a small segment of the customerbase that
you can adapt your product towards - and focus on

5. Be radical and prepared to change the model

There is a school of thought that says you should not try and aim only at market share but create an entirely new market (think of
the iPad)

6. Build alliances

(google and its android system).. and this is the subject of the next section..

Implementation
Change Management
Contextual Features of Change
JSW argue that successfully managing change depends on context.

This context depends on the specific organisation

JSW again use the work of Balogun and Hope Hailey to consider the contextual features that need to be taken into account
in deciding how a strategic change programme should be managed
There are eight contextual factors, identified by Balogun and Hope-Hailey , which
significantly influence strategic change

1. Time

This refers to the amount of time available to implement change

This, occassionally can be super important, for example when the company is losing money at an alarming rate (and so needs to
change quickly)

How much time does the organisation have to achieve this change? Is it in a short term crisis or is it concerned with long-term
strategic development?

Are stakeholders, such as the stockmarket, expecting short term results from the change?

2. Scope of change

Is just a small realignment or a big transformation (requiring a huge cultural change) needed?

Then think of what action is needed (an incremental, evolutionary approach or a big bang one)
Realignment does not alter the fundamental beliefs of the organisation. It is therefore easier than transformation

Evolution can take a long time.

Revolution, on the other hand, is immediate and requires simultaneous action from many change managers. It is therefore the
most difficult to accomplish successfully

So Managers need to be aware of what type of change they are looking for: adaption, reconstruction, evolution or revolution

1. Capability

This refers to what experience there is of managing change in the organisation.

Does the organisation have managers who have successively managed change in the past?
Is the workforce used to change and have they readily accepted changes in their work practices?

2. Readiness for change

This concerns the organisation’s attitude towards change.

Is it likely to embrace it or oppose it?

Are staff aware of the need for change?

If they are, how willing and motivated are they towards the change?
How much support generally is there for the change? How much understanding is there for the scope needed?

3. Preservation
To what extent is it essential to maintain continuity in certain practices or preserve specific assets?
Do these practices and/or assets constitute invaluable resources, or do they contribute towards a valued stability or identity
within an organisation?

4. Diversity
Is the staff group concerned diverse or relatively homogeneous in terms of its values, norms and attitudes?
Are there many subcultures or national cultures within the group?
Are there different departments or divisions or is it one particular staff group?
Are there professionals who identify more with their profession than their organisation?
With whom or what in the organisation do different staff groups identify – their team, job, department, division or the
whole organisation?
5. Capacity
How much cash or spare human resource is there to divert towards the change?

6. Power
Where is power vested within the organisation?
For this change to be successful, who are the major stakeholders within and outside the organisation whose support must be
canvassed?
Is the unit needing to change part of a larger group or is it relatively autonomous?

Organisation Structure
Span Of Control

Recent trends is towards a flatter structure

As a flatter structure is more adaptable and cheaper as managing each other does not always add value
Tall Narrow - Organisation A

Many layers of management. Close supervision

Task specialisation

Very formal roles and job titles

Slow to adapt as info takes a long time to get from bottom to top

Wide Flat - Organisation B

Fewer managers with more subordinates each

Bosses and employees treated as equals

Team work required. More responsibilities throughout.

Task switchers and less formal roles

Rapid decision making

Types of Structure

What’s the best structure to achieve the strategic objectives?

Option 1: Entrepreneurial Organisation

This works best in the early stages of a firm.

As it grows it may become inefficient to stay like this

(in fact these options are ordered in life-cycle order)

Entrepreneur takes all the big decisions. No delegation

No formal management structure

 Simple processes. Small number of products probably

Option 2: Functional Organisation

Each function (production, marketing, finance etc) has its own management and staff

Option 3: Divisional Organisation

As different product-markets appear, this structure may become most appropriate

A division is simply an area of operations (geography, product or customer)

Head office delegates authority and responsibility to divisional management

Option 4: Matrix Organisation

Where different functions need to work closely together, so horizontal relationships become very important with dual command

Project Managers: In charge of individuals across functions; Functional Managers: Still in charge of their function

The matrix structure should:

Encourage communication
Focus on getting the job done (not defending own position)

Internal & External Relationships

Internal

Centralisation v De-centralisation

Head office decision making v delegated decision making

 Centralisation Decentralisation

Ensures corporate objectives met Better local knowledge

Better coordinated decisions Motivates managers

Easier in a crisis situation Quicker and more practical in large, complex firms

External

Strategic alliances, Joint ventures, Value Networks (all seen earlier) now let’s look at a different external relationship

Outsourcing

Common in the building industry - work carried out by a sub-contractor on your behalf

Often happens elsewhere, mostly in non-core activities e.g. Security, Payroll etc

Reasons for Problems with

Allows firm to concentrate on core competencies Loss of control over the work

Outsource the work to an organization whose core competency is that work Managing the relationship
 Allows specialists to work when otherwise couldn't afford the ability to pay Not as fully committed / flexible as
them full time own staff

The Virtual Organisation

These have no physical existence

They are operated by emails and telephone services e.g. A sole trader operating from home as ‘head office’

These will take on work and outsource a lot of their business e.g. Accountancy, delivery etc

Even large companies could do this e.g. Selling other producers goods. All aspects could be outsourced
Contingency Theory for Structure

Structure should be the one best suited to its size, complexity and
strategies

Mechanistic Organic

Authority delegated through formal structure Network control structure

Manager power depends on their position in the Individuals decision making is due to their knowledge and
hierarchy skills

Bureaucratic Free flow of information

Vertical communication More horizontal communication

Specialised jobs Contributions to a common task is the job

Tasks governed by superiors Advice rather than orders given

This was created by Burns & Stalker

In B&S’s research not one structure was found to be better than another, however they did notice that it’s ‘horses for courses’ e.g.
A stable market suits a mechanistic structure and vice-versa

Mintzbergs 5 building Blocks

Whichever group is most powerful dominates the organisation structure

The groups are...

Top Management = Strategic Apex

Normal employees of the firm = Operating Core

Management = Middle Line

Secretarial, cleaning, repairs, IT etc = Support Staff

No line management responsibilities. Produce systems manuals etc = Technostructure

Most powerful group Structure

Strategic Apex Entrepreneurial. Leaders give sense of direction

Operating Core Highly skilled workers with lots of influence e.g. Schools, hospitals

Middle Line Localised and divisionalised company

Remember that poor performance in a company may simply be due to having an inappropriate structure for the environment
and the strategies it follows

Mintzbergs 6 Configurations

1. Simple Structure

Entrepreneurial. Strategic apex gives direct control, little middle line, support staff or technostructure. Owner-managers often.
Flexible, quick to react

2. Machine Bureaucracy

Technostructure dominant. Controls through regulations. Slow to react to change

3. Professional Bureaucracy
 Operating Core dominant. Highly skilled professionals abound

4. Divisionalised

Middle line dominant. Division leaders powerful and often able to restrict strategic apex influence

5. Adhocracy

Complex and disordered. Extensive teamwork/project type work. Support staff very important as close relationship to external
suppliers can be vital. Innovation is a strength here

6. Missionary

All member share a common set of beliefs. Difficult to accept change. Only suitable for small, stable environments

Information Technology
Principles of e-business
Meaning & Scope of e-business

The Meaning of e-business

e-Business
Using internet technologies for key business processes

e-commerce

Electronic information exchanges between the company and its external stakeholders

B2B (business to business) - e.g. Supermarkets systems automatically placing orders when stocks are low

B2C (Business to Consumer) - Selling over the internet (aCOWtancy.com)

C2B - Groupon - consumers together buying from a business

 C2C - Ebay

Scope
Technology has helped rigid functional and divisional structures to be replaced by matrix and network systems.

New work patterns have emerged that encourage flexi-working and other family friendly measures. Many business processes
are now automated.

Enterprise Resource Planning Solutions (ERP Systems) are now widely available providing management with information that is
available almost instantaneously.

Whilst Information Technology may be in fact be used as a core competency, it needs to be applied judiciously to suit the specific
business needs

The impact of IT on each of Porter’s five forces:

1. Rivalry

Use IT to reduce the effects of tough competition

Eg.Tour Operators can compare their price competitiveness by accessing the web-sites of other providers on the internet
accordingly.

2. Threat of new Entrants

Sophisticated IT applications are expensive & slow to develop whilst being technologically challenging. On the other hand, IT
reduces distribution costs for other industries.

Eg MP3 has created a seismic shift in the music industry by penetrating at a very low cost into an on-line distribution channel
compared to its brick and mortar competitors

3. Supplier Power

Increased access to different suppliers decreases the power of the suppliers

4. Customer Powers

Increased knowledge of the market through the Internet has increased the bargaining power of consumers

5. Threat of Substitutes

Using computer-aided design & manufacture to develop new products first

Why (and barriers to) e-business adoption

Why adopt e-business

1. Cost

It can often be less costly - think of the cost of producing online courses compared to offline

2. Increased Sales

The internet is worldwide and 24/7. Of course not all businesses can benefit from this - think of a local 2nd hand car business

3. Better Information

Comparison websites and collating info from your customers

4. Increased Visibility

aCOWtancy.com is run from Lincoln, England but is known throughout the world within its industry

5. Enhanced Customer Service

Many services run technical help through their websites but even through Twitter.

Fast, real-time and personal service

6. Better Marketing

It reaches more people and a website can help create the brand. Serious? Friendly? Fun? etc

7. Market Penetration

Low cost and no need to have a physical presence opens up a whole new market to many businesses

Barriers to Adoption

Technophobia

Some business owners are wary of what they have never had experience of previously.

This comes to the fore with e-business

Security Concerns

The website could be hacked and access to private information

 Set-up costs

Some websites can be costly indeed to set up (trust me i know!)

No e-business opportunities

Some business areas just don't really work online - eg restaurants

No in house IT

Although this can be overcome by outsourcing

How IT improves customer relations

The Impact of eBusiness on Customer Relationships

Tie in/Switching Costs:

The consumer may need to learn how to use the technology and so incur some learning costs in the process.

Moreover, some consumers may further be required to purchase a specific application in order to be in a position to make
use of services made available through an ebusiness channel.

Such factors raise the switching costs incurred by the customer to move from one service provider to another;

Disintermediation:

eBusiness can do away with the middleman who would otherwise be required to act as a broker between the buyer and the
seller.

Eg. on-line purchase of airline tickets & hotel accommodation

Reintermediation:

Where alternative services are offered through a single gateway.

 Eg. eBay, Expedia, and Travel Supermarket amongst others.

A key advantage of using these intermediaries is the possibility to access a wealth of information on price and quality criteria
for products and services that may be acquired and compare these in accordance with the customer’s specific requirements;

Faster and Cheaper two way communication:

The RCA website was designed by a dude in downtown Brooklyn, New York. The site was coded by William from Malta.

aCOWtancy was developed in London, UK. The illustrator lives in Israel, and the customers come from all over the world

Communication between all parties is frequent and immediate

Development of User Communities:

Want to know how good your new Jaguar car might be?

There will be a forum and website dedicated to in the internet

Recommendations from user communities are indeed a powerful tool that may be used by the organisations using ebusiness
models since prospective customers are viewing an independent opinion on the overall quality and value for money of the
product and/or service acquired from the seller.

Similarly a negative opinion is bound to put off a sale to a prospective buyer - think of user reviews on Amazon

Easier tracking of consumer patterns:

eBusiness Systems retain a trail of all transactions carried out by consumers over the internet thereby making it easier for
organisations to collect and analyse consumer patterns in the process;

Enhanced Customisation:

Increased interactivity and easier tracking of consumer patterns creates the right framework for segmenting the market and
developing dynamic ebusiness applications which customise the presentation, type and level of information and services
posted on the portal.
e-business models

The main models, my little moo-friends, are as follows..

e-shopping

The one we all love and know well - Think Amazon. If you need more explanation of this - then please call 1990 as it is
where you belong..

e-auction

Nice and straightforward, think e-bay

Freemium

This is the model on which acowtancy is built. A free trial, or free sections of the site are made available but those who
enjoy the site or want more from the site then you need to pay for premium access.

Free

This works on advertising. The content is yours for free, but you become the product that is being sold. Your attention is
sold to advertisers. Think facebook

(Dis) Intermediation

This has already been referred to in the previous section

It is where you either cut out the middle man and sell direct to your customer (e-shopping). Or you become a middle man
on purpose - you do all the hard work on behalf of the customer and take a commission. Think comparison price websites

Infrastructure Required

Infrastructure Required
A company needs computer hardware & software, data and communication networks.

The company website is located on a ‘server’ which gives it access to the internet.

The company will also need a database management system, which are used to display and locate the information on the
website.

The company will also probably have a customer relationship management system (CRM) which basically holds information
about all dealings with the customer
Content and customer information is held on data files.

The communication network is provided by the internet.

Websites

Every website has a unique address (URL) eg aCOWtancy.com

This allows other internet users to locate and access the website
The URL has to be registered as a domain name to ensure it is unique.

Designing a website for e-commerce

Design is vital - think of the rise in Apple computeres and hardware

One of these remote controls is made by Apple...

There is a whole industry built around not only design but also user experience.

This is as important as the content.

Users need to feel comfortable with the site.

See the learn more section for a great video on this

Design helps build the brand - it needs to be continually updated and aware of latest trends.

Again see the learn more section for a wonderful web designer talk

It should be designed with security in mind, and also with providing reassurance to users that it is a secure site.

Upstream supply management

Push & Pull

Push System
Push System

Push explained

Remember this can be used upstream as well as downstream

Here suppliers "push" their products toward the consumers. Therefore stock is made and built up and waits for demand

Works well where there is little uncertainty over demand

May lead to excessive stock levels

Push System in Marketing

This is non-intreactive, eg Radio / TV advertising, the information is just "pushed" toward the buyer. Think here about static
websites that are basically just advertising. This is push marketing

Less marketing is needed in comparison to pull systems

Pull System

Pull explained

Here consumers "pull" the goods they need, when they need it

Works well where it is hard to anticipate demand levels

It is difficult to implement but does lead to quick lead times. (Point-of-sale information is vital to suppliers to suppliers to
ensure this)
Pull System Marketing

An unteractive marketing exercise. Think acowtancy. It shows you whats available content wise - the student literally
interacts with the product and then decides whether he or she wants to buy more of the same..

Twitter & facebook interactions with customers is a form of pull marketing

Learn more list

We Demand
A great example of Pull !

The Supply Chain & The Value Chain

The Supply Chain & The Value Chain

The value chain shows the value adding activities between supply and demand.

By focussing on these activities, they can be redesigned to create more value

How Can IT help?

1. Increase efficiency in each activity

eg. Procurement

2. Enabling date sharing between activities

If the supplier can see the company's stock levels it can send out new stock when needed
The Value Network

This is the link between the company and it strategic partners (which helps create value)

As outsourcing becomes more popular, these links' management becomes more important

IT has made outsourcing easier, and the flow of info between suppliers, wholesalers & distributors is vital

Electronic data interchange (EDI) could be used for the big players in the network, whereas simple emails are enough for the
smaller ones

IT and the Supply Chain

Supply Chain problems and how e-business can help

Problems of Supply Change

Management How e-business can help

Keeping manufacture & distribution costs Less paperwork by EDI of orders, invoices & delivery notes.
low
Reduced stockholding through shared information

Forecasting Demand Sharing knowledge of demand with suppliers using Efficient Customer
Response (ECR)

Failure to deliver on time Supplier becomes responsible via vendor managed inventory

Failure to deliver correct product Less human error - less humans involved!

High Inventory Costs Less inventory due to better understanding of demand

Product development speed Online marketplaces gives more info about suppliers and componenets

e-procurement
Procurement is the buying of goods & services.

This involves:

1. Finding items at the right price

2. Get them delivered at the right time

3. Get the right quality & Quantity

4. Also the delivery to the customer

E-procurement

This is the automating of parts of procurement to improve the performance of the above.

This may vary from the simple automation of part of the system, to re-thinking the way the company does business.

Using websites for Procurement

Invite Suppliers to bid on your website for business

This places the onus on suppliers to spend time completing details and making commitments.

It will also attract a wide range of suppliers

Using an Intermediary website to find a supplier

These marketplaces allow:

1. Potential customers to search products being offered by suppliers

2. Potential customers to place their requirements and be contacted by potential suppliers

These websites promise greater supplier choice with reduced costs. They also provide an opportunity for aggregation where
smaller organisations can get together with companies that have the same requirement to place larger orders to gain cheaper
prices and better purchasing terms.

Benefits of e-procurement

Cost effective, saving time and money

These improvements in efficiency can be shared between suppliers and customers, adding value to the supply chain.

It might be possible to find suppliers who can offer better value, in terms of lower prices or better-quality products.

Benefits of direct communication between computer systems. Removing the need for human input to computer systems
saves time and reduces the risk of error. Purchase orders sent by a company can be read and processed by the supplier’s
system. Similarly delivery notices and purchase invoices from the supplier can be read directly into the company’s own
system and processed automatically

Electronic data interchange (EDI)

A system for the electronic translation of data from one computer system to another, it's expensive and so only used by
large companies.

Downstream Supply Management

e-Marketing

Dealing with customers and other selling intermediaries, and may be

appropriately managed through the deployment of an e-Marketing
System.
The impact of ebusiness on the marketing mix for products and services is outlined below:

Product

A wider range of products is made available. An opportunity to provide customised offerings is further created particularly
as a result of increased knowledge of the specific needs of the customer.

Price

Lower costs are incurred due to process automation which could in turn result in lower prices. Although, direct comparison
with others puts further pressure to lower prices

The web also offers the option of "differential" pricing - where different prices can be charged in different parts of the
world

Promotion

Opportunity are created to use other Web-sites to promote an organisation’s own web-site. Search Engine Optimisation has
become a key Promotional tool.

Place

Elimination of the middle man and wider reach across a far reaching geographic base. Has enabled direct delivery of
knowledge based products over the internet.

People/ Participants

Automation, reduces the need for front line personnel to generate sales. On the other, increased customer support is
required.

Processes

Business Processes are pushed down to the consumer. Whilst business cost is reduced, this creates consumer frustration

Physical Evidence
 A Web-site provides a first impression and hence becomes an ambassador for the company which it represents.

Elements of eMarketing

eMarketing forms a critical part of downstream supply chain management systems. The key elements of eMarketing comprise
the following:

Interactivity:

This is the extent to which the website promotes a two way communication channel between the customer and the
supplier.

This comes in many forms.. forums, emails, polls, online chat, webinars etc

In the exam, you will often have to think of ways of making the site more interactive (the pull side of marketing). Think of
getting communication with the customer, or getting them to trial a product, or giving feedback, or getting them to ask a
question if they so wish (eBay does this for example)

Intelligence:

This is the extent to which customer information can be collected to form meaningful patterns & analysis; Every business
can track who has been on their website, where they come from, how long they stayed etc.

Furthermore, sign up forms also give an opportunity for more information to be gathered

Additionally there are online polls etc

Individualisation:

This is the extent to which a web-site content is customised to the specific need of the customer; Think of personalised
content only being shown, with filters being applied so you only get shown what youre interested in

Also recommendations can be made using complex algorithms. Think Amazon and how they recommend books etc for you
based on past purchases

This form of relevant after sales service is vital

Integration:

Think here of booking something on the website and it is immediately updated on the organisation’s back end systems; So,
think of booking a seat on a course and immediately it is reserved and confirmation emails sent out and materials ordered
for you etc

Industry Structure:
 This is the extent and potential opportunities for disintermediation and reintermediation; Think of how the music industry
has been transformed - artists can now sell directly to their fans, or iTunes / Spotify can be incredible middle men allowing
easy and immediate downloads of music

Independence of Location:

Basically businesses are not restricted to their own locality anymore. It is not called the world-wide web for nothing you
know

Be careful here though for some businesses, the internet doesnt help them. Eg Your local newsagent

eBranding

A Brand is a representation of the values, quality & positioning of an organisation’s products and services as compared to those
of its competitors. eBranding is the process through which an organisation’s products and services are effectively positioning on
the on-line market place.

There are choices that need to be made available for organisations on how to apply ebranding initiatives. These are:

Retain the same Branding

On the Web-Site to that being applied to its brick and mortar business. In this case the ebrand replicates the physical
brand. Airmalta uses the same brand for the sale of air tickets both over the counter as well as over the internet.

Offer a Slightly Amended Product:

This is normally the case for information products. For example, the Times of Malta offers additional interactivity
functionalities to its on-line electronic version as compared to its paper version;

Form a partnership with an existing brand:

Such partnerships enable the sharing of costs and resources necessary to build the strength of the eBrand. This is
particularly commonplace in the case where electronic payments need to be channelled through the internet whereby
companies partner up with brands such as Paypal to give the consumer comfort on the security and reliability of the
transactions processed on-line.

Develop an entirely new brand:

This may be necessary in the case of product or service offerings which target a completely separate market than that
which is originally targeted in the brick and mortar business.

This technique is commonly used by Insurance Companies that may offer Insurance Policies over the internet using a
different brand name.
Learn more list

Lost my Name
A beautiful example of Individualisation

Pricing

Pricing

This is determined chiefly by 4 factors:

1. Corporate objectives

break into a market or consolidate

Think here about pricing reflecting quality for example.

However, there may be other objectives such as achieving maket share

Another may be getting cash flow to develop new products

Cheap pricing may also be used as a barrier to entry for future competitors

2. Customers

What are they willing to pay

Here the market is segmented and the price sensitivity and demand from each is assessed.

Think about what sort of selling is occurring in each segment (B2B, B2C etc)

With B2C especially look at the wealth of the consumers in order to assess price sensitivity

Depending on price elasticity over a particular range of prices, it may be worth either increasing or reducing prices to increase
revenues and profitability.

With B2B it is likely that businesses will expect discounted prices for multiple purchases

3. Competitors

This is clearly an important consideration.

You cannot be too far over the price of competitors, unless you have a discernable improvement in quality
 Undercutting competitors prices is also dangerous.

You need to try and forecast what the competitors' reactions will be.

This is often known as "the race to the bottom" as a price war begins and the market is destroyed as profit margins get eroded for
everyone

4. Costs

Costs need to be understood, not only continuing costs, but also development costs of the product being sold.

Although development costs are sunk costs the pricing can be used to ensure the recovery of these

Consider the variable costs in particluar of the product. For example selling a service over the internet has a very low variable cost
- and so this could be reflected in the price

Also factor into the price the cost of any dedicated support staff.

These will be difficult to predict but with a better quality product or service they should be lower - these would be a fixed cost (a
salary) that will rise at certain demand points so is in fact a stepped fixed cost

Other factors to consider are promotion and product enhancement costs.

Also perhaps finance, human resources, administration etc.

There are further issues to consider such as:

Survival

break even being the goal for the short term as you may feel your product is a little ahead of its time in that particular
market

Return on investment

If this needs to be met then the selling price may have to be adapted accordingly

Market positioning

where do you want to be in the market

Practical Pricing Methods

 Method Technique

Penetration Low price to gain market share

Perceived High price to create the quality image

Quality

Periodic Sales
discounting

Price Different prices for the same product in different markets

discrimination

Price High price at first until all those customers willing to pay such high prices have been “skimmed off”. Then
Skimming charge a lower price and repeat the process

Loss Leader Customers tempted by this then (possibly tied in to) purchase other more profitable products

Bait pricing Advertise a low price but hope customer will buy a higher priced one from within the range

Customer Relationship Management

Customer Relationship Management Systems

CRM is an approach to build and sustain long term business with customers.

It consists of the processes a company uses to track and organise its contacts with its current and prospective customers

CRM software is used to support these processes; information about customers and customer interactions can be entered, stored
and accessed by employees in different company departments.
The Customer Relationship Management Development Process

relationships with customers are slowly built over time.

The key is to retain the highest proportion of the customers in the business.

The main stages of developing and maintaining appropriate customer relationships are illustrated below:

1. Phase 1 - Selection:

Identify the customers to be targeted through the normal Segmentation, Targeting and Positioning Process.

Some form of market research may need to be carried out to ensure that the right customers are targeted;

2. Phase 2- Acquisition:

How to get a new customer.

Remember that first impressions last - so this stage is critical.

The customer needs to be delighted

The costs of getting this customer though need to be minimised

3. Phase 3 – Retention:

Retention is the ultimate objective of CRM systems particularly since it costs more to get a new customer than to retain an
existing one.

Retention requires an in-depth understanding of the needs of the customer so that products and services are tailored to his or her
specific requirements.

Some lock in strategies are normally used such as is the case for loyalty schemes that are widely popularised by supermarkets,
vendors of fast moving consumer goods and airlines.

4. Phase 4 – Extension:

Retention results in the generation of additional sales from the customers with whom the organisation has built a relationship.

Additional sales may be generated either by reselling the same product (ex selling a renewal of a motor insurance policy), cross-
selling (ex selling a home insurance policy to an existing customer having a motor insurance policy) or even up- selling (ex-
encouraging a customer to upgrade his motor insurance policy from a third party only cover to a fully comprehensive cover).

5. After-sales service

Using technology to provide answers to frequently asked questions, make and handle complaints

This service should help retain customers.

Newsletters, special offers for established customers and targeted emails should also boost customer retention.

Acquiring Customers
One of the most challenging phases in an eMarketing initiative is the acquisition stage.

From an eCRM perspective, a number of methods of acquisition may be contemplated.

These include the following:

Search engine Optimisation (SEO)

Pay Per Click (PPC)

Here advertisers pay their host only when their ad is clicked.

Contextual Advertising

The advertisements themselves are selected and served by automated systems based on the content displayed to the user.

On-Line Public Relations

These include on-line blogs and social media

Affiliate Marketing

This is where a business rewards the affiliate for each visitor or customer brought about by the their marketing efforts.

Sponsorship

Firms advertise themselves as sponsoring or part sponsoring the web-site under review.

Co-Branding

This is when two companies form an alliance over the internet to work together, creating marketing synergy

Opt in emails

Opt in e-mail is a term used when someone is given the option to receive "bulk" e-mail, that is, e-mail that is sent to many
people at the same time.

An example of this is the email recap sent to all RCA students

Viral Marketing

Where the advertising is passed around indirectly by consumers (thus becoming viral).

Viral promotions may take the form of video clips, interactive games, ebooks etc
Project Management
Nature of a Project
What is a Project

A project has: A beginning and an end

It also has

Goals

Cost, time and scope constraints

Resources are the money, facilities, supplies, services and people allocated to the project

So how is a process different from 'ordinary work'?

Projects Ordinary work

A defined beginning and end On-going

Have resources allocated specifically to them Resources used 'full-time'

Are intended to be done only once A mixture of many recurring tasks

Follow a plan towards a clear intended end-result Goals and deadlines are more general
 Often cut across organisational and functional lines Usually follows the organisation or functional structure

Common examples of projects include:

Producing a new product or service
Changing the structure of an organisation
Developing a new information system
Implementing a new business procedure or process

Time:
Consists of two elements including the project completion date and available man hours.

Scope:
Comprises of the tasks that need to be performed and the levels of quality expected of the outcome.

Cost:
The available budget for project completion and the value added generated through the outcome.

Managing Project Risk

This, therefore, basically refers to the management of the 3 constraints.

So you are looking for these constraints to be:

Well Defined (at the beginning)

Well Understood (Particularly if the project is complex)
Well Measured (Particularly if the project is large)
Clearly the less well defined, more complex and large the project - the more risk is involved

Risk management involves keeping a close eye on the constraints from beginning to end and taking appropriate corrective action
wherever necessary

All projects incur risks which include cost over-run, missed deadlines, poor quality, disappointed customers and business
disruption.

Time Risks:
The risk of not completing the project within the deadline and/or within the time available;

Scope Risks:
The risk of not meeting the specifications and quality levels expected by the customers;

Cost Risks:
The risk of exceeding the budgeted cost of the project or of not achieving the desired value added following the completion of
the project;

Even the basic structure of the project plan is uncertain.

Linking Projects to Strategy

Projects involve change, so the company strategy should inititiate this change (at least under the Strategy as Design view)

Each project should enhance the organisation’s strengths in specific critical success factors.

In the Strategy as ideas view, initiatives may be developed on an ad hoc basis. Engaging into ad hoc projects may in some cases
be required due to unforeseen circumstances

Defining the Project

Every project should start with a plan..

A project plan is important because:

1. Communicates roles and timings

2. Encourages forward thinking

3. Provides the measures of success

4. Identifies resources needed

Contents of a Project Plan

Part of Plan Contents

Overview Background, Aims, scope, outputs, stakeholder analysis (mendelow), Risk Analysis (risk map),
Intellectual property rights

Resources Details of project partners, reporting relationship, decision process

 Detailed Plan Project deliverables and reports, phasing of work and deadlines

Evaluation Plan How the output quality should be evaluated, how success will be measured

Quality Plan Quality assurance procedures for each deliverable

Dissemination Plan How outcomes will be shared with stakeholders

Exit & Sustainability What will happen to knowledge etc at the end. See if any outputs may live on after profit ends
Plan

Initial Documentation

The project initiation document (PID).

This is used to develop and clarify the terms of reference for the project.

It's contents are as follows:

Business Justification - basically the objectives from the business case. It is important to clearly distinguish between
project and business objectives and assign responsibilities to each

Scope of the Project - objectives and deliverables. These need to be perfectly clear and well defined

Constraints (cost, time and scope) - as above these are vital to be fully understood at the very outset

Roles and responsibilities - including authorisations - it should be made clear that the project sponsor (see managing the
project section) is responsible for making decisions about the project, providing resources, considering and agreeing
changes.

The role of the project sponsor should be formally defined and everyone's responsibilities should be clear.

Any failure to adhere to those responsibilities should be addressed.

Risks and resources committed to the project

Business Process Redesign
A specific project can be linked to a specific process - this is then business process redesign

The steps for this would be:

1. Analyse the existing process

2. Design the new process

3. Get the resources for the new process

4. Manage the implementation

For an e-business system this would involve

1. Establish e-business plan

2. Design the system and build new website

3. Integrate the e-business into the current system

4. Test the system and monitor

Designing the Project

A project needs a business case

Building a business case:

To obtain funding

To compete with other projects

To improve planning

To improve project Management

Contents of a Business Case
Heading Content

Introduction Sets the scene and explains reasons behind the project

Executive Summary The key considerations; The options considered; Reasons behind the choice made and
the key numbers

Current Situation Strategic and operational assessment including a SWOT analysis

Options Assessment of each and reasons why not chosen

Cost / benefit analysis Detail in the appendices; tangible and intangible (customer satisfaction etc) items;
Appraisal techniques numbers also

Impact Impact on the cultural web

Risk Identification and Contingency planning

management of each risk

Recommendations Justification for the chosen path

Appendices Detailed cost/benefits and appraisal technique numbers

Cost / Benefits of a Project

Project Costs
Investment Cost - Include IT costs and project specific assets
Development Costs - Include potential future development costs (as an estimate)
Centrally allocated costs - For use of premises and services (personnel, accounting etc)
External Consultancy costs
Resource costs - for ongoing (incremental) staffing costs and material costs
Quality costs - Training, reworking, monitoring
Flexibility costs - IT equipment for home use; lower batch sizes etc
Disruption costs - loss of productivity during changeover

Project Benefits

Some benefits are more worthy than others - here’s the scale

1. Financial (cost reductions / revenue increases)

2. Quantifiable (now and forecastable before the project)

3. Measurable (now but not forecastable until after the project)

4. Observable (e.g. Improvements in morale)

Managing the Project

Project Execution

Project Team Structures

Projects need coordination.

Teams will be from different function boundaries, therefore a matrix structure is required

Projects need different skills and cross organisational reporting lines, each individual then has a dual role, their
functional/divisional responsibilities as well as those of the project team.
 The size of the team will depend on the project

Project Sponsor

Normally a senior member of management, often the one with most to gain (or lose) from it

They direct and therefore allow the Project Manager to manage.

Responsibility Explanation

Gatekeeper Selecting only projects that support the business strategy

Monitor Have regular meetings with the PM and give advice where needed

Supporter Assist the PM to do their job efficiently

Decision​maker Ultimate responsibility lies with the sponsor

Champion Ensure that the project is given high priority by all project members

Problem solver When the team lacks the skills to solve it alone

Resource negotiator Vital to get resources from across the different functions at the right time

Project Manager

Manages it on a day-to-day basis. Responsibility to deliver the project and ensure effectiveness and efficiency

Various roles include team leader, co-ordinator, relationship manager, problem solver, budget manager and change manager

They are often ‘generalists’ not specialists, facilitating rather than supervising team members
 Task Needs Team Needs Individual Needs

Reach Objectives Co-ordinate the team Motivation

Planning Keep them motivated Support

Resources & Responsibilities allocated Create a sense of identity Guidance

Quality maintained

Resolve Problems

Typical problems faced by Project Managers

1. Managing people with their own department responsibilities

2. Dealing with departmental managers

3. Managing the resources

4. Dealing with specialists

The project manager does not usually have the power to reward project team members.

That resides with their department line manager normally.

Project team members struggle with feeling part of their department AND part of the project one-off team.

This needs managing by the project manager

Concluding a Project

Project Completion
Post Project Review

A post-project review takes place once the project has been completed.

In fact, it can often be the last stage of the project, with the review culminating in the sign-off of the project and the formal
dissolution of the project team.

The focus of the post-project review is on the conduct of the project itself , not the product it has delivered.

The aim is to identify and understand what went well and what went badly in the project and to feed lessons learned back
into the project management standards with the aim of improving subsequent project management in the organisation.

This involves:

1. Acceptance by client

2. Review of outputs (against goals)

3. Disbanding the team

4. Performance review

5. Lessons learnt

6. Formal closure by the steering committee

Post Implementation Review

A post-implementation review focuses on the product delivered by the project.

It usually takes place a specified time after the product has been delivered.

This allows the actual users of the product an opportunity to use and experience the product or service and to feedback their
observations into a formal review.

The post-implementation review will focus on the product’s fitness for purpose .

The review will not only discuss strategies for fixing or addressing identified faults, but it will also make recommendations on
how to avoid these faults in the future.

This involves:

1. Gap analysis on business case objectives

 2. Costs / benefits v forecasts

3. Other benefits realised

4. Effectiveness of new business operations

5. Stakeholder satisfaction

6. PIRs are on-going to ensure benefits are managed and realized (PPR is a one -off with a lessons learnt goal)

7. PIR objective is to ensure maximum benefit is obtained from the product of the project (PPR focuses on the project
itself)

Benefits Realisation Review

To see if the benefits claimed at evaluation stage are subsequently realised.

It is concerned with establishing whether the predicted benefits in the business case have been realised once the product or
service delivered by the project has been in place for some time.

It compares actual costs and benefits with those predicted in the business case

A benefits realisation review also takes place after the product has been delivered .

It revisits the business case to see if the costs predicted at the initiation of the project were accurate and that the predicted
benefits have actually accrued.

In effect, it is a review of the initial cost/benefit analysis and any subsequent updates made to this analysis during the conduct
of the project.

It may be part of a post-implementation review , although the long-term nature of most benefits means that the post-
implementation review is often held too soon to properly conduct benefits realisation.

In fact, it can be argued that benefits realisation is actually a series of reviews where the predicted long-term costs and benefits
of the business case are monitored .

Again, one of the objectives is to identify lessons learned and in this case to feed these back into the benefits management
process of the organisation.

It includes:
 1. Seeing which benefits have been achieved (and which haven’t)

2. Identify any unexpected benefits and weaknesses

3. Understand reasons for the above

4. Understand how to improve the management process

Thus it forces the sponsor to define the nature, timing and value of each benefit

Project Management Software

This software to help plan and control of the project

The software package needs four items of information:

How long each activity lasts

Are any of the activities dependent on each other (does one have to be done after another etc)

What resources (and when they) are available

It can be used for Planning, Estimating, Monitoring and Reporting

Planning Estimating Monitoring Reporting

Create diagrams of Create alternative resource Allow all project members access Gives access to all
the system allocations to real time info members
 Create Gantt charts Create budgets A database for all Can create end of
etc stage reports

Allocate timings to different Automatic comaprisons to plan

project sections

Advantages:

1. Improved planning and control

2. Improved communication

3. Improved quality of systems developed

Miscellaneous points

When choosing..

Look at all software which is within budget and has the essential functions

Trial them if possible

Get them installed and get training on them

Delivering the Project

Project management

Ensuring the goals of the project are achieved:

on time
 within budget

to the required quality

We now know the project manager's tasks but remember she also has to understand which tasks cannot begin until others have
been completed, and which tasks can be carried on at the same time.

After planning, comes the controlling and monitoring of the project

This involves keeping things on schedule and there dealing with any slippages in time or cost over-runs

Scope management

The risk is that project specification is not reached, so this involves breaking down the total project into individual
tasks

‘Scope creep’ happens when during the course of the project, uncontrolled scope changes are made to the it takes
longer and costs more than necessary to complete.

Time management

Non time-critical taks can be delayed, so special attention is paid to those time critical ones

Another problem is that all time planning is based on estimates

As mentioned above, the project manager needs to identify the inter-dependencies between certain tasks.

Which have to be done before others and which can be done in parallel

This is called critical path analysis or network analysis

Monitoring completion times: slippage

A CPA chart can be used by the project manager to:

1. Ensure time-critical activities are being completed on schedule

2. Calculate maximum delays possible for none-time crtical taks

 3. See when slippage has occured and allocate extra resources if necessary

Cost management

The expected financial returns might be expressed in terms of net present value (NPV) and payback, or internal rate of
return on investment (IRR).

However, costs need to stay within budget, for these returns to materialise

Standard costing techniques will be used to analyse the difference between budgeted and actual costs.

The difference will be caused by either:

actual spending is higher than planned

the amount of work done is more or less than budgeted.

These are expenditure variances and volume variances.

Project Gateways

These are review points for critical points in the project.

They ensure the business case remains valid

At each project gateway - If there are problems then control measures and corrective action will be necessary (or stop if
severely off course)

Normally carried out by someone not involved in the project

A Product Breakdown Structure

This looks at the physical components of a particular product. It comes in the form of a hierarchy.

It begins with the final product at the top of the hierarchy followed by the sub-categorised elements of the product.
It reduces a complex project, or product, into manageable components.

As a result, teams can obtain a clear understanding of a product, its components, and what is required to provide those
components
 Threat Identification

This will obviously reduce the risk of slippage and other problems

Threat Prevention

Threat Prevention

Poor management or planning or controls Training managers, no critical projects until proved themselves

Poor Planning Use proper planning methods

Poor Controls Set out in advance

Unrealistic deadline Ensure no slippage and change deadlines

Insufficient budgets Do a smaller project properly

Moving targets Structured walkthroughs and prototyping

Corrective action examples

1. Fast tracking - doing some phases in parallel (instead of in sequence)

2. Crashing - reducing the time available on critical aspects while minimising the cost of doing so

3. Adding resources

4. Reducing scope or quality

5. Incentives and punishments

Processes
The Role of Process
The basics of Processes

The basics of Processes

Business processes (e.g. Development, manufacturing, distribution etc) make up the value chain of a company.

Different strategies will need different processes

Process Change Examples

Automate Rationalise Business Process Redesign

Definition Manual Processes automated More efficient Processes Major redesign of Processes

Examples Payslips EDI Sharing data with suppliers

Businesses are run via a number of different processes, literally everything they do is a process

How these processes are performed comes from the strategy of that business

The strength of the processes forms a competitive advantage

The strength of this process as a competitive advantage is related to how difficult (or easy) it is to copy

When I taught this subject many years ago I used to perform a "trick" in my London based courses.

I used to ask students to write down a business they think of when i say "Really simple online booking".

I would then write on the turned off overhead projector (that's how old this example is!) - EASY JET

The students would then write down their business and be astonished when i turned on the OHP to see that I had
written exactly the same as them.
 The reason being of course was that EasyJet had created a fantastic process and was famous for it, however I couldnt
perform that trick anymore because the competition has caught up and many now have similar easy online booking
processes

How should the process be changed?

Scope and Focus of Change

Harmon Process-Strategy Matrix

Which processes to change and how to change them

 Quadrant Type of Process Action Required

Bottom Simple and stable; No competitive Automate them to be as efficient as possible. They are just a
Left advantage from them necessary evil eg. Payslips

Bottom Simple and stable but Strategically Automation to a high standard

Right important e.g. Assembly work

Top Left Complex and dynamic Not a core Outsource

competence of ours though e.g. Calculating tax to be paid

Top Right Complex and dynamic A core competence Carefully investigating and analysed Redesigned to create
even more value

Should a Process be bought?

Should we outsource?
The idea is here that some processes may be best not performed in house but rather bought in from outside ie Outsourced

Let's think of aCOWtancy.com

Should I outsource the materials writing and videos?

I'm HOPING you're screaming "Nooooooooo!!!!"

The reason being that the whole competitive advantage of aCOWtancy.com is the simplicity of the materials, videos
(amongst a million other things :P)

In all seriousness - this is one process I wouldn't outsource - because the suppliers competences don't match my needs

However, what about the design of the site?

Well I personally think design is of enormous strategic importance (like the materials and videos etc).

However, here I do outsource some. Why?

Well here my strength is in teaching accountancy and not in the design and usability of websites.

I know a fair bit about these topics and i study them daily but it is sooooo important to me that I want to be the best in the
world at it.

So i outsource it to people who I believe are the best in the world.. Naomi, Dan, Miki... take a bow

Some processes are more suited too to outsourcing than others eg Standardised processes (you're not losing a competitve
advantage then)

Never forget though also the external v internal costs of processing.

Is it cheaper or more expensive to have the process outsourced

Business Process Outsourcing

Under the right circumstances outsourcing can certainly provide significant opportunities for savings, though it is no panacea.

Sony announced plans recently to close 10 percent of its plants worldwide and shift more manufacturing to outsourcing

Different companies will have different expectations for their outsourcing partners.

A niche business to business producers’ core competencies are very different than those of a provider that's set up to produce
large volumes of a consumer-oriented product

The current economic environment presents an excellent opportunity to further utilise outsourcing as a way to reduce their
manufacturing and design costs, there are challenges and difficulties that come with this kind of change.

The most successful situations are those where the customer understands that outsourcing is as much a cultural change as a
strategic one for their organisation

The bottom line is that even in the best of economic times, the decision to outsource should be made based on a careful
cost/benefit analysis.

It is not a quick, short-term solution

Advantages of BPO

1. Cost savings

2. Improved customer care

3. Allows management to focus on core competencies

Problems of BPO

1. More outsourcing suppliers leads to fragmentation and a less cohesive business

2. Security problems

3. Managing of the outsourcers

4. Performance measuring problems

Improving a Process
Business Process Redesign

Business Process Redesign

Business Process redesign is also called Business process Re-engineering (BPR)

Harmon recommends a 5 stage approach to this:

1. Plan Identify goals, scope, personnel and plan

2. Analysis Document workflow, identify problems

3. Redesign Explore alternatives and choose best

4. Development Redesign of jobs, products, hiring & firing, KPIs

5. Transition Integrate, train, test, modify where needed

In the exam you may be asked to evaluate an existing process and make redesign
suggestions - look out for..

1. Are there any steps or gaps missing?

2. Any duplication of work?

3. Any no value added activities?

Process Re-design Patterns

These are simply solutions / approaches that have worked in the past..

Pattern What causes it? Description

Re-engineering Major re-organisation Major redesign from scratch. High risk/return

 Simplification Duplication and unnecessary Checking each step in the process to check they’re needed.
activities Low risk/return

Value added Non value adding activities Check each activity for what value it adds to the customer.
analysis Moderate returns

Gaps and Information flows not Using process diagrams to see what needs to happen.
Disconnects working Moderate returns

In the exam you need to decide if you think a complete redesign is needed or just an improvement on existing processes.

In doing so think about the pros and cons in terms of money, culture, effect of change etc

Process redesign and Strategy

As we have seen BPR involves improving the value chain and looks at existing processes to check they are operating according to
our current strategy

This strategy, according to Norton and Kaplan’s Balanced Scorecard, is formulated from
four different perspectives.

1. Financial

2. Customers

3. Internal business processes

4. Innovation and learning

 Each of these 4 categories will have KPIs

So BPR should be aimed at improving these KPIs and thus ensuring that they are following strategy

Software Solutions

Software Solutions

Before we get onto looking at software to help us with process redesign, we first of all we need to establish business information
needs, we have various options open to us as listed below..

Technique When Suitable

Interviews Nearly all scenarios

Written Questions When interviews not possible

Questionnaires User population very large

Observation Before interviews

Documented analysis Good for redesign proposals

Workshops Where there is high uncertainty or conflicts

Protocol analysis (Interviews and observation) To consider all aspects and none taken for granted
 Prototypes Where functionality needs to be addressed

Using Generic Software

Advantages

1. Cheap

2. Available immediately

3. Few bugs

4. Good documentation and support

5. Regular updates

6. Previous users feedback built in

Disadvantages

1. Not a precise fit

2. Difficult to adapt

3. Incompatible data structures

4. No competitive advantage

5. Not a bespoke design / user interface leading to inefficiencies

Choosing a generic package

Process

1. Requirements listing

2. Select say 3 from their tender documents

3. Try them out or ask for a presentation

4. Get user input evaluation

5. Get technical input evaluation

6. Test unusual items of test data

7. Make recommendation (including evaluation of post sales service)

Criteria to consider

1. Costs

2. Design

3. Needs met

4. Updates

5. Support

6. Compatibility

7. Finances of supplier
 8. 3rd party references

9. Availability of demosData migration (moving from one system to another)

Changeover Techniques

Parallel Running

Keep both systems running for a while until trust is built up in new system

Direct Changeover

Old finishes at 11.59.59 New starts at 12.00.00

Phased

Stage by stage implementation if possible (e.g. in departments)

Financial Analysis
Strategy and Finance
Ratios and Strategy

Accounting Ratios

In your exam, you may be required to calculate some ratios in order to support your strategic analysis of the case.

You have already covered ratio analysis in other subjects of the ACCA syllabus.

This section shall therefore only present a summary and list of ratios that could potential be used in your exam for such purpose.
Ratios may be divided into the following categories:

PROFITABILITY RATIOS

These are measures of value added being generated by an organisation and include the following:

Total assets - current liabilities

ROCE Operating Profit (PBIT)/Capital Employed

Capital Employed Equity + LT liabilities

Capital Employed Non current assets + net current assets

Capital Employed Equity + LT liabilities

Gross margin Gross Profit/Sales

Net Margin Net Profit/Sales

ROE Profit After Tax - Preference dividends/Shareholders’ Funds (Ordinary shares + Reserves)

EFFICIENCY RATIOS

These are measures of utilisation of Current & Non-current Assets of an organisation. Efficiency Ratios consist of the
following:

Asset Turnover Sales/Capital Employed

ROCE Margin X Asset Turnover

Receivables Days (Receivables Balance / Credit Sales) x 365

 Payables Days (Payable Balance / Credit Purchases) x 365

Inventory (Inventory / Cost of Sales) x 365

LIQUIDITY & GEARING RATIOS

Liquidity Ratios measure the extent to which an organisation is capable of converting assets into cash and cash
equivalents.

On the other hand, Gearing Ratios measure the dependence of an organisation on external financing as against shareholder
funds.

Liquidity and Gearing Ratios are outlined below:

Liquidity

Current Ratio Current Assets / Current Liabilities

Quick Ratio (Current Assets – Inventory) / Current Liabilities

Gearing

Financial Gearing Debt/Equity

Financial Gearing Debt/Debt + Equity

INVESTOR'S RATIOS

These ratios measures return on investment generated by stakeholders. Such ratios include:

Dividend Cover Profit After Tax / Total Dividend

 Dividend Yield Dividends per share / Share price

Interest Cover PBIT / Interest

Earnings Per Share Profit After Tax and preference dividends / Number of Shares

PE Ratio Share Price / EPS

In the exam you have to act like a detective. You have to sift through evidence and extract meaningful messages for
effective business decisions. The starting point is often the basic accounting documents that record the progress of any
business, the Income statement & SFP

These are closely related so need reading together.

The balance sheet is a snapshot of a business at one point in time.

The income statement is dynamic and describes the flow of money through the business over a period of time.

Managing for Value

Managing for Value

This is a move from “scale” to “values”

In other words, the questions should no longer be in how many countries do we have the biggest market share etc to what is the
contribution of this product to the brand

To do this, there are 3 steps:

 1. Competitive strategy (where customers see value in your ptoduct and buy off you as opposed to the competiton).

2. Financial strategy (Ensuring that the funds we use are as cheap as possible (cost of capital) and fit with our corporate strategy)

3. These funds are then re-invested to create value for our stakeholders in products which again take us back to step 1

So where does this finance come from?

The possible sources of finance are..

Equity - Ordinary issue and rights issue

Self generated funds

Debt - Including preference shares and convertible loans

Leasing

Grants

Things to consider when choosing which one to go for are:

1. Their costs (debt cheaper than equity)

2. Effect on gearing (shares will reduce this)

3. Effect on control (Debt and rights issue will maintain control)

4. Availability (Issuing shares not always a possibility, debt also)

5. Time needing funds for (Shares more long term)

6. Expectations (Will repayments be feasible)

7. Security to be offered (without it more debt might not be possible)

Effectively Managing Assets

Cash
 How much cash to keep on hand and how much to invest elsewhere. This will depend on future investing requirements and
cashflow forecasts

Debtors
Efficient managing of these to ensure prompt payment but also enough incentive for customers to buy from us by an
attractive credit period

These current assets need managing according to the company needs for either profitability or liquidity.

Eg Inventory - hold high amounts if concerned with profitability (no stock outs and loss of orders). Hold low amounts if
concerned with liquidity as stock ties up cash

Non current assets

Need replacing and cash must be set aside or be budgeted for

Cost Accounting and Strategy

Standard Costing

A standard cost is an estimated/target cost of a product or service

Uses of Standard Costing

1. For planning, control and motivation

2. To value inventories and cost production for cost accounting purposes

3. As a control device by establishing standards (planned costs), highlighting activities that are not conforming to plan and thus
alerting management to areas which may be out of control and in need of corrective action

Variance Analysis

Variances provide feedback to management indicating how well, or otherwise, the company is doing.
Standard costs are essential for calculating and analysing variances.
Before any meaningful comparison can be made, the original budget should be ‘flexed’ to the actual level of performance.

A flexible budget

Is a budget which, by recognising different cost behaviour patterns, is designed to change as volume of activity
changes.

A flexed budget

Is a budget prepared to show the revenues, costs and profits that should have been expected from the actual level of
production and sales.

Consider this - you plan to make 10 products.

Each product should use 2Kg each.

Therefore the budgeted number of Kg is 20Kg

Actually 14 products were made and 25Kg used.

If the budget wasn't flexed you would compare 25Kg to the budgeted 20Kg and get an ADVERSE variance of 5Kg.

But this is not taking into account the fact that 4 more products were made than budgeted

So we need to flex this budget..

Actual Quantity of 14 should take 2kg each = 28kg

Actual Kg used 25kg

Therefore, the usage variance is actually 3 kg FAVOURABLE

Illustration

The budget was for 100 items at a labour cost of $200

The actual amount produced was 120 items at a labour cost of $250

Flex the budget and compare actual to budgeted

$200 / 100 x 120 = $240 (Flexed Budget)

Compare to actual = $250

$10 over budget

Reasons for Variances

Sales Variances

Possible causes of sales variances:

1. Unplanned price increases

2. Unplanned price reduction to attract additional business

3. Unexpected fall in demand due to recession

4. Increased demand due to reduced price

5. Failure to satisfy demand due to production difficulties

Material Variances

The direct material total variance can be subdivided into the direct material price variance and the direct material usage
variance.

Variance Favourable Adverse

Material price Unforeseen discounts received Price increase

More care taken in purchasing Careless purchasing

Change in material standard Change in material standard

Material usage Material used of higher quality than standard Defective material

More effective use made of material Excessive waste

 Theft

Errors in allocating material to jobs Errors in allocating material to jobs

Stricter quality control

Labour Variances

The total labour variance can be subdivided between labour rate variance and labour efficiency variance.

Variance Favourable Adverse

Labour rate Use of apprentices or other workers Wage rate increase

Use of higher grade labour

Idle time The idle time variance is always adverse Machine breakdown

Non-availability of material

Illness or injury to worker

Labour efficiency Output produced more quickly than expected Lost time in excess of standard allowed

Errors in allocating time to jobs Errors in allocating time to jobs

Variable Overhead Variances

The variable production overhead total variance can be subdivided into the variable production overhead expenditure
variance and the variable production overhead efficiency variance (based on actual hours).
 Variance Favourable Adverse

Variable overhead Savings in costs incurred Increase in cost of overheads used

Expenditure

More economical use of overheads Excessive use of overheads

Change in type of overheads used Change in type of overheads used

Variable overhead Efficiency Labour force working more Labour force working less
efficiently efficiently

Better supervision or staff training Lack of supervision

Fixed Overhead Variances

Variance Favourable Adverse

Fixed overhead Expenditure Savings in costs incurred Increase in cost of services used

Changes in prices Excessive use of services

Fixed overhead volume - Labour force working more Labour force working less efficiently
Efficiency efficiently

Lost production through strike

Fixed overhead volume - Labour force working overtime Machine breakdown, strikes, labour
Capacity shortages

When should a variance be investigated?

When deciding which variances to investigate, the following factors should be
considered:

1. Reliability and accuracy of the figures

2. Mistakes in calculating budget figures

or in recording actual costs and revenues, could lead to a variance being reported where no problem actually exists (the
process is actually ‘in control’).

3. Materiality

The size of the variance may indicate the scale of the problem and the potential benefits arising from its correction.

Possible interdependencies of variances

Sometimes a variance in one area is related to a variance in another.

For example, a favourable raw material price variance resulting from the purchase of a lower grade of material, may cause
an adverse labour efficiency variance because the lower grade material is harder to work with.

These two variances would need to be considered jointly before making an investigation decision.

The inherent variability of the cost or revenue

Some costs, by nature, are quite volatile (oil prices, for example) and variances would therefore not be surprising.

Other costs, such as labour rates, are far more stable and even a small variance may indicate a problem.

Adverse or favourable?

Adverse variances tend to attract most attention as they indicate problems.

However, there is an argument for the investigation of favourable variances so that a business can learn from its
successes.

Trends in variances

One adverse variance may be caused by a random event. A series of adverse variances usually indicates that a process
is out of control.

Controllability/probability of correction

If a cost or revenue is outside the manager’s control (such as the world market price of a raw material) then there is
little point in investigating its cause.
Risk and Strategy

Dealing with risk in decision-making

Risk refers to the situation where probabilities can be assigned to a range of expected outcomes arising from an investment
project and the likelihood of each outcome occurring can therefore be quantified.

For example, based on past experience, a sales team may estimate it has a 60% chance of winning a particular contract

Expected Values (EV)

The likelihood that an event will occur is known as its probability. This is normally expressed in decimal form with a value
between 0 and 1.

A value of 0 denotes a nil likelihood of occurrence whereas a value of 1 signifies absolute certainty.

A probability of 0.4 means that the event is expected to occur four times out of ten.

The total of the probabilities for events that can possibly occur must sum up to 1.0.

An expected value is computed by multiplying the value of each possible outcome by the probability of that outcome, and
summing the results.

EV = ∑px

Where p = probability of the outcome

x = the possible outcome

Advantages and disadvantages of EVs

Advantages:
 1. Takes risk into account by considering the probability of each possible outcome and using this information to calculate
an expected value.

2. The information is reduced to a single number resulting in easier decisions.

3. Calculations are relatively simple.

Disadvantages:

1. The probabilities used are usually very subjective

2. The EV is merely a weighted average and therefore has little meaning for a one-off project

3. The EV gives no indication of the dispersion of possible outcomes about the EV, i.e. the risk

4. The EV may not correspond to any of the actual possible outcomes

Decision trees and Strategy decision problems

Large corporations have to handle uncertain future scenarios.

But, with things changing so quickly, plans need to be made for a variety of outcomes to remain competitive.

It might be better to rely on quantitative techniques to verify expertise and experience, rather than just "gut feeling"

Decision analysis techniques help companies solve complex problems, as well as evaluate a potential project’s
financial value.

Decision trees allow for the probability of multiple scenarios and determine the potential impact of each.

This process gives a quantifiable value to the choices presented by future scenarios.

By quantifying the uncertainty, decision trees allow decision makers to model a variety of outcomes at multiple levels
and react appropriately.

The process works by assigning probabilities based on managers’ experience and judgment.

When used as a strategic planning tool, decision trees can help to allocate resources and decide when to scale up or
delay investment.
 For example (see above)

a company estimates that next year’s demand for a new product has a 30% chance of being high, a 40% chance of being
fair and a 30% chance of being low.

The product costs $3 million to bring to market.

Based on the costs associated with bringing the product to market, returns are positive in this scenario if the demand is
high or fair, but negative if the demand is low.

In this example, the three scenarios result in a 30% chance of $7 million in cash flow, a 40% chance of $2 million and a
30% chance of $6 million.

Based on those probabilities, the project’s expected value is $1.1 million in positive cash flow.

By calculating investment costs and comparing them to potential returns based on the likelihood of demand for the
product, the company can pick the highest-value alternative.

Based on the alternatives in this scenario, the company should introduce their new product next year for a better
chance of success.

This example, while valid, is simplistic. In a real decision tree, most organizations would include several layers
reflecting probabilities that explore a variety of “what ifs” for each choice.

While the example deals with a product launch, the same method can be used to explore the consequences and
subconsequences of security investments intended to prevent terrorist attacks and the resulting costs.

It can also be applied to natural disasters or other failures.

By assigning a quantifiable value to potential outcomes, decision trees help organisations make good decisions to
navigate uncertain future scenarios.

Management Accounting and Strategy

Make or Buy Decisions

A key consideration here is spare capacity

If Spare production capacity is available

So here we have spare room to MAKE more products, therefore...

Production resources may be idle (if the component is purchased from outside)

Fixed costs are irrelevant (because we won't need any extra fixed costs)

So just consider the variable costs of MAKING compared to the purchase cost of BUYING

Decision

1. Buy

If buying price < the variable costs of making

2. Make

If buying price > variable costs of making

No spare capacity available?

So we need to buy more space or stop making something to create space

Stopping making something to create capacity causes lost contribution

So compare the contribution lost + extra costs of MAKING to the purchase price of BUYING

Decision

1. Buy

if relevant costs of making > Purchase price

2. Make

if relevant costs of making < Purchase price

Illustration

Craft Ltd makes four components A, B, C, and D and the associated annual costs are as follows:

A B C D

Production volume (units) 1,500 3,000 5,000 7,000

Unit variable costs $ $ $ $

Direct Materials 4 4 5 5

Direct Labour 8 8 6 6

Variable production overheads 2 1 4 5

Total 14 13 15 16

Fixed costs directly attributable are: 3,000 6,000 10,000 7,000

The unit prices of an external supplier are: 12 16 20 24

Determine whether any of the components should be bought in from the external supplier.

SOLUTION:

A B C D
 Costs if Made 14 13 15 16

Costs if Bought (12) (16) (20) (24)

Savings per unit Bought 2 (3) (5) (8)

Number of units 1,500 3,000 5,000 7,000

Total Savings if Bought 3,000 (9,000) (25,000) (56,000)

Plus Direct Fixed Costs Saved 3,000 6,000 10,000 7,000

Total Saving 6,000 (3,000) (15,000) (49,000)

Therefore only buy in component A as this is the only one which makes a saving if bought in

Accept or Decline contracts

Accept or Decline contracts

A business should identify the incremental cash flows associated with a new one-off contract/project.
Illustration

The managing director of Q Limited is considering undertaking a one-off contract.

She has asked her inexperienced accountant to advise on what costs are likely to be incurred so that she can price at a profit. The
following schedule has been prepared:

Costs for special order

Direct wages $28,500

General overheads $4,000

Machine depreciation $2,300

Materials $34,000

Total $68,800

Notes

Direct wages comprise the wages of two employees, particularly skilled in the labour process for this job.

They could be transferred from another department to undertake the work on the special order.

They are fully occupied in their usual department and sub-contracting staff would have to be brought in to undertake the work
left behind. 


Sub-contracting costs would be $32,000 for the period of the work.

Other sub-contractors who are skilled in the special order techniques are also available to work on the special order.

The costs associated with this would amount to $31,300.

General overheads comprise an apportionment of $3,000 plus an estimate of $1,000 incremental overheads.

Machine depreciation represents the normal period cost, based on the duration of the contract. It is anticipated that $500 will be
incurred in additional machine maintenance costs.
Materials represent the purchase costs of 7,500kg bought some time ago.

The materials are no longer used and are unlikely to be wanted in the future except for the special order.

The complete stock of materials (amounting to 10,000kg), or part thereof, could be sold for $4.20 per kg.

The replacement cost of material used would be $33,375.

Required: 
Produce a revised costing schedule for the special project based on relevant costing principles. Fully explain
and justify each of the costs included in the costing schedule.

Direct Wages

1. Option 1:

Take the workers from their usual departments at a cost of $32,000 to replace them there

2. Option 2:

Hire sub-contractors at a cost of $31,300

Therefore choose sub contractors

General Overheads

General fixed overheads will have to paid anyway

We are only interested in 'extra' fixed costs which here are $1,000

Machine Depreciation

We are only interested in the relevant cashflows - depreciation is not a cashflow

There are extra maintenance costs though with the new contract of $500

Materials

The amount already in stock is a past sunk cost.

We are only interested in future incremental costs

The replacement cost is not a future cost either (as we have the stock already and is not to be used elsewhere)

The only relevant future cost is the fact we cannot sell it in the future (as we would as we are not using it)
 This cost is 7,500 x $4.20 = $31,500

Overdraft Interest

This is a future incremental cost if the contract is taken

$20,000 x 3/12 x 18% = $900

Item Cost

Direct wages 31,300

Overheads 1,000

Maintenance 500

Materials 31,500

Interest 900

Close or Continue

Closure or continuation decisions

Here you need to look at:

1. The loss in revenue from closing down the operation, and

2. The saving in costs from closing down (= avoidable costs).

This basically means look at its contribution - so make sure all the costs are direct - otherwise they wont be saved

Illustration

The management of Oh no It's all going wrong!

Co is considering the closure of one of its operations (department 2) and the financial accountant has submitted the
following report.

Department 1 2 3 Total

Sales (units) 10,000 5,000 15,000 30,000

Sales ($) 150,000 92,000 158,000 400,000

Direct material 75,000 75,000 50,000 200,000

Direct labour 25,000 25,000 10,000 60,000

Production overhead 5,000 2,500 7,500 15,000

Gross profit 45,000 -10,500 90,500 125,000

Expenses -15,000 -9,200 -15,800 -40,000

Net profit ($) 30,000 -19,700 74,700 85,000

In addition to the information supplied above, you are told that:

 Production overheads of $15,000 have been apportioned to the three departments on the basis of unit sales volume

Expenses are head office overhead, apportioned to departments on sales value.

As management accountant, you further ascertain that, on a cost driver basis:

Half of the so-called direct labour is fixed and cannot be readily allocated.

Prepare a report for management including a restatement of the financial position in terms of contribution made
by each department and making a clear recommendation.

1 2 3 Total

Sales 150,000 92,000 158,000 400,000

Direct Materials (75,000) (75,000) (50,000) (200,000)

Direct Labour (12,500) (12,500) (5,000) (30,000)

Production Overheads (5,000) (2,500) (7,500) (15,000)

Contribution 57,500 2,000 95,500 155,000

As Department 2 makes a positive contribution it should not be closed down

Shut down decisions

Shut down decisions

Loss of contribution from the segment

Savings in specific fixed costs from closure

Penalties resulting from the closure, e.g. redundancy, compensation to customers

Alternative use for resources released

Knock-on impact, e.g. loss leaders cancelled - products that got customers into the store

Effective Use of Resources

Effective Use of Resources

When there is only one scarce resource, key factor analysis can be used to solve the problem.

Options must be ranked using contribution earned per unit of the scarce resource.

Three steps in key factor analysis

1. First find the limiting factor (bottleneck resource)

2. Rank the options using the contribution earned per unit of the scarce resource

3. Allocate resources

Assumptions

A single quantifiable objective.

In reality, there may be multiple objectives.

Each product always uses the same quantity of the scarce resource per unit.

The contribution per unit is constant. However, the selling price may have to be lowered to sell more; discounts may be available
as the quantity of materials needed increases.

Products are independent. It may not be possible to prioritise product A at the expense of product B.

Illustration

X Ltd manufactures 3 products for which details are as follows:

Department 1 2 3 Total

Sales (units) 10,000 5,000 15,000 30,000

Sales ($) 150,000 92,000 158,000 400,000

Direct material 75,000 75,000 50,000 200,000

Direct labour 25,000 25,000 10,000 60,000

Production overhead 5,000 2,500 7,500 15,000

Gross profit 45,000 -10,500 90,500 125,000

Expenses -15,000 -9,200 -15,800 -40,000

Net profit ($) 30,000 -19,700 74,700 85,000

 A B C

Selling price $25 $20 $15

Materials 7 6 5

Labour (@ 75c per hr) 9 6 3

Variable overheads 3 3 3

$19 $15 $11

Contribution $6 $5 $4

There are 90,000 labour hours available.

Determine the production schedule that will yield the maximum contribution per period.

Calculate the total contribution generated at this level of production.

Hours are the limiting factor as 120,000 are needed in total (with only 90,000) available

A B C

Hours Needed per unit 12 8 4

Contribution per unit $6 $5 $4

Contribution Per hour $0.5 $0.625 $1

Ranking 3rd 2nd 1st

Product Units Hrs Total Contribution

C 6,000 4 24,000 x $1 = 24,000

 B 6,000 8 48,000 x $0.625 = 30,000

A 1,500 12 18,000 x $0.5 = 9,000

Relevant Costs

Relevant costs for decision making

The costs which should be used for decision making are often referred to as "relevant costs".

To affect a decision a cost must be:

1. Future

Past costs are irrelevant, as we cannot affect them by current decisions and they are common to all alternatives that we may
choose.

2. Incremental

' Meaning, expenditure which will be incurred or avoided as a result of making a decision.

3. Cash flow

Expenses such as depreciation are not cash flows and are therefore not relevant. Similarly, the book value of existing equipment is
irrelevant, but the disposal value is relevant.

Other terms:

Common costs

Costs which will be identical for all alternatives are irrelevant, e.g. rent or rates on a factory would be incurred whatever
products are produced.
 Sunk costs

Another name for past costs, which are always irrelevant, e.g. dedicated fixed assets, development costs already incurred.

Committed costs

A future cash outflow that will be incurred anyway, whatever decision is taken now, e.g. contracts already entered into
which cannot be altered.

Opportunity cost

Relevant costs may also be expressed as opportunity costs.

An opportunity cost is the benefit foregone by choosing one opportunity instead of the next best alternative.

Example

A company is considering publishing a limited edition book bound in a special leather.

It has in stock the leather bought some years ago for $1,000.

To buy an equivalent quantity now would cost $2,000.

The company has no plans to use the leather for other purposes, although it has considered the following possibilities:

of using it to cover desk furnishings, in replacement for other material which could cost $900

of selling it if a buyer could be found (the proceeds are unlikely to exceed $800).

In calculating the likely profit from the proposed book before deciding to go ahead with the project, the leather would not be
costed at $1,000.

The cost was incurred in the past for some reason which is no longer relevant.

The leather exists and could be used on the book without incurring any specific cost in doing so.

In using the leather on the book, however, the company will lose the opportunities of either disposing of it for $800 or of using it
to save an outlay of $900 on desk furnishings.

The better of these alternatives, from the point of view of benefiting from the leather, is the latter.
"Lost opportunity" cost of $900 will therefore be included in the cost of the book for decision making purposes.

The relevant costs for decision purposes will be the sum of:

1. 'avoidable outlay costs', i.e. those costs which will be incurred only if the book project is approved, and will be avoided if it is not

2. the opportunity cost of the leather (not represented by any outlay cost in connection to the project)

This total is a true representation of 'economic cost'.

The assumptions in relevant costing

Cost behaviour patterns are known, e.g. if a department closes down, the attributable fixed cost savings would be known.

The amount of fixed costs, unit variable costs, sales price and sales demand are known with certainty.

The objective of decision making in the short run is to maximise 'satisfaction', which is often known as 'short-term profit'.

The information on which a decision is based is complete and reliable.

People
Leadership
Visionary Leadership

Leadership traits for Strategy Implementation and

Change:

Vision
Clear direction about what needs to be done;

Communication
Listening to what others have to say and enabling them to gain trust in you

Passion & Motivation

Inspiring others to work harder through passion and making others see the purpose & value in what they do

Flexibility
Adapting one’s leadership style to the circumstances in which one has to lead.

Criticisms of leadership traits

1. Possession of all the traits is impossible

2. There are too many exceptions

3. Good leaders may have many of these qualities but possession of them does not always make one a good leader

4. The traits are so ill defined as to be useless in practice

Introduction to Leadership Theories

Leaders can think creatively in non-routine situations & influence the

actions, beliefs and feelings of others

In this sense being a leader is personal.

It comes from a person's qualities and actions.

However, it is also often linked to some other role such as manager or expert.

Here there can be a lot of confusion. Not all managers, for example, are leaders; and not all leaders are managers.

4 main generations of Leadership theory

It is important to recognize that none of the four ‘generations’ is mutually exclusive or totally time-bound.
 1. Trait theories

2. Behavioural theories

3. Contingency theories

4. Transformational theories

The next few sections we will look at these in more detail..

Transformational Theory

Transformational Leaders are the opposite of transactional leaders

The transactional leader:

Recognises what it is that we want to get from work and tries to ensure that we get it if our performance merits it

Exchanges rewards and promises for our effort

Is responsive to our immediate self interests if they can be met by getting the work done.

The Transformational leader

Raises our level of awareness about the significance and value of designated outcomes, and ways of reaching them

Gets us to transcend our own self-interest for the sake of the team, organisation or larger polity

Alters our need level (after Maslow) and expands our range of wants and needs
Transformational Leaders are visionary leaders who seek to appeal to their followers better nature and move them toward higher
and more universal needs and purposes. In other words, the leader is seen as a change agent

It is impossible to say how effective transformational leadership is with any degree of certainty.

We will return to some questions around charisma later – but first we need to briefly examine the nature of authority in
organisations (and the relationship to leadership).

Authority

Frequently we confuse leadership with authority.

Authority is often seen as the possession of powers based on formal role. In organisations we obey managers because we see
their exercise of power as legitimate. It may also be that we fear the consequences of not following their orders or ‘requests’.

We may also follow them because they show leadership. As we have seen, the latter is generally something more informal

In this way, leaders don’t simply influence; they have to show that crises or unexpected events and experiences do not faze
them.

Leaders may have formal authority, but they rely in large part on informal authority. This flows from their personal qualities and
actions. They may be trusted, respected for their expertise, or followed because of their ability to persuade.

The leader also relies on ‘followers’ for feedback and contributions. Without these they will not have the information and
resources to do their job. Leaders and followers are interdependent.

People who do not have formal positions of power can also enjoy informal authority. In a football team, for example, the
manager may not be the most influential person. It could be an established player who can read the game and energise that
colleagues turn to.

Charisma
Before moving on it is important to look at the question of charisma.

Charisma is, literally, a gift of grace or of God

Such leaders gain influence because they are seen as having special talents or gifts that can help people escape the pain they are
in

When thinking about charisma we often look to the qualities of particular individuals - their skills, personality and presence. But
this is only one side of things.
To make our lives easier we may want to put the burden of finding and making solutions on someone else. In this way we help to
make the role for ‘charismatic leaders’ to step into.

They in turn will seek to convince us of their special gifts and of their solution to the crisis or problem.

When these things come together something very powerful can happen. It doesn’t necessarily mean that the problem is dealt
with - but we can come to believe it is. Regarding such leaders with awe, perhaps being inspired in different ways by them, we
can begin to feel safer and directed. This can be a great resource.

Someone like Martin Luther King used the belief that people had in him to take forward civil rights in the United States. He was
able to contain a lot of the stress his supporters felt and give hope of renewal. He articulated a vision of what was possible and
worked with people to develop strategies.

Steve Jobs used his charisma with Apple to take it from a small failing tech company to the biggest company in the world

But there are also considerable dangers.

By placing people on a pedestal the distance between ‘us’ and ‘them’ widens. They seem so much more able or in control.

Rather than facing up to situations, and making our own solutions, we remain followers (and are often encouraged to do so).

Just as we turned to charismatic leaders, we can turn against them. Especially when, or if, he has not made things better. It might
be that some scandal or incident reveals the leader in what we see as a bad light. Whatever, we can end up blaming, and even
destroying, the leader.

Trait Theory

If we can identify the distinguishing characteristics of successful leaders,

we will at least be able to select good leaders

A number of common traits can be found in good leaders

1. Ability to solve problems creatively

2. Ability to communicate and listen

3. Many interests and sociability

4. Self-Confidence

5. Enthusiasm

6. Self-Discipline

7. Manners
8. Emotional stability

9. Positive & Sincere attitudes towards subordination

Leaders are people, who are able to express themselves fully.

They also know what they want, why they want it, and how to communicate what they want to others, in order to gain their co-
operation and support.

Lastly, they know how to achieve their goals.

But what is it that makes someone exceptional in this respect?

As soon as we study the lives of people who have been labelled as great or effective leaders, it becomes clear that they have
very different qualities.

We only have to think of political figures like Nelson Mandela, Margaret Thatcher and Mao Zedong to confirm this.

Instead of starting with exceptional individuals many turned to setting out the general qualities or traits they believed should be
present.

Surveys of early trait research by Stogdill (1948) and Mann (1959) reported that many studies identified personality
characteristics that appear to differentiate leaders from followers.

Problems with Trait Theories

It's not always true

As Peter Wright (1996: 34) has commented, ‘others found no differences between leaders and followers with respect
to these characteristics, or even found people who possessed them were less likely to become leaders’.

Yet pick up almost any of the popular books on the subject today and you will still find a list of traits that are
thought to be central to effective leadership.

The basic idea remains that if a person possesses these she or he will be able to take the lead in very different
situations. At first glance, the lists seem to be helpful. But spend any time around them and they can leave a lot to be
desired

Different situations need different traits

The first problem is that the early searchers after traits often assumed that there was a definite set of characteristics
that made a leader - whatever the situation. In other words, they thought the same traits would work on a
battlefield and in the staff room of a school.

They minimised the impact of the situation (Sadler 1997). They, and later writers, also tended to mix some very
different qualities.

Some are aspects of a person's behaviour, some are skills, and others are to do with temperament and intellectual
 ability

The list is very big but still not exhaustive

Like other lists of this nature it is quite long - so what happens when someone has some but not all of the qualities?

On the other hand, the list is not exhaustive and it is possible that someone might have other ‘leadership qualities’.
What of these?

More recently people have tried looking at what combinations of traits might be good for a particular situation.
There is some mileage in this. However, it remains an inexact science!

Different traits needed for different genders?

One of the questions we hear most often around such lists concerns their apparent ‘maleness’ (e.g. Rosener 1997).

When men and women are asked about each others characteristics and leadership qualities, some significant patterns
emerge.

Both tend to have difficulties in seeing women as leaders.

The attributes associated with leadership on these lists are often viewed as male. However, whether the
characteristics of leaders can be gendered is questionable.

If it is next to impossible to make a list of leadership traits that stands up to questioning, then the same certainly
applies to lists of gender specific leadership traits!

Behavioural Theory

This is a move from leaders to Leadership

As the early researchers ran out of steam in their search for traits, they turned to what leaders did - how they behaved
(especially towards followers).

This became very popular in organisations in the 1950s and early 1960s.

Different patterns of behaviour were grouped together and labelled as styles. This became a very popular activity within
management training – perhaps the best known being Blake and Mouton’s Managerial Grid (1964; 1978).

The four main styles that appear are:

Concern for task: Here leaders emphasize the achievement of concrete objectives. They look for high levels of productivity,
and ways to organize people and activities in order to meet those objectives.

Concern for people: In this style, leaders look upon their followers as people - their needs, interests, problems, development
and so on. They are not simply units of production or means to an end.

Directive leadership: This style is characterised by leaders taking decisions for others - and expecting followers or
subordinates to follow instructions.

Participative leadership: Here leaders try to share decision-making with others.(Wright 1996: 36-7)

Often concern for task is set against concern for people; and directive is contrasted with participative leadership.

If you have been on a teamwork or leadership development course then it is likely you will have come across some variant of this
in an exercise or discussion.

Many of the early writers that looked to participative and people-centred leadership, argued that it brought about greater
satisfaction amongst followers (subordinates).

Problems with Behavioural Theory

No 1 style is best

However, as Sadler (1997) reports, when researchers really got to work on this it didn’t seem to stand up. There were lots of
differences and inconsistencies between studies. It was difficult to say style of leadership was significant in enabling one group
to work better than another.

Different styles suit different situations

Perhaps the main problem, though, was one shared with those who looked for traits (Wright 1996: 47). The researchers did not
look properly at the context or setting in which the style was used. Is it possible that the same style would work as well in a
gang or group of friends, and in a hospital emergency room?

The styles that leaders can adopt are far more affected by those they are working with, and the environment they are operating
within, than had been originally thought.
Contingency Theory

The idea that what is needed changes from situation to situation

Another way of putting this is that particular contexts would demand particular forms of leadership.

This placed a premium on people who were able to develop an ability to work in different ways, and could change their style to
suit the situation.

What began to develop was a contingency approach. The central idea was that effective leadership was dependent on a mix of
factors.

Three things are important here:

1. The relationship between the leaders and followers: If leaders are liked and respected they are more likely to have the
support of others.

2. The structure of the task: If the task is clearly spelled out as to goals, methods and standards of performance then it is more
likely that leaders will be able to exert influence.

3. Position power: If an organisation or group confers powers on the leader for the purpose of getting the job done, then this may
well increase the influence of the leader

Models like this can help us to think about what we are doing in different situations.

For example, we may be more directive where a quick response is needed, and where people are used to being told what to do,
rather than having to work at it themselves.
Problems with Contingency Theories

A North American bias

Some cultures are more individualistic, or value family as against bureaucratic models, or have very different
expectations about how people address and talk with each other.

All this impacts on the choice of style and approach

Gender Differences

As we saw earlier, there may be different patterns of leadership linked with men and women.

Some have argued that women may have leadership styles that are more nurturing, caring and sensitive. They look
more to relationships. Men are said to look to task.

However, there is a lot of debate about this. We can find plenty of examples of nurturing men and task-oriented
women.

Any contrasts between the style of men and women may be down to the situation.

In management, for example, women are more likely to be in positions of authority in people-oriented sectors – so
this aspect of style is likely to be emphasised

Not enough on structure of relationship

The focus is mainly on the relationship between managers and immediate subordinates, and says little about issues
of structure, politics or symbols

Job Design
Introduction to Job Design

Job Design
Job design refers to the way that a set of tasks, or an entire job, is organised.

Job design helps to determine:

1. What tasks are done?

2. How the tasks are done?

3. How many tasks are done? and

4. In what order the tasks are done?

It takes into account all factors which affect the work, and organises the content and tasks so that the whole job is less likely to
be a risk to the employee.

Job design involves administrative areas such as:

1. Job rotation,

2. Job enlargement,

3. Task/machine pacing

4. Working hours.

A well designed job will encourage a variety of 'good' body positions, have reasonable strength requirements, require a
reasonable amount of mental activity, and help foster feelings of achievement and self-esteem.

Techniques for job design may be grouped under four major schools of thought (which are
looked at in the next 4 sections)

1. Scientific management

2. Job enrichment
3. Japanese management and

4. Re-engineering

Scientific Management

Here employees will not be asked to perform work beyond their abilities

This involves analysing jobs to see:

What the worker does and

What the requirements are for the job

Jobs are then divided into small segments for the worker to perform, thus focussing on one small aspect within their skills range

It was created by Frederick Taylor in his 1911 The Principles of Scientific Management.

Taylor’s idea was that there is an “optimal” or “best” way to structure a job to maximise performance.

So he developed two principles to help this:

1. Job simplification

Which means deconstructing work into the “simplest individual components.

For example, the production of a piece of clothing could be divided into individual steps like “cutting fabric,” “sewing
together,” and “adding designs.”
2. Job specialisation

Here employees perform these simple specific tasks and focus on them exclusively – hence, specialisation. One employee
specialises in cutting the fabric, one employee specialises in sewing the fabric, and so on.

Time and motion studies help work out the best way to organise these jobs - then managers can then set realistic
expectations and performance goals for employees.

Advantages

1. A high degree of production efficiency through formulating standard tasks

2. Employees may be easily replaced because skills are despecialised

3. Minimal skill and training

4. Highly suitable for the provision of standardised products & services

Disadvantages

1. Creates worker alienation: No worker has complete control and/or knowledge of the whole product or service

2. Discourages innovative thinking

3. Not appropriate in a context where products and services need to be customised to the specific needs and requirements of
customers

Job Enrichment

Job Enrichment

Job enrichment is an attempt to motivate employees by giving them the opportunity to use the whole range of their abilities.
It can be contrasted to job enlargement which simply increases the number of tasks without changing the challenge.

Most of us want interesting, challenging jobs where we feel that we can make a real difference to other people's lives.

So how do we make the jobs you offer more satisfying?

This where job enrichment comes in - most notably promoted by psychologist Frederick Herzberg in his 1968 article "One More
Time: How Do You Motivate Employees?".

It is the practice of enhancing individual jobs to make the responsibilities more rewarding and inspiring for the people who do
them.

With job enrichment, you expand the task set that someone performs.

You provide more stimulating and interesting work that adds variety and challenge to an employee's daily routine.

This increases the depth of the job and allows people to have more control over their work.

Before you look at ways to enrich the jobs in your workplace, you need to have as your foundation a good, fair work
environment.

If there are fundamental flaws – in the way people are compensated, their working conditions, their supervision, the
expectations placed upon them, or the way they're treated – then those problems should be fixed first.

If they are not resolved, any other attempts to increase satisfaction are likely to be sterile.

Designing Jobs that Motivate

Hackman and Oldham identified five factors of job design that typically contribute to people's enjoyment of a job:

1. Skill Variety

Increasing the number of skills that individuals use while performing work.

2. Task Identity

Enabling people to perform a job from start to finish

3. Task Significance

Providing work that has a direct impact on the organization or its stakeholders

4. Autonomy

Increasing the degree of decision making, and the freedom to choose how and when work is done

5. Feedback

Increasing the amount of recognition for doing a job well, and communicate the results of people's work
An enriched job should ideally contain:

A range of tasks and challenges of varying difficulties (Physical or Mental)

A complete unit of work - a meaningful task

Feedback, encouragement and communication

Advantages

1. Reducing some of the alienation that was created by scientific management (just do as you’re told)

2. Workers have increased control & responsibility

3. Believed to improve job satisfaction

Disadvantages:

1. Workers still do not have full visibility of the overall production cycle; and

2. Has been frequently associated with burdening workers with more despecialised tasks as opposed to providing them
with opportunities to develop appropriate skills.

Japanese Management

Japanese Management

distinctive element of the Japanese management model is the greater role given to workers' knowledge.
distinctive element of the Japanese management model is the greater role given to workers' knowledge.

It came about primarily as worker involvement in industrial engineering.

Just-in-time (Kanban) and the continuous learning program (Kaizen), as well as other aspects of Japanese personnel practice,
have come from this

The following are the basis of Japanese Management

1. Management technology is a highly transportable technology

2. Just-in-time production exposes problems otherwise hidden by excess inventories and staff.

3. Quality begins with production, and requires a company-wide "habit of improvement."

4. Culture is no obstacle; techniques can change behavior

5. Simplify, and goods will flow like water

6. Flexibility opens doors

7. Travel light and make numerous trips, like the water beetle

8. More self-improvement, fewer programs, less specialist intervention

9. Simplicity is the natural state

Advantages

1. Emphasis on quality

2. Emphasis on Team Work and coming up with new ideas

3. Encourages the development of skills & multi-tasking

4. Is likely to increase job satisfaction

Disdvantages

May be difficult to implement for cultural reasons

Does not exploit economies of scale as advocated by Scientific Management

May be difficult to replace workers if they leave the organization

Re-engineering

Business Process Reengineering

Views employees as Assets rather than costs

Involves the establishment of a horizontal structure with work carried out by self managed teams

Designing and redesigning jobs is not easy.

Changes in one part of a job hierarchy are bound to bring about changes elsewhere.

Change maybe welcome in one group, but not in another.

This is likely to cause tensions between groups.

Individuals may initially welcome change, but then feel less enthusiastic if related job conditions (pay, re-training etc) do not
meet their needs.

Supervisory staff may feel particularly threatened by any form of job redesign, but will expect to benefit ultimately.

However, when work can be redesigned effectively, the rewards are twofold.

1. For individuals, there is the opportunity to find personally challenging and satisfying work

2. For firms, there is the opportunity to achieve lower costs, better quality and improved productivity through a more effective
match between the needs of people and the requirements of technology

The approach to work structuring and job design embodied in some aspects of Business Process Re-engineering focuses on key
business processes rather than on tasks and operational structures in designing work.

This may lead to job losses for some, but also to more interesting and challenging jobs for others.
Organisations employing BPR may enjoy reduced costs of production and improved customer relations.

Advantages

1. Selection of employees based on value added not costs

2. Promotes Delegation

3. Promotes Decentralisation

4. Maximises the use of IT to automate repetitive processes

Disadvantages

1. May create a degree of alienation due to standardisation of processes

2. May not be able to keep up with the rate of change in the external environment

3. May create an element of bureaucracy which may be uncalled for

Staff Development
Human Resource Management

What is Human Resource Management

Human Resource Management (HRM) is a strategic and coherent approach to the management of an organisation’s most valued
assets: the people working there who individually and collectively contribute to the achievement of its objectives for sustainable
competitive advantage.

Human Resource Development

This is concerned with the development of skills and abilities of people within an organisation in order to ensure its success;

People are seen as a major source of competitive advantage;

Learning is seen as essential and a means for coping with change;

Employees have expectations that they will learn and change and retrain as necessary as strategy demands;

Development & Training is seen as a key part of a manager’s role;

Human resource implications are considered as part of strategic planning;

Two main approaches for Human Resources Development may be readily identified:

1. Systematic Approach

A more formalised approach to sustaining the development of employees. Training based on needs analysis and implemented by
following a clear timetable.

Each training activity is evaluated and assessed on its overall effectiveness in achieving the intended objectives.

Systematic approaches are less effective for organisations in a changing environment where objectives are less clear.

2. Integrated Approach

Potential of employees is developed incrementally through a continuous learning process.

A culture of learning is created within the organisation

Human Resource Management becomes a central theme in the Business Strategy

Staff development is decentralised at a managerial level through the use of competency frameworks (see next section) that are
developed to identify key skills and behaviour needs to meet the strategic objectives of the company.

Human Resource Planning

The key stages in Human Resources Planning are the following:

1. Identify Skills

Skill requirements need to be identified in line with Strategy

2. Recruit Staff
 Ensure that the right mix of skills are available

3. Develop People

Gaps in skills addressed through training

4. Retain the Best

This is even more important with increasing job mobility and training & development costs

5. Motivate

Personnel need to be properly incentivised

6. Improve Performance

Gaps between desired and actual performance may be evaluated and monitored

7. Create Culture

This is by far one of the most difficult tasks that need to be undertaken by the Human Resources Department.

The Culture is created by ensuring a harmonised value system that permeates across all strata of the organisation.

Competency Framework
Key elements

Establishing the elements of competence;

Establishing the criteria of performance of the skill or ability required and set standards to measure by it;

Monitoring the level of performance achieved;

Measuring the performance against the standard; and

Taking corrective action for deviation from the standard.

Uses

1. To provide an analysis of the behaviour needed to achieve a given strategy;

2. To act as a basis for determining person specifications during the recruitment process;

3. To identify training and development needs & develop people to a level of performance expected at work;

4. Managing performance & focusing on what people do at work; and

5. For Benchmarking Purposes

What exactly are Competencies?

Are relative to one’s job description, roles & responsibilities;

Are expressed in visible, behavioural terms & reflect the main components of the job (skills, knowledge & attitude); and

Must be demonstrated to an agreed standard & must contribute to the overall aims of the organisation.
An example of a competency framework in the context of the recruitment of a financial controller is outlined below:

Competency Description

Communication The ability to present complex information in simple, succinct and memorable ways. The ability to
Skills bring context to abstract information

People Skills The ability to give clear direction to sub-ordinates and work pro-actively within a team

Customer The ability to empathise with student needs and go beyond the bare minimum of what is required
Service

Results To aim for pass rates above the company average and feedback in the top quartile of the company
Orientation

Learn more list

ACCA's
Competency Framework

Workplace Learning

Workplace Learning

Workplace learning sees the organisation as a unit of learning in which:

1. Learning is of strategic importance and is seen in a wider context by managers and staff

2. Links are made between learning & other parts of the organisation
Effective workplace learning should provide enterprises with the capacity to innovate.

Key characteristics

1. Actions have two purposes

2. To resolve the immediate problem; and

3. To learn from the process

The Learning Organisation

A learning organisation recognises how important employees are in helping to innovate and change

All members of a learning organisation can contribute to policy-making, as part of the learning process

What is needed for a Learning Organisation to thrive?

1. Awareness

Organisations must be aware that learning is necessary before they can develop into a Learning Organisation.
This may seem to be a strange statement but this learning must take place at all levels; not just the Management level.

Once the company has excepted the need for change, it is then responsible for creating the appropriate environment for
this change to occur in.

2. Environment

Centralised, mechanistic structures do not create a good environment.

Individuals do not have a comprehensive picture of the whole organisation and its goals.

Therefore a more flexible, organic structure must be formed.

By organic, we mean a flatter structure which encourages innovations.

The flatter structure also promotes passing of information between workers and so creating a more informed work
force.

It is necessary for management to take on a new philosophy; to encourage openness, reflectivity and accept error and
 uncertainty.
Members need to be able to question decisions without the fear of reprimand. This questioning can often highlight
problems at an early stage and reduce time consuming errors.

One way of over-coming this fear is to introduce anonymity so that questions can be asked or suggestions made but
the source is not necessarily known.

3. Leadership

Leaders should foster the Systems Thinking concept and encourage learning to help both the individual and
organisation in learning.

It is the leader's responsibility to help restructure the individual views of team members.

For example, they need to help the teams understand that competition is a form of learning; not a hostile act.

Management must provide commitment for long-term learning in the form of resources.

The amount of resources available (money, personnel and time) determines the quantity and quality of learning.

This means that the organisation must be prepared to support this.

4. Empowerment

The focus of control shifts from managers to workers.

The workers become responsible for their actions; but the managers do not lose their involvement.

They still need to encourage, enthuse and co-ordinate the workers.

Equal participation must be allowed at all levels so that members can learn from each other simultaneously.

This is unlike traditionally learning that involves a top-down structure (classroom-type example) which is time
consuming.

5. Learning

Companies can learn to achieve these aims in Learning Labs.

These are small-scale models of real-life settings where management teams learn how to learn together through
simulation games.

They need to find out what failure is like so that they can learn from their mistakes in the future.

These managers are then responsible for setting up an open, flexible atmosphere in their organisations to encourage
their workers to follow their learning example.

Anonymity has already been mentioned and can be achieved through electronic conferencing.
This type of conferencing can also encourage different sites to communicate and share knowledge, thus making a
company truly a Learning Organisation.