CIMA E3 Notes - Enterprise Strategy - Chapter 1.pdf

CIMA E3Course Notes

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CIMA E3 Enterprise Strategy Course Notes

By Nick Best

© Strategic Business Coaching Ltd 2013 Personal use only - not licensed for use on courses

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CIMA E3Course Notes

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Chapter 1 ...............................................................................4 Formulating a business strategy ...................................................4 1. 2. 3. 4. 5. 6. 7. 8.

Business strategy .............................................................................. 5 Levels of Strategy ............................................................................. 7 Approaches of Strategy Formulation ...................................................... 8 Planned Strategies ............................................................................ 8 Emergent Strategies (Mintzberg) ..........................................................11 Incrementalism ...............................................................................12 Freewheeling Opportunism .................................................................13 The three strategic lenses ..................................................................13

Chapter 2 ............................................................................. 16 Mission and objectives ............................................................. 16 1. 2. 3. 4. 5. 6.

Mission .........................................................................................17 Mission Statements ..........................................................................17 Objectives .....................................................................................19 Effective Objectives .........................................................................21 Stakeholders ..................................................................................22 Corporate Social Responsibility (CSR) ....................................................25

Chapter 3 ............................................................................. 29 External analysis .................................................................... 29 1. 2. 3. 4. 5.

External Analysis .............................................................................30 PESTEL analysis ...............................................................................30 Porter’s Five Forces .........................................................................32 Evaluating overseas markets – Porter’s Diamond .......................................36 Environmental uncertainty .................................................................38

Chapter 4 ............................................................................. 43 Internal Analysis .................................................................... 43 1. 2. 3. 4. 5. 6.

Internal Analysis..............................................................................44 The Resource Audit - The Nine M’S .......................................................44 Porter’s Value Chain.........................................................................46 Supply Chain Management..................................................................49 Product life cycle ............................................................................52 Boston Consulting Group (BCG) Matrix ................................................... 54

Chapter 5 ............................................................................. 60 Financial evaluation of current position ....................................... 60 1. 2. 3.

Financial analysis ............................................................................61 Financial ratios ...............................................................................62 Ad-hoc financial evaluation in the CIMA P3 exam......................................67

Chapter 6 ............................................................................. 70 Corporate Appraisal ................................................................ 70 1. 2. 3.

Corporate Appraisal - Swot Analysis ......................................................71 GAP analysis...................................................................................72 End of the strategic analysis stage........................................................73

Chapter 7 ............................................................................. 75 Strategic Choice and Evaluation ................................................. 75 1. 2. 3.

Strategic Choice ..............................................................................76 Porter’s Generic Strategies ................................................................76 Strategy Clock ................................................................................79


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CIMA E3Course Notes

4. 5. 6. 7. 8.

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Strategic direction ...........................................................................80 Methods Of Strategic Development .......................................................83 Corporate political activity and non-market strategies ...............................87 Strategy Evaluation ..........................................................................87 Ethics and strategic choice.................................................................88

Chapter 8 ............................................................................. 93 Strategic Implementation – Change management ............................ 93 1. 2. 3. 4. 5. 6.

Strategy Implementation ...................................................................94 Change management ........................................................................94 Types of change ..............................................................................95 Effective management of change .........................................................97 The process of change ......................................................................99 Culture and Change........................................................................ 100

Chapter 9 ........................................................................... 106 Strategic Implementation – Information systems ........................... 106 1. 2. 3. 4. 5. 6. 7.

Information.................................................................................. 107 IS strategy ................................................................................... 107 Steering committee........................................................................ 112 Levels of management, information and control ..................................... 113 Information systems at different levels ................................................ 115 E-commerce................................................................................. 119 Using business strategy models to identify IT needs................................. 120

Chapter 10 ......................................................................... 125 Strategic Implementation - Marketing ........................................ 125 1. 2. 3. 4. 5. 6. 7. 8.

Marketing .................................................................................... 126 Defining a marketing strategy ........................................................... 127 The Marketing Mix ......................................................................... 128 Marketing Research ........................................................................ 131 Segment - Target – Position .............................................................. 132 The Management accountant’s role in marketing.................................... 136 Branding ..................................................................................... 140 Relationship marketing ................................................................... 142

Chapter 11 ......................................................................... 144 Strategic Implementation – Organisational Structure...................... 144 1. 2. 3. 4. 5.

Structure..................................................................................... 145 Types of organisational structure ....................................................... 145 Centralisation Versus Decentralisation................................................. 151 Structure and strategy .................................................................... 152 Business process reengineering and lean systems .................................... 152

Chapter 12 ......................................................................... 156 Strategic Review And Control .................................................. 156 1. 2. 3. 4. 5. 6. 7.

Strategic Review And Control ............................................................ 157 Performance Measurement ............................................................... 157 Balanced Scorecard........................................................................ 161 Performance pyramid ..................................................................... 163 Benchmarking............................................................................... 164 Critical Success Factors ................................................................... 165 Internal Control ............................................................................ 166


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CIMA E3Course Notes

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CIMA E3 Course Notes

Chapter 1 Formulating a business strategy


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CIMA E3Course Notes

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Business strategy

Strategy A strategy is a plan of action designed to achieve a goal or objective. The aim of a strategy is to gain some kind of competitive advantage or to help to exploit future opportunities. A strategic plan tends to be an overall guide to the way forward rather than a detailed step by step approach due to the tendency of the real world to be uncertain. In the example of a chess game, a ‘strategy’ provides the over-riding approach that the player will take to win the game, but the exact set of moves they undertake will vary depending on the opponent’s moves.

Strategy in business Applying this to a business scenario, according to the CIMA official terminology a business strategy can be defined as: "A course of action, including the specification of resources required, to achieve a specific objective" Or, more complete definition is given by Johnson, Scholes and Whittington as: “The direction and scope of an organisation over the long term, which achieves advantage for the organisation through its configuration of resources within a changing environment, to meet the needs of the markets and to fulfil stakeholder expectations” Business strategy therefore is concerned with the overall management of an organisation and includes the management of and taking decisions about: a) b) c) d) e) f) g)

Products Markets Locations (production and sales) Structure Personnel Buildings and machinery How to compete


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Key features of strategic management The key features of strategic management are:

Long term approach – decisions are made over the long term, often for periods exceeding one year Focused on organisational objectives – the aim being to ensure that the plan of action achieves the most important objectives for a wide group of key stakeholders Aligned with internal strengths and weaknesses – the aim should be to capitalise on the business strengths and overcome any key weaknesses. Devising a strategy will often follow a position audit of the business to ascertain the businesses current position. Adapted to the changing business environment – so that changes in political, economic, social and technology factors are taken account of, while adapting to industry changes, such as competitive threats, supply issues or changing customer needs.

The importance of strategy Strategic management of businesses is important for the following reasons: •

•

•

•

•

Provides a clear direction, focusing management decision making Adapts the organisation to the changing environment ensuring it’s continuing survival and success Ensures competitiveness through understanding and adapting to competition Focuses in building key competences to meet customer needs Co-ordinates all elements of the business in a structured planned approach.

Director’s role in strategy Ultimately it is the director’s responsibility to decide on and take decisions on strategy in the organisation. Typically strategy will be discussed and agreed in board meetings. Larger organisations often have a small department whose role is to analyse the business, markets and competitors and devise strategy for the board to discuss and agree upon. © Strategic Business Coaching Ltd 2013 Personal use only - not licensed for use on courses

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The directors have a fiduciary duty to make strategic decisions which are in the best interests of the company and its shareholders, and as such it is important that due diligence undertaken before key contracts resulting from strategic decisions are signed. This might include an analysis of key suppliers prior to long term supply agreements or review of an acquisition target by an independent accountancy firm prior to purchase.

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Levels of Strategy

There are three different levels on which strategy can be set:

Corporate Strategy The corporate strategy provides the direction for the business as whole, including all parts of the business. It includes consideration of: • • • • • •

The overriding purpose and scope of the business Which businesses and markets should the organisation operate in? What should the core competencies be? Resources and financing How to compete How to integrate and structure the business

For a company such as Diagio, one of the world’s leading premium drinks businesses with brands such as Guiness, Smirnov and Johnie Walker amougst it’s group. It needs to decide which products to include in it’s brands, which markets to operate in and so on. In 2002 Diagio sold Burger King as they moved out of the ‘food’ industry into a focus on Premium Branded Drinks. This was a ‘corporate level decision’.

Business Strategy Each business unit or subsidiary of the business is likely to have different goals, competitors, suppliers, manufacturing approaches, IT, financial requirements and so on, and so each strategic business unit (SBU) needs its own strategy. This covers: • • • • • •

Which competencies? Which products? Which markets? Tactics to beat competition in this market Business resources (people, buildings, machinery, processes) How to compete in this business area?

In Diagio, different strategies will be required for each drinks brand and each regional market due to the different nature of the products and markets. These are ‘business level’ strategies. © Strategic Business Coaching Ltd 2013 Personal use only - not licensed for use on courses

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Operational/Functional Strategy Each functional area within each business unit will then have its own strategy, so there will be strategies in each department e.g. HR, IT, production, finance and marketing. These should be designed to be consistent with the business strategy of the SBU.

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Approaches of Strategy Formulation

There are a number of different approaches to the development of strategies within organisations. • • • •

Planned strategies Emergent strategies Incrementalism Opportunism

These will be examined one by one in the following sections.

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Planned Strategies

Strategies can be consciously and formally planned in advance, either by the directors or by a specialist department. This provides a clear, justifiable strategy based on the information available about the company’s current position, environment and competencies. As such the strategy developed should be well thought through and effective. Planned strategies are often used in large organisations, and are particularly suitable where the industry is subject to relatively little change. Planned strategies tend to consist of four of distinct stages:

Strategic Analysis •

•

Defining the direction (e.g. Mission and objectives) External analysis of the business environment (e.g. PESTEL analysis, Porter’s 5 forces)


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•

•

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Internal analysis of the firm (e.g. Value chain, Resource audit, Product analysis) Corporate appraisal (e.g. SWOT analysis)

Strategic Choice •

•

Selecting strategic options Choosing options the firm is going to take (including financial evaluation using techniques such as NPV, IRR and Payback period).

Strategic Implementation Putting the strategies into practice including polices and strategies for: • • • • • • • •

marketing finance R&D IT Human Resources Project management Change management Structure

Strategy Evaluation and control •

•

Evaluating the success of the strategy by measuring actual performance against objectives Taking control action by amending future strategies and objectives.


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Rational planning model The stages of strategic planning can also be shown using the rational planning model, which is an alternative way of showing the same process.

Mission and Objectives Environmental Analysis

Position Audit

Corporate Appraisal

Strategic Options

Strategic Evaluation Strategic Implementation

Review and Control

Criticisms of planned strategies While planned strategies provide logical focused, well organised strategies they have also been criticised:

Time commitment – they can be very time consuming to create, for large businesses often taking many months, and may be out of date by the time they are published Cost – costs include staff time, collecting information, using strategy consultants


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Lack of flexibility - The organisation can become constrained by a fixed plan and as a result not take new opportunities that arise or adapt to changes in the business environment (e.g. a new competitive threat).

5.

Emergent Strategies (Mintzberg)

Emergent strategies are strategies which emerge out of the course of the business rather than having been formally planned. They could perhaps be due to opportunities which present themselves (e.g. a competitor comes up for sale) or threats which need to be addressed (e.g. a competitor develops a new product and the company must follow suit to remain competitive).

E m e r g e n t s t r a t e g i e s i n c l u d e d C r a f t i n g

NOW

Planned strategy Realised strategy

General idea of goals And future direction

F a i l e d s t r a t e g i e s d i s c a r d e d

Emergent strategies can be combined with the successful elements of the planned strategy to define the way forward for the business. The process of bringing these together is called crafting a strategy. In the example of a development of a new product, that needs of the new product would need to be crafted alongside those of the existing business, © Strategic Business Coaching Ltd 2013 Personal use only - not licensed for use on courses

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including production timings and approaches of both existing and new products, combined marketing strategies, allocation of funds to different product lines and the use of human resources for each area. This is more appropriate for businesses in a changing environment, such as high technology, where restriction to one planned strategy may be a competitive weakness. It is also most commonly used in smaller organisations where the organisation relies less of formal plans and processes and more on the knowledge of key managers and staff who can be very flexible to change.

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Incrementalism

In fast changing environments it may be unrealistic to effectively undertake the full strategic planning process. Instead it is more practical to develop a short term strategy based on the consensus of opinion of major stakeholders. An incrementalist approach was adopted by many businesses during the ecomonic downturn of the late 2000s as uncertainty made it hard to make accurate long term predictions. The strategy is then developed regularly using a series of small scale changes as dictated by the changing environment. Another situation where incrementalism is common in the public sector which while not a rapidly changing environment, is one where there are a wide variety of stakeholder needs to satisfy. It can thus be hard to a gree clear long term objectives to keep every stakeholder content, and thus a shorter term ‘middle ground’ view is taken that ‘satisfies’ all groups.


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CIMA E3Course Notes

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Freewheeling Opportunism

NOW

Take advantage of opportunities as they arise Little plan or direction, but very flexible and dynamic

In this model there is no formal approach to strategy development. Directors dictate the business direction through taking whatever opportunities are available at a particular point in time. This allows the business to be very flexible and take opportunities that companies using a more formal approach to strategy development would be slow to take. Freewheeling opportunism is most common in small companies with an entrepreneurial leader who can direct and focus their organisation down each new track based on the opportunities they identify and wish to pursue. The lack of formal processes makes change quick and easy.

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The three strategic lenses

According to Johnston, Scholes and Whittington, business strategy ca n considered from three different perspectives.

Strategy as design A strategy is planned based on internal and external analysis and logical and rational thought. e.g. Rational model


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Strategy as experience Strategy comes from learning from and adapting to real-world experience e.g. Emergent strategies (and to a lesser extent incrementalism)

Strategy as ideas Strategy comes from the continuous application of new innovations and business and process change. This depends on staff and structural flexibility, entrepreneurship and idea generation.


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CIMA E3Course Notes

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Strategic Mock Exams – E3, F3 and P3 Based around the latest Preseen 2 full mocks are available for each strategic subject

Full marking and detailed feedback Full mock marking Detailed and personalised feedback to focus on helping to pass the exams

Personal coaching on your mock exam 1hr personal coaching session with your marker Personalised feedback and guidance Exam technique and technical review

Strategic and Financial analysis of the Pre-seen Strategic analysis - all key business strategy models in E3 Financial analysis – based around the F3 syllabus Risk analysis – based around the P3 syllabus 30 page strategic report Full video analysis of how all key models apply to the unseen Video introduction to all the key models

Personal Coaching Courses Personal coaching to get you through the exam

Tuition Course – Personalised tuition to give you the required syllabus knowledge – tailored to your needs Revision Course - Practise past exam questions with personal feedback on your technical weaknesses and exam approach and technique Resit Course – Identifying weaknesses from past attempts and providing personalised guidance and study guides to get you through the exam


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CIMA E3 Notes - Enterprise Strategy - Chapter 1.pdf

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