CIMA-E3

CIMA PAPER E3 – STRATEGIC LEVEL Enterprise Strategy SMART Notes Prepared by Darren Sparkes Email: [email protected]

CIMA E3 – Enterprise Strategy

These notes are not intended to cover the whole of the E3 syllabus

© Darren Sparkes, 2010

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Contents

Page No.

An important message from Darren………………………..3 Dealing with the pre-seen case-study material……………4 A message from the Examiners…………………………….5 Examiners comments November 2009…………………….6 The scope for numbers in the examination………………..7 Examination Technique……………………………….…..…8 Background to Paper………………………………………...9 Syllabus Overview………………………………………......11 Strategic Planning…………………………………..…….…12 Mission and Objectives…………………………………......13 Internal Analysis……………………………………………..14 External Analysis…………………………………………….15 Filling the Gap……………………………………………….16 Strategic Options……………………………………………17 Method of Growth…………………………………………...18 Strategic Choice and Implementation……………………..19 Change Management and other Implementation Issues..20 Developing an IT Strategy………………………………….22 Organisational Structure…………………………………….23 Marketing……………………………………………………..24 Profitable customers or products?....................................25 Business and Professional Ethics………………………….26 The International Market Place……………………………..27 Review and Control………………………………………….28




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Thank you for requesting a copy of my ‘SMART Notes’. The notes act as a learning and memory aid for the core models, theories and academic tools included in the syllabus. However, in order to pass your examination the academic knowledge must be combined with extensive question practice leading up to the examination. Your examiner is not interested in the regurgitation of your knowledge but how you APPLY that knowledge to the scenarios provided in order to answer the requirement set. The examiner feedback from every exam sitting confirms this. I suggest that you should practice as many exam standard questions as possible before the examination. Your practice answers can be a mixture of answer plans and full written answers to get through as many questions as possible. In particular, you must practice the new pilot paper for the new E3 examination. However, I would also suggest that it is essential for you to practice at least one full examination to time before entering the exam room. It is only by replicating the time pressure in the exam that you can appreciate the importance of time planning on the day. Keep a look out for relevant articles appearing in your professional magazine or on the Institute’s website prior to the examination, particularly if they are written by the examiner. I would welcome feedback on the notes. And remember…. ‘Whether you believe you can or you can’t, you’re right.’ (Henry Ford) Regards, Darren Sparkes




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Dealing with the pre-seen material The most significant change in the new E3 paper is the addition of ‘pre-seen’ case study material for Section A (scenario common to all three strategic papers). This will be available for students to download from www.CIMAglobal.com around 6 weeks prior to the examination. The pilot paper pre-seen material has five pages. Once in the examination there will be additional ‘un-seen’ case study material and the requirements. The pilot paper contains two pages of ‘un-seen’ material. Once the real examination pre-seen material has been released by CIMA you should do the following in preparation for the exam:  Complete a thorough analysis of the pre-seen material. As a start point you could conduct a corporate appraisal (SWOT) of the organisation in question, that is, a full internal and external analysis (see pages 14 and 15 of these notes). This should help you to recognise the major issues affecting the organisation. Pay particular attention to any numbers and what they may tell you about the organisations performance and position.  You should avoid too much emphasis on the research of industry information. Leave that for your T4 TOPCIMA examination!  From your analysis, identify the related syllabus areas and learn/review them in light of the position and problems of the organisation.  You can now conduct some scenario planning. Think of the different scenarios that could appear in the un-seen material and the requirements that could be asked by the examiner. Remember that there is likely to be at least four separate requirements.  Practice your approaches to answering the scenarios that you have identified.  Be warned, identifying likely requirements is a dangerous occupation. It is done here for you to start thinking more widely about the pre-seen material. Once in the exam room you must FOCUS ON THE ACTUAL REQUIREMENT IN THE QUESTION and avoid replicating an answer to a different requirement that you had prepared for.  Purchase a revision kit from one of the big tuition providers that contain a number of mock exams (probably around 6 different un-seen scenario’s) based upon the actual pre-seen material and practise as many as you can to time. It is essential that you familiarise yourself well with the pre-seen material before entering the exam room. However, this must not be to the detriment of your wider studies. Remember, the Section A of the exam only accounts for 50% of the marks. You will still have to complete two Section B questions that will be completely un-seen.




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Approach Required ‘Overall this paper is a balanced test of the key syllabus areas and covers a number of well used strategic tools and models. Candidates should not find any surprises in this paper and a well prepared candidate should have no difficulty in both demonstration of syllabus knowledge and in the application of this to the various examination scenarios.’ ‘It’s easy to get carried away with all the models covered in the (P6) syllabus and forget why it’s there in the first place. The syllabus is at the top of the business management pillar, but its title is very clear. It isn’t a business strategy exam; it’s an exam in business strategy in the context of management accounting.’ ‘…candidates should recognise that depth of argument is desirable in answers to this paper, and a series of brief points will never be rewarded highly.’ (Co-examiners for CIMA P6)




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Extracts from the Examiners comments November 2009 Section A - Question 1  Knowledge Management question very poorly answered as candidates had no clear understanding of Knowledge Management  ‘… with no reference to the scenario information.’  Only generic benefits of knowledge management given with no reference to the scenario  Insufficient depth of discussion – use of short form answers such as bullet points  Provision of calculations good but limited critical analysis or discussion plus poor use of the scenario information  Basic description of the Five Forces model with limited application to the scenario Section B  Limited application  General discussion of the process of competitor analysis  Unjustified recommendations in terms of why they were appropriate to the short or long term  Not answering the question set  Insufficient application  Description rather than evaluation of the proposed strategies  Limited/no application  Recommendations with no/limited justification  Including a range of stakeholders not included in the scenario information  Some repetition of points made between each suggestion  Imbalanced discussions of suggestions  Limited/no justification of recommended course of action  Part c a repeat of answer to part b




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Cost of Capital (debt / equity / WACC) Company Valuations

Discounted Cash flow (NPV / IRR / ARR)

Enterprise Strategy Expected Values

The scope for numbers/calculations in the examination

Variances including planning variances

Costing (DPP / CVP / CAP / Absorption / marginal)

Pricing / transfer pricing Ratio Analysis




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Examination Technique to give the Examiners what they want PADI – Plan, Analyse, Design, Implement PLAN 1. USE 20 MINUTES READING TIME WISELY • Examine section B questions and choose the two on which you can MAXIMISE MARKS (not necessarily those on your ‘favourite’ topics) • If you have some time left then analyse Question 1 requirements and skim read the Q1 un-seen material to get a feel for the relevant issues and identify where the information is for each part of the requirements. 2. WORK OUT TIMINGS • Q1 = 90 minutes. Planning = 20-25 minutes, Writing answer = 65-70 minutes • Section B Questions = 45 minutes each. Planning up to 10 minutes, Writing answer 35 minutes. • Break down the time required for each part of the requirements using the marks as a guide. 1.8 minutes per mark in total, 1.4 minutes per mark after planning. • I suggest you start with Question 1 as you know you have 90 minutes to complete it. START PLANNING IN YOUR ANSWER BOOK 3. ANALYSE THE REQUIREMENTS • Identify the verb, or verbs, and make it stand out. The verb tells you what the examiner wants you to do, e.g. evaluate, recommend, analyse, calculate. Be sure to identify all the verbs in the requirement just in case there is more than one thing to do, e.g. analyse and discuss, evaluate and recommend. • Identify key words. These tell you what to do it on or about, e.g. evaluate what?, recommend what? 4. ALLOCATE MARKS TO EACH VERB IN THE REQUIREMENT • This can now determine how much to write for each verb in the requirement 5. IDENTIFY RELEVANT MODELS, TOOLS, THEORIES FROM YOUR KNOWLEDGE BANK




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6. DEVELOP HEADINGS AND NUMBERS LAYOUT • Put key elements of model in plan as headings, e.g. Porters 5 Forces analysis = 5 headings. Headings will give your answer a framework and structure. • Use requirements to develop headings to show marker that you are answering the question asked 7. DISTRIBUTE MARKS ACROSS HEADINGS • This can now determine how much you write under each heading

ANALYSE 8. ANALYSE THE SCENARIO • Make brief notes in your plan under relevant headings from models/tools/theories and requirement • Find relevant numbers for calculations

DESIGN 9. THINK BEFORE YOU WRITE • Decide which points you are going to put in your answer (trying to put in everything usually leads to going over time) and start with your strongest points • Decide how you are going to layout your answer to make life easy for the marker and maximise marks

IMPLEMENT 10. WRITE UP YOUR ANSWER TO MAXIMISE MARKS • Layout calculations in a logical and easy to mark format - Add value to calculations by asking ‘SO WHAT?’ • Use as many headings as possible to give the answer structure • Short sentences in short paragraphs - Paragraphs of 3/4 sentences maximum - Looking for 2 marks for each paragraph • PEE for 2 marks – Point, Evidence, Explain (So what?) • Leave a blank line between paragraphs to make your answer ‘easy on the eye’ • Be strict with timings. When time is up on a question, or part of a question, move on. • Stick to answering the requirement – use your plan to keep you on track REMEMBER THE THREE GOLDEN RULES – 1)APPLICATION 2) APPLICATION and 3)APPLICATION




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Exercise professional judgement Select relevant data

Determine appropriate techniques

Candidate Requirements

•

Evaluate the Key external factors affecting an organisation’s strategy

•

Evaluate the impact of information systems on an organisation

•

Advise on important elements in the change process

•

Evaluate tools and methods for successfully implementing a change programme

•

Recommend change management processes in support of strategic information

•

Evaluate the process of strategy development

•

Evaluate tools and techniques used in strategy formulation

•

Evaluate tools and process of strategy implementation

Apply knowledge and skills

Background Format of paper

Aims of the paper

Study Weighting

Section A 50% • • • •

Compulsory Major case study, pre-seen and un-seen Usually four parts Case will include numbers

Section B 50% • • •

Choice of two from three Each question up to three parts Will include short scenario


•

Interacting with the Competitive Environment

20%

•

Change Management

20%

•

Evaluation of Strategic Position and Strategic Options

30%

•

Implementation of strategic plans and performance evaluation

30%



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3 E’s – Efficiency, Economy, Effectiveness

Syllabus Overview CSF’s

SMART

Mission and objectives Purpose,Strategy,Standards,Values

Mendelow power-interest matrix

PEST

Stakeholder Analysis Resource audit M’s

External Analysis

Internal Analysis Core competences (SARI)

Porters 5 Forces

Corporate Appraisal

Competitor Analysis (PROSAC)

Value Chain

Benchmarking

SWOT

PLC / BCG

Resource Based vs Positioning

Withdraw Ansoff’s productmarket matrix

Strategic Options

Porter’s Generic Strategies

Risk Acquisition vs organic vs joint development

Suitability, Acceptability, Feasibility Game theory, Real options

Strategic Choice

Cost/Benefit Change Management

HRM / IT Structure

Culture

Implementation International Trading

Marketing

Ethics

Quality

Review and Control CSF’s

Financial Measures ROI / RI


SVA / EVA®

Non-financial Measures


Balanced Scorecard


KPI’s

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Integrates activities

Competitive advantage

Corporate = Strategic level

Relationship with environment

Whole organisation

All stakeholders Long-term

‘Strategy is the direction and scope of an organisation over the long term: which achieves advantage for the organisation through it’s configuration of resources within a changing environment, to meet the needs of markets and to fulfil stakeholder expectations.’

Freewheeling Opportunism • Market Driven – reactive • Hands on management • Exploit complacent players • Relies on leaders vision • No formula for success √ Take advantage of market opportunities × Stock market problems

• • √ √ × ×

Business = Tactical level

Strategy

Alternative

Incrementalism (Lindblom) Building block approach Build strategy through incremental steps not radical shifts Accepts uncertainty of future Builds commitment May be too slow Ideas often compromised

Functional = Operational level (Johnson & Scholes)

Purpose

Strategic Planning

• • • • •

Rational ‘Top Down’ Approach Mission & Objectives Corporate appraisal √ Strategic options √ √

Emergent Strategy - ‘Bottom up’ (Mintzberg) Intended Strategy Unrealised Strategy

Deliberate Strategy

Realised Strategy

Strategic choice √ √ Implementation


Advantages Identification of strategic issues Consistency of goals Improve performance/survival Pro-active Recognises environment Optimum use of resources

Disadvantages Expensive (time and money) × Bureaucracy × Stifles creativity × Less relevant in a crisis ×

Review

Emergent strategy

E.G. Honda’s entry into the USA, 3M

√

JSW

Respond and fit to environment Utilise scarce resources Provide direction Ensure consistent objectives Monitor progress

Position Analysis

Strategic Choice

Strategy Implementation



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Purpose

• • • •

Strategy

•

Advantages Resolve stakeholder conflict Set direction Help formulate strategy Communicates values to employees Marketing to customers

• • • •

Policies and standards

Criticisms Meaningless terms used Written retrospectively? Not communicated to employees Ignored by managers

S M A R T

Specific Measurable Attainable Relevant Timebound

Mission Statement ‘… the most generalised type of objective which can be thought of as its raison d’etre.’

Values

Stakeholders

Mendelow’s Power – Interest Matrix Low

Low

Interest

A

B

Minimal Effort

Keep Informed

Give Direction

Education / Communication

Power

High

High

C

D

Keep Satisfied

Key Players – Keep Close

Intervention Participation

Objectives

Mission and Objectives Critical Success Factors "The limited number of areas in which results, if they are satisfactory, will ensure successful competitive performance for the organization. They are the few key areas where things must go right for the business to flourish. If results in these areas are not adequate, the organization's efforts for the period will be less than desired."

Determinants: Flexibility Innovation Resource utilisation Excellence (Quality of service)

F I R E

Results: Financial performance Competitiveness (Brignall et al)

F C

Not for Profit Organisations

• • • • • •

Features of objective setting Multiple and contradictory objectives Participation in objective setting Providers of funding different to beneficiaries of service Priorities may change frequently Value for money a requirement not an objective Increased role of personal objectives

Economy (Inputs)

Effectiveness (Outputs) Efficiency (Process)




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• • • • • • • • •

• • • • • • •

Manpower Management Money Make-up Machinery Methods Materials Markets Management information

Strategy Structure Systems Staff Style Shared values Skills

McKinsey 7 S Model

• • • • •

Valuable Rare Can’t be copied Not substitutable Give access to wide range of markets

Strategic Assets

S A

Architecture

R

Reputation

I

Core Competences ‘…the activities or processes that critically underpin competitive advantage.’

9 M’s

Innovation

• •

• •

Introduction: high risk, little competition, low volume, high advertising = losses + negative cash Growth: increased competition, growing volumes, EOS, high advertising = losses to profits + negative to positive cash Maturity: steady repeat sales, high volumes, EOS, low level advertising = profits + positive cash Decline: falling volumes, falling prices = profits to losses + positive to negative cash, divest Balance the portfolio

Problems: • • • •

No common shape Unpredictable Self-fulfilling prophecy Product orientated – ignores market

High High

Low CIMA E3 – Enterprise Strategy

Problems: • Definition of axes • Definition of market • No account of complimentary goods • Assumes high market share = advantage

BCG Matrix

Balance the portfolio

Inbound Logistics Operations Outbound logistics Marketing and sales Service

• • • •

Procurement HRM Technology development Firm infrastructure

• • • •

Streamline linkages Eliminate non-value added activities Business Process Re-engineering Benchmark key processes

Uses

Internal Analysis (Strengths & Weaknesses) Portfolio Analysis

Primary Activities

Support/secondary activities

Resource Audit/ Position Audit Product Life-cycle Stages:

…identify activities within the firm which contribute to competitive advantage and those which do not.

• • • • •

Competences Threshold OR Core?

Resources Basic OR Unique?

Porter’s Value Chain

Relative market share

Low

STAR Build then Hold Losses to profits, negative to positive cash

PROBLEM CHILD Build or Divest Losses, negative cash

CASH COW Hold then Harvest Profits and positive cash

DOG Harvest then Divest Profits to losses, positive to negative cash


Value Networks

Benchmarking 1. 2. 3. 4. 5. 6. 7.

Determine processes to be benchmark Choose type of benchmarking Choose partner Determine measures Collect data Learn and improve Implement changes

Competitive


Internal

Process/Activity BEST IN PRACTICE

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• • • • • •

• • • • • • • •

Economic Globalisation Economic cycle Interest rates Inflation Employment levels Exchange rates

Political and Legal Taxation Government policy Foreign trade regulations Monopoly legislation Environmental legislation Employment legislation Consumer protection Protectionism

Social & Demographic • Income distribution • Education levels • Population size • Age profile • Lifestyle changes Market • Fashions and tastes growth • Consumerism

• • • • • •

Technological Internet Government spending on RnD Communications Speed/rate of change Processes and methods of production Transportation

P R O S A C

Prediction of Reaction Resources Objectives Strategy Assumptions Competences

PEST analysis (External, Environmental analysis) Competitor Analysis

External Analysis (Opportunities and Threats)

Threat from New Market Entrants Barriers to Entry: • Economies of Scale • Other cost advantages • Capital requirements • Access to distribution channels • Patents, Government policy • Reaction of existing firms

Power of Buyers Power greatest where: • Few buyers • High number of suppliers available • Cost is high proportion of buyers total cost • Low switching costs • Buyers have low profits • Buyers have full information • Little product differentiation

Porter’s 5 Forces (Competitive, Industry analysis)

Threat from Substitute Technologies • •

Competitive Rivalry

•

Greatest where: • Competitors of similar size • Slow market growth rate • High fixed cost industry • Lack of differentiation

Power of Suppliers

Internal + External Analysis = Corporate Appraisal = Position Appraisal= SWOT Analysis Strengths

Can same features be produced cheaper? Can new features be provided for same cost? Level of danger may be influenced by barriers to entry and/or power of buyers

Power greatest where: • Few suppliers • Few substitutes • High switching costs • Threat from forward integration • Customer not significant to supplier • Supplier has differentiated product

Weaknesses

INTERNAL EXTERNAL Opportunities CIMA E3 – Enterprise Strategy

Threats



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Filling The Gap Gap Analysis

Target Objective e.g. ROI

Diversification

GAP

New products or new markets Penetration

Future Plans

Efficiency

Current operations

Scenario Planning

Time

 Focuses management on future    

possibilities Encourages creative thinking Encourages communication and participation Identifies sources of uncertainty Identifies most important variables CIMA E3 – Enterprise Strategy

1. 2. 3. 4. 5. 6.

Define the scope of the scenario Identify the major stakeholders Identify basic trends Identify key uncertainties Construct initial scenario themes Check for consistency and plausibility 7. Develop learning scenarios 8. Identify research needs 9. Develop quantitative models 10. Evolve towards decision scenarios


 Costly  Often inaccurate  Uses resources on scenarios that will not  

materialise Tendency for managers to get carried away Risk of self-fulfilling prophecy


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• • • •

Strategic Assets Architecture Reputation Innovative ability

PEST

Porter’s Generic Strategies Strategically develop organisation in line with environment challenges

Harness core competences to give sustainable competitive advantage

Positioning view (outside-in)

Resource Based Strategy (Inside-out) Method of Growth? (See next page)

Strategic Options competitive products,

Differentiation (Premium price, better margin, barrier, reduce buyer power)

•

Focus (Niche)

Vertical Integration Disadvantages • Increased operational gearing • Reduced flexibility to change partners • Capital investment needs

Conglomerates

Disadvantages • No additional benefit to shareholders through synergies • No operating advantages


Ansoff’s Matrix Products, existing and new (PEN) Markets, existing and new (MEN) • •

•

•

Uses • • •

Do nothing / Withdraw

complementary products, by-products

Advantages • Flexibility • Quick growth • Access to capital • Portfolio effect • Avoidance of antimonopoly legislation

•

(better margin, potential price cuts, entry barrier, reduce supplier power)

What Basis?

What Direction?

Advantages • Economies of combined ops • Economies of control and coordination • Avoiding the market • Tap into technology

Overall Cost Leadership

Beware of ‘Stuck in the Middle’

Definition of market Ignores factors such as competitors Suggests strategies in isolation

Horizontal diversification –

•

(Cost or Differentiation, focus on market needs, develop core competencies)

Limitations • • •

To beat the five forces

Porters Five Forces

Market Penetration (cost reductions, price reductions, advertising, minor product modifications) Product Development (exploit existing customers, RnD, buy-in and badge, JV’s, Licensing) Market Development (new markets such as foreign markets, new segments such as adult to child or industrial to consumer) Diversification (related = vertical integration or unrelated = conglomerate)


Analyse rivals Suggest own strategy SBU level strategy

Limitations • Unclear definition of industry • Defines advantage in terms of position not • • •

•

resources Lack of empirical evidence Ignores middle ground Restricts firm to position in present industry Requires perfect information

• • • •

Risks Product Market Operations and management Financial


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Advantages • • • • • •

Disadvantages

Quick Lower risk Overcomes barriers to entry Same number of competitors Possible synergies Possible under-valuation of target

• •

• •

Porter’s 3 Tests for Acquisitions • • •

Advantages

Purchase premium Integration issues o Systems o People o Culture Synergies do not materialise Reputation of target

• • • • • •

Disadvantages

No premium for assets People development Staged investment Established culture Introduction of new technology and systems easier Possibility of grants

Acquisition

• • • • •

Slow Increases number of competitors Overcoming barriers to entry No opportunity for synergies Higher risk

Organic Growth Acquisition versus Organic growth

The attractiveness test The cost of entry test The better off test

Divestment

Possible synergies • • • • • • • • •

Market Economies of scale Shared activities Surplus assets Vertical integration Skills transfer Dilution of risk Reduced power of buyers/suppliers Tax advantages

√ √

Method of Growth?

Withdrawal

Quick Higher price due to strategic value

Demerger √ √ √

Joint Venture Separate business entity with equity form two or more businesses

Joint Development Methods

Strategic Alliance Licensing

Long-term agreement to share knowledge, competences, technology for mutual benefit

Giving the right to exploit brand, recipe, process etc for a share of the profits

Franchising Giving the right to exploit a business method/model in return for a capital sum plus a share of the profits. Franchisor usually provides support e.g. marketing, training, technical CIMA E3 – Enterprise Strategy

√ √ √ √ × × × × × ×

Quick growth Access to competences Less financial risk/outlay Overcome product, market, operational risk May lose competences Train future competitors Brand infection Operational and contractual disputes Ownership of assets Sharing of profits



Gives shareholders an exit route Management can focus on core areas Two companies can develop separate identities

Management Buyout (MBO) Consider • On-going involvement of holding company • Why is holding company selling? • Loss of Holding company help, e.g. technical support, finance services • Quality of management team • Price • Personal risk, e.g. home at risk?

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Acceptability

Suitability Is the proposed strategy suitable for the present situation and circumstances of the organisation? i.e. Is it suitable given the SWOT analysis?

Risk

Feasibility

Will the proposed strategy meet the objectives of the organisation and, therefore, be acceptable to the major stakeholders?

Has the organisation got, or can it get, the necessary resources to carry out the strategy?

Strategic Evaluation & Choice

Game Theory • • •

Concerned with the interrelationships between the competitive moves of a set of competitors Can be a useful tool to analyse and understand different scenarios Relies on two key principles: - Strategists take a rational, informed view of potential competitor actions - If a competitors strategy allows them to dominate us then the priority is to eliminate that strategy

For example, taking competitor reaction into account, a company may not be any better off by making a particular strategic move as it may be cancelled out by the competitor. This may leave both companies worse off than they were before.

Cost/Benefit

Real Options •‘…the net present value rule is not sufficient. To make intelligent investment choices, managers need to consider the value of keeping their options open.’ (Dixit and Pindyck, 1995) •…all business decisions are real options…they confer the right but not the obligation to take some initiative in the future. (Lewent, 1994) Real options capture the value of managerial flexibility to adapt decisions in response to unexpected market developments.

McKinsey’s 4 stage process for Real Options 1. Use standard NPV approach to produce valuation of investment 2. Use scenario planning to determine the potential futures • Model the uncertainties in the project with event trees 3. Identify the decision options at key stages of the project • Convert event tree into decision tree 4. Value the portfolio of options using the Black & Scholes portfolio approach




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Unfreeze

Change

Refreeze

Role Job Factors

Strengthen

Weaken

Driving Forces

Restraining Forces (resistance)

Personal Factors Social Factors

A N I T A

Acceptance of change New Ideas Interaction Tolerance of failure Acknowledge creative behaviour

•

Organisational Factors

Lewin’s Force Field Analysis

Kanter’s prescription for creativity:

• • • • •

The change process

Change Management

• • • • • •

Cultural Web Stories Rituals Symbols Power structure Organisation structure Control systems

Participation Education & communication Facilitation & support Negotiation Manipulation Coercion

Implementation Issues

Context of Change Quality Organisational Development To increase: • Level of trust • Likelihood of solving problems • Openness of communication • Level of individual and group responsibility for problem solving Methods • Survey research and feedback • Therapy groups (T-Groups) • Team Building • Change Agents CIMA E3 – Enterprise Strategy

Triggers • Internal • External

• • • • •

Types of change Planned Emergent Incremental Step Transformational

Power

Task Person

Handy’s cultural types

Culture ‘The way we do things around here’

Excellence Culture – Peters and Waterman P A S S C A S H

Productivity through people A bias for action Stick to the knitting Simple structure Close to the customer Autonomy and entrepreneurship Simultaneous loose-tight properties Hands on, value driven

‘Fitness for use’ Customers

TQM Quality control = reactive Quality Assurance = proactive Four costs of Quality: • Appraisal • Preventative • Internal failure • External failure

Continued on next page These notes are not intended to cover the whole of the E3 syllabus

‘Get it right first time’

Commitment

6 C’s

Competence

Continuous improvement

Costs Communication


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• • • • • • •

Recruitment Appraisals Training Reward Job design Involvement Status and security

HRM Strategy

Staff understand org’n goals & values

•

Commitment

•

Quality

•

Flexibility

HRM Practices

HRM Outcomes

Financial Outcomes

Networks

Motivated workforce

Groupware

Turn tacit into explicit

Organisational Knowledge Management

Intranet

Implementation Issues (cont’d)

Associations Classification

Data Mining Reports

Errors in data transfer

De-motivation

Format of information

Social barriers

Extranet

Information Systems Technology

Technological barriers

Issues / Problems

Systems

Sequences

Organisational Structure

Politics

Performance Outcomes

HRM

Benefits

Knowledge = closest we can get to ultimate ‘competitive advantage’

Behavioural Outcomes

Guest model of HRM

Increased ability to compete & add value

People encouraged to generate & use knowledge

Motivation: • Maslow – Hierarchy of needs • Herzberg – Hygiene factors and motivators

Incompatible systems & processes

Support strategic decision making Support integrated value chain

Data Warehousing

Speed up response times to queries

Turning data into information

Clustering

Large relational database Improve quality of data

Forecasting

Predictive models

Descriptive models

Implementation Issues (cont’d) CIMA E3 – Enterprise Strategy



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Beat the five forces Generic strategies

Key business areas Cost

1. 2. 3.

Performance

Radical & fundamental change for quantum leaps in performance 1. 2. 3. 4. 5. 6. 4. 5.

Work backwards from outcomes not tasks Empower the end user Increase access to databases Link parallel activities Capture information only once Identify IT gap Identify potential opportunities

Value chain

Strategic importance in current competitive environment

Strategic Weapon

Considerations (PICK)

Implications

Strategic importance in predicted competitive environment Low High

L o w

H i g h

Identify business needs Identify IT gap Identify potential opportunities

Developing an IT Strategy

Process Innovation

Supporting management processes (COPT) Technology

L o w Strategic impact of current systems

Control Planning Organisation


Strategic –

Critical to sustain existing business

Critical to future business success

Low

IM Strategy – Technology infrastructure

Key Operational–

Strategic impact of future systems

Earls 3 Levels of IT Strategy

IT Strategy –

Innovative with high future potential

McFarlan & McKenney’s Strategic Grid

Completely new and radical processes.

IS Strategy -

High Potential –

Improve management effectiveness but not critical to the business

Peppard – Applications Portfolio

Business Process Re-engineering

Organisation of systems

Support –


H i g h

High

Support –

Turnaround –

No strategic value

Expect info system to become strategically important in the future

Factory –

Strategic –

See strategic value of info system now but expect value to decrease in the future

Depend on info system for competitive advantage


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Functional √ √ √ √ × × ×

Entrepreneurial √ √ √ × × ×

Fast decisions Responsive to market Congruence No career structure No autonomy Single product & market

Centralised vs Decentralised S T O P

Strategy

T I E S

Tasks

Implementation Issues cont’d

Economies of scale Specialists with some autonomy Career structures Frees up entrepreneur Slow decisions (bureaucratic) Functional silo’s Few products & markets

Quality

√

Flexibility

Decisions

People

Environment Size

Advantages: • Frees senior management • Better local decisions • Better motivation • Flexibility • Training/career path

Checklist

Congruence

Matrix √ √ √ √ × × ×

Breakdown of silo’s Shared knowledge Skill development Innovation and creativity Dual command Dilution of functional authority Time consuming meetings

Span of control Mintzberg’s Structural Configurations

Tall/Narrow √ √ √

√ √ √ √ √ √

•

Promotional opportunities Smooth progression between levels More personal contact

Flat/Wide Disadvantages: • Loss of control • Loss of congruence • Duplication of effort • Extra costs of control

× × ×

Autonomy

Organisational Structure

Ideology

Decentralisation

Employee motivation

Multiple products & markets Autonomy for SBU managers Training of SBU managers Frees up senior managers Focus on specific products/markets Loss of congruence? Duplication of effort Isolation of SBU managers

Motivation of managers

Technology Features of Organisation

√ √ √

Career path

Speed

Ownership

Divisional √

Encourages delegation Quicker, more informed decisions Encourages participation of lower levels Lower management costs Promotions real and meaningful Closer contact between senior management and lower levels


Strategic Apex Technostructure

Operating core

Greiner’s Growth Model Growth through Creativity Direction Delegation Coordination Collaboration

Middle Line

Support Staff

• • • •

Simple structure = entrepreneurial Machine bureaucracy = functional Professional bureaucracy = decentralised Divisional form Adhocracy = matrix

Revolutionary Crisis Leadership Autonomy Control Red Tape Psychological saturation



23

Market Leader - largest market share

Supplier Markets

Recruitment Markets

Influence Markets

Referral Markets

Market Challenger - runner-up, fighting to increase share

Market nicher - serve small segment, not pursued by larger firms

Market Segmentation and Target Market

Marketing …identify, anticipate and satisfy customer requirements

Competitive Strategies

Production

Product

Analyse environment and competitors – PEST / Porter’s five forces / PROSAC / 4P’s

Marketing Strategy

Six Markets Model (Payne)

Customer Markets

Market Follower - runner-up, aiming to hold share

Internal Markets

…division of the market into homogenous groups of potential customers who may be treated similarly for marketing purposes

Sales

• •

Firm’s orientation A I D A

Awareness

Marketing

Interest Desire Action

Communications Mix: Advertising Sales promotion Public relations Personal selling

Promotion

Place

Use of intermediaries: • Economic criteria • Control criteria

Marketing Mix – 4P’s Price

• • • • • • • • •

…set of controllable marketing variables used to produce desired response in the target market

Cost based Target pricing Discriminatory pricing Psychological pricing Promotional pricing Product line pricing Captive product pricing Market skimming Market penetration

Product qualities Features, options, range, warranty, packaging, branding

Product


Marketing Research

Product mix

Undifferentiated

…systematic gathering, recording and analysing of data about problems relating to the marketing of goods and services

Field Research (Primary data) Interviews, focus groups, questionnaires, experiments, Test marketing

Product Life Cycle Product to meet needs

• • • •

Geographic Demographic o Age o Gender o Income o Family life-cycle Social class Psychological Education Hobbies

Differentiated Concentrated

Desk research (secondary data) Internal Accounts, Sales reports, Customer complaints

External CSO reports, Business monitors, Trade journals, newspapers

Brand Strategies

Existing Product

New Product

Existing Brand

Line Extension

Brand Extension

New Brand

Multi-branding

New Brand



24

Sales (price x number of units – returns)

Calculating DPP

LESS: Costs (unit cost + ordering + inventory + storage + transport + shelf stacking + wastage + breakage)

Profits from sales of individual products

•

Drawbacks: • Hard to predict future behaviour • Hard to factor in competitors • Difficult to pinpoint life-cycle stage • Uncertainty of environmental factors

Product View

CAP – Customer Account Profitability

1. Analyse customer base and divide into segments 2. Calculate annual revenues earned from customer segments 3. Calculate annual costs of serving the segment including the ‘hassle’ factor 4. Identify and retain ‘quality’ customers 5. Eliminate or re-engineer unprofitable customers • • • •

Evaluation of DPP: • Too product focussed • Easier and cheaper to cut price than conduct DPP exercise • Ignores relationships between products

DPP – Direct Product Profitability

Typical cost drivers: • Product size • Demand uncertainty • Delivery cycle • Ordering method

Single period view of value of customer

Improving DPP: • Increase sales price • Increase sales volume • Reduce costs of stocking • Offer incentives

Minimum order size Install telesales / EDI Charge service fees Impose flat order charge Discriminatory pricing CIMA E3 – Enterprise Strategy

Profitable Products or Customers?

Consider: • Present value of existing & future purchases • Probability of customer retention • Probability of customer purchasing new products • Costs of initial attraction

Life-Cycle customer value

Customer View Evaluation of CAP:  Includes non-production costs  Identifies customer groups of value to the firm  Enables assessment of value of marketing expenditure × Leads to ill-judged product changes × Calculation difficulties × Single period view

Customer Relationship Marketing / Management Focus marketing resources on maintaining & enhancing existing customer base


Developing Customer Relationships: • Develop customer retention schemes for staff • Reduce staff turnover • Elevate customer retention in corporate thinking • Analyse detailed information on customers and their buying habits • Monitor customer relationships • Engage with customer • Develop ideas to increase loyalty


DREAMED

25

C O P P I T

Confidentiality

Equal opportunities

Objectivity Professional due care

Consumer health and safety

Professional Ethics

Professional Competence

Fair Trade

‘Self control, not self interest’

Integrity

Safety in the workplace

Threats

Honesty in Advertising Sustainability

Corporate Governance • • • • •

Divorce of ownership and control Separate roles of CEO and Chairperson Audit Committee / Remuneration Committee Directors re-election at least every 3 years Non-exec Directors o Independent o Role on audit / remuneration committees o Corporate conscience o Mentors to inexperienced execs o Strategic value through expertise

Innovation & ideas from close links to community

Reputation and branding

Small company advantage in the supply chain

Issues

Environment

Corporate Social Responsibility

Views on Business Ethics

Business and Professional Ethics

‘The business of business is business’ (Friedman) Management to concentrate on maximising profits and shareholder wealth.

Avoid future Government policy

Competitive advantage

Enlightened Self-Interest

Recruitment

Benefits to Business

Firms should acknowledge their social responsibilities.

Relieve stress on management

Businesses have no duty to society. Societal benefits will arise as a result of commercial success.

Attract ethical investor funds Competitive disadvantage

No universal acceptance of morals & ethics

Potential problems

Deciding what is ethical

Disclosure of business information

Conflict of CSR with shareholder wealth • • • •

Reduced revenues Increased costs Diverts funds from shareholders Distracts management

Bad publicity from monitoring and enforcement CIMA E3 – Enterprise Strategy



26

Trade barriers reduced Saturated home market

Opportunities for lower costs

Political power

Political sponsorship

Opportunities for management

PEST

Market Knowledge

Economies of scale

Cultural Diversity

Financial

Reduced risk

Reasons for growth in international business (POST)

PROSAC

General risks

Benefits of international growth (COPPER)

Pressure on ROCE

5 Forces

Demand Conditions

Exporting √ √ √ × × ×

The International Market Place

Low capital outlay Low risk Can learn about market May not meet customer needs Perceived lack of commitment High distribution costs

Porter’s Diamond

Strategy, structure, & rivalry

Methods of International Expansion Joint Venture & Franchising √ √ √ √ × × × ×

Access to local resources Reduced national sentiment Shared capital input Access to competences and knowledge Shared profits Lose competences Train competitor Operational disputes

Ethnocentric • • • •

Foreign Direct Investment CloserPto market

√ √ √ √ × × ×

Retain profits More control Reduced operational conflicts High financial risk Staffing decision Integration difficulties

Factor Conditions

Multinational - Polycentric See overseas market as distinctive • Customised products and marketing mix • Increased overseas sales volumes BUT • Fewer EOS giving higher costs, so volumes not turned into profits •

Exporting

Global - Geocentric Standardise wherever possible, e.g. RnD, Branding Market convergence may allow standardised product BUT Demand-driven Customised marketing mix where necessary = GLOCAL

• • • • •

Joint venture, Franchising, Foreign Direct Investment STAFFING

√ ×


Perceives foreign markets as similar to domestic market Products & marketing mix constant Standardisation to save time and money Supply-driven policy

Related & supporting industries

‘National Competitive Advantage’

Overcomes lack of host skills, unified culture, Transfers competencies Resentment by host, cultural myopia

√ ×

Alleviates cultural myopia, inexpensive Limits career mobility, isolates HQ from subsidiaries


√ ×


Efficient use of HR, builds strong culture and management network Subject to National immigration policies, expensive

27

Transfer Prices: • • • • • •

Marginal Cost – no incentive for seller & inflated profit for buyer Full Cost (Cost Plus) – may be no incentive for the buyer & no incentive for seller to control costs Market price – no buyer incentive Opportunity Cost – usually best Centrally set – uncontrollable Negotiated – powerful divisions

Problem: no account taken of invested capital used to generate profits

• • • •

Aims of performance measures: • • • • •

Motivation Congruence Accurate reflection of performance Accountability/Controllability Reconcile long and short-term

Return On Investment (ROI)

Examples Gross margin Net margin Cost % sales Profit

Profit Related Measures

PBIT X 100 = % CE

PBIT (CE x imputed interest rate) RI

Relative Measure %

Absolute Measure £’s

Problems:

√ √ √ √ √

Review and Control

Longer-term measures More difficult to manipulate Measures determinants and results Promotes goal congruence Includes stakeholders

The Balanced Scorecard Financial Perspective

Customer Perspective

Potential Drawbacks × × × × ×

Measures conflict with each other Requires cultural change Overload – ‘paralysis by analysis’ Time and cost No obvious relationship with shareholder wealth

Internal Business Perspective Innovation and Learning Perspective

1. 2. 3. 4. 5.


Identify CSF’s Identify competences required for CSF’s Develop KPI’s for competences Measure competence Take action – continuous improvement

Problems:

Sub-optimal investment decisions Deplete capital assets too early

•

Benefits

Residual Income (RI)

•

•

Absolute measure poor for performance comparisons

Joint issues when used in isolation • • •

Backwards looking measures Short-termist decisions Open to easy manipulation of discretionary costs and capital employed

Conclusion Financial measures should not be used in isolation to measure performance but should be combined with non-financial measures.

Economic Value Added (EVA®) Adjusted NOPAT (Adjusted CE x imputed interest rate) EVA



Shareholder Value Analysis The business should be managed to increase shareholder wealth – i.e. all activities and processes

28

CIMA-E3

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