cima paper 6 – strategic level

CIMA P6 – Management Accounting Business Strategy These notes are not intended to cover the whole of the P6 syllabus © Darren Sparkes, 2009 1

CIMA PAPER 6 – STRATEGIC LEVEL

Management Accounting Business Strategy

SMART Revision notes

Prepared by Darren Sparkes

Email: [email protected]


ContentsPage No.

A message from Darren……………………………………..3A message from the Examiners…………………………….4Examiners comments November 2008…………………….5The scope for numbers in the examination………………..6Examination Technique……………………………….…..…7Background to Paper………………………………………...9Syllabus Overview………………………………………......10Strategic Planning…………………………………..…….…11Mission and Objectives………………………………….....12Internal Analysis……………………………………………..13External Analysis…………………………………………….14Filling the Gap……………………………………………….15Strategic Options……………………………………………16Method of Growth…………………………………………...17Strategic Choice and Implementation……………………..18Implementation Issues………………………………………19Developing an IT Strategy………………………………….21Organisational Structure…………………………………….22Marketing……………………………………………………..23Profitable customers or products?....................................24Business and Professional Ethics………………………….25The International Market Place……………………………..26Review and Control………………………………………….27


Thank you for requesting a copy of my ‘SMART Revision 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 practiceleading up to the examination.

Your examiner is not interested in the regurgitation of your knowledge but how you APPLY that knowledge to thescenarios provided in order to answer the requirement set.

I suggest that you should practice as many exam standard questions as possible before the examination. Your practiceanswers can be a mixture of answer plans and full written answers to get through as many questions as possible.

However, I would also suggest that it is essential for you to practice at least one full examination to time before enteringthe exam room. It is only by replicating the time pressure in the exam that you can appreciate the importance of timeplanning on the day.

Keep a look out for relevant articles appearing in your professional magazine or on the Institute’s website prior to theexamination, 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


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)


Extracts from the Examiners comments November 2008Section A - Question 1

Candidates demonstrated a good understanding of BCG matrix and applied it to AAA

Most candidates did well in producing a quantitative analysis

Very disappointing that so many candidates unable to competently discuss these numbers

Question 1b) (quantitative analysis) showed some poor presentation and layout

Candidates advised to read the question requirements carefully – many confused requirement bii) and c)

Requirements c) and d) well answered by most candidates

Section B

Questions answered generally well

Question 2b) answered badly - candidates should be careful in choosing questions and only attempt those

that they have knowledge of

Question 2c) recommendations not adequately discussed or justified

Question 3 was a popular choice but many answered it badly due to lack of application to the scenario

Question 3c) some candidates had not read the examiners article

Question 4a) very popular but showed that many candidates do not have basic syllabus knowledge

Question 5b) – the candidates who did well used the scenario


Business Strategy inthe context ofManagementAccountingThe scope for

numbers/calculations inthe examination

CompanyValuations

Expected Values

Variances includingplanning variances

Costing(DPP / CVP / CAP /

Absorption / marginal)

Pricing / transferpricing

Discounted Cash flow(NPV / IRR / ARR)

Ratio Analysis

Cost of Capital(debt / equity / WACC)


Examination Technique to give the Examiners what they want

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 scenario 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 casethere 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


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

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

9. 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 1 mark for making your point/answering the question + 1 mark for application 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


Background

Candidate Requirements

Apply knowledgeand skills

Determine appropriatetechniques

Select relevantdata

Exercise professionaljudgement

Aims of the paper

Identify and evaluate approaches to strategic management

Explain the place of the enterprise in the broader economic and socialenvironment

Apply contemporary thinking on strategic management

Identify and utilise appropriate tools for strategic analysis

Evaluate appropriate strategic options and make recommendations

Evaluate the linkages between strategic planning and the implementation ofthose plans

Design and recommend appropriate performance measure systems

Format of paper

Section A 50% Compulsory Major case study Usually four parts Case will include numbers

Section B 50% Choice of two from four Each question likely to include

two parts May include short scenario

Study Weighting

Assessing the Competitive Environment 20%

Interacting with the Competitive Environment 20%

Evaluation of Options, Planning and Appraisal 30%

Implementation of Strategic Plans 30%


Syllabus Overview

Mission and objectives

Stakeholder Analysis

External Analysis Internal Analysis

CorporateAppraisal

SWOT

StrategicOptions

Strategic Choice

Implementation

Review and Control

Hierarchy SMART

Resource audit

Mendelow power-interest matrix

Core competences

Value Chain

PLC / BCG

Benchmarking

PEST

Porters 5 Forces

Porter’s GenericStrategies

Resource Basedvs Positioning

Ansoff’s product-market matrix

Acquisition vs organic vs joint development

Suitability, Acceptability, Feasibility

Change Management

Culture

Quality

HRM / IT

Structure

MarketingEthics

International Trading

Financial MeasuresROI / RI

Balanced Scorecard

Withdraw

Purpose,Strategy,Standards,Values

3 E’s – Efficiency, Economy, Effectiveness

Cost/Benefit

Risk

Non-financial Measures

CSF’s

KPI’s

CompetitorAnalysisPROSAC

SVA / EVA®


Alternative

StrategicPlanning

Strategy‘… a course of action, includingthe specification of resources, to

achieve a specific objective

Long-term

Wholeorganisation

Integrates activities

All stakeholders

Competitive advantage

Relationship with environment Corporate =Strategic level

Business = Tactical level

Functional = Operational level

(Johnson & Scholes)

Purpose

Respond and fit to environment

Utilise scarce resources Provide direction Ensure consistent objectives Monitor progress

Advantages

Identification ofstrategic 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

Rational ‘Top Down’ Approach

Mission & Objectives

Corporate appraisal

Strategic options

Strategic choice

Implementation

Review

Emergent Strategy - ‘Bottom up’ (Mintzberg)

IntendedStrategy

UnrealisedStrategy

DeliberateStrategy

RealisedStrategy

Emergentstrategy

E.G. Honda’s entry into the USA, 3M

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

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


Mission andObjectives

Mission Statement‘… the most generalised type

of objective which can bethought of as its raison d’etre.’

Purpose

Strategy

Policies andstandards

Values

Advantages

Resolve stakeholder conflict Set direction Help formulate strategy Communicates values to

employees Marketing to customers

Criticisms Meaningless terms used Written retrospectively? Not communicated to

employees Ignored by managers

Objectives

S Specific

M Measurable

A Attainable

R Relevant

T Timebound

Results:Financial performanceCompetitiveness(Brignall et al)

Determinants:FlexibilityInnovationResource utilisationExcellence (Quality of service)

Hierarchy

Mission

Goals

Objectives

Strategy

Action/tasks

Control

Rewards

Stakeholders

Mendelow’s Power – Interest Matrix

InterestLow High

Power

Low

High

AMinimal Effort

Give Direction

BKeep Informed

Education /Communication

CKeep Satisfied

Intervention

DKey Players

Participation

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)

Efficiency(Process)

Effectiveness(Outputs)

FIRE

FC


Internal Analysis(Strengths & Weaknesses)

Resource Audit/Position Audit

9 M’s

Manpower Management Money Make-up Machinery Methods Materials Markets Management

information McKinsey 7 SModel

Strategy Structure Systems Staff Style Shared values Skills

Core Competences‘…the activities or processes that

critically underpin competitiveadvantage.’

StrategicAssets

Architecture

Reputation

Innovation

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

range of markets

…identify activities within the firm whichcontribute to competitive advantage andthose which do not.

Primary Activities Inbound Logistics Operations Outbound logistics Marketing and sales Service

Support/secondary activities Procurement HRM Technology development Firm infrastructure

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

Portfolio Analysis

Product Life-cycleStages: Introduction: high risk, little

competition, low volume, highadvertising = losses + negative cash

Growth: increased competition,growing volumes, EOS, highadvertising = losses to profits +negative to positive cash

Maturity: steady repeat sales, highvolumes, EOS, low level advertising= profits + positive cash

Decline: falling volumes, fallingprices = profits to losses + positiveto negative cash, divest

Balance the portfolio

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

BCG Matrix

Marketgrowth

High

Low

High LowRelative market

share

STARBuild then Hold

Losses to profits, negativeto positive cash

PROBLEM CHILDBuild or Divest

Losses, negative cash

CASH COWHold then Harvest

Profits and positive cash

DOGHarvest then Divest

Profits to losses, positiveto negative cash

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

advantage

Benchmarking

1. Determine processes to bebenchmark

2. Choose type of benchmarking3. Choose partner4. Determine measures5. Collect data6. Learn and improve7. Implement changes

Competitive

Process/Activity

Internal

BEST IN PRACTICE

Porter’s Value Chain

ResourcesBasic OR Unique?

CompetencesThreshold OR Core?

S

A

R

I

Balance the portfolio


Internal + External Analysis= Corporate Appraisal = Position

Appraisal= SWOT Analysis

External Analysis(Opportunities and Threats)

PEST analysis(External, Environmental analysis)

Political and Legal Taxation Government policy Foreign trade

regulations Monopoly legislation Environmental

legislation Employment legislation Consumer protection Protectionism

Economic Globalisation Economic cycle Interest rates Inflation Employment levels Exchange rates

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

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

production Transportation

Porter’s 5 Forces(Competitive,

Industry analysis)

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

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

Power of BuyersPower 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

Threat from SubstituteTechnologies

Can same features be producedcheaper?

Can new features be provided for samecost?

Level of danger may be influenced bybarriers to entry and/or power of buyers

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

Strengths Weaknesses

Threats

INTERNAL

EXTERNALOpportunities

CompetitorAnalysis

P Prediction of ReactionR ResourcesO ObjectivesS StrategyA AssumptionsC Competences


Filling The Gap

Gap Analysis

Currentoperations

FuturePlans

Target

GAP

Scenario Planning

Efficiency

Diversification

New productsor new markets

Penetration

Time

Objectivee.g. ROI

1. Develop scenarios & identify trends

2. Build analysis and strategic options

3. Link strengths of business to scenarios

4. Consider probability of scenarios

5. Identify resources and competencesrequired

6. Modify strategic options

7. Monitor reality and match to scenarios

8. Redeploy scenarios and modify strategies

Costly

Often inaccurate

Uses resources on scenarios that will notmaterialise

Tendency for managers to get carriedaway

Risk of self-fulfilling prophecy

Focuses management on futurepossibilities

Encourages creative thinking

Encourages communication andparticipation

Identifies sources of uncertainty

Identifies most important variables


Strategic Options

What Basis?

Resource Based Strategy(Inside-out)

Harness core competences togive sustainable competitive

advantage

Strategic Assets Architecture Reputation Innovative ability

Positioning view(outside-in)

Strategically developorganisation in linewith environment

PESTPorters Five

ForcesTo beat the five

forces

Porter’s Generic Strategies

Overall Cost Leadership(better margin, potential price cuts, entrybarrier, reduce supplier power)

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

Focus (Niche)(Cost or Differentiation, focus on marketneeds, develop core competencies)

Beware of ‘Stuck in the Middle’

Uses Analyse rivals Suggest own strategy SBU level strategy

Limitations Unclear definition of industry

Defines advantage in terms of position notresources

Lack of empirical evidence

Ignores middle ground Restricts firm to position in present

industry

Requires perfect information

What Direction?

Ansoff’s MatrixProducts, existing and new (PEN)Markets, existing and new (MEN)

Market Penetration (cost reductions,

price reductions, advertising, minor productmodifications)

Product Development (exploitexisting customers, RnD, buy-in and badge,JV’s, Licensing)

Market Development (new marketssuch as foreign markets, new segments suchas adult to child or industrial to consumer)

Diversification (related = vertical

integration or unrelated = conglomerate)

Do nothing/ Withdraw

Risks Product Market Operations and

management Financial

Vertical IntegrationAdvantages Economies of combined

ops Economies of control and

coordination Avoiding the market Tap into technology

ConglomeratesAdvantages Flexibility Quick growth Access to capital Portfolio effect Avoidance of anti-

monopoly legislation

Disadvantages Increased operational

gearing Reduced flexibility to

change partners Capital investment needs

Disadvantages

No additional benefit toshareholders throughsynergies

No operating advantages

Horizontal diversification – competitive products,complementary products, by-products

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

Method of Growth? (See next page)


Method ofGrowth?

Acquisition versusOrganic growth

Acquisition

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

target

Disadvantages Purchase premium Integration issues

o Systemso Peopleo Culture

Synergies do notmaterialise

Reputation of target

OrganicGrowth

Advantages No premium for assets People development Staged investment Established culture Introduction of new

technology and systemseasier

Possibility of grants

Disadvantages Slow Increases number of

competitors Overcoming barriers to

entry No opportunity for

synergies Higher risk

Porter’s 3 Tests forAcquisitions

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

Possible synergies Market Economies of scale Shared activities Surplus assets Vertical integration Skills transfer Dilution of risk Reduced power of

buyers/suppliers Tax advantages

Joint DevelopmentMethods

Joint VentureSeparate business entitywith equity form two ormore businesses

Strategic AllianceLong-term agreement toshare knowledge,competences, technologyfor mutual benefit

LicensingGiving the right toexploit brand, recipe,process etc for ashare of the profits

FranchisingGiving the right to exploit a businessmethod/model in return for a capital sumplus a share of the profits. Franchisorusually provides support e.g. marketing,training, technical

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

Withdrawal

Divestment Quick Higher price due to

strategic value

Demerger Gives shareholders

an exit route Management can

focus on core areas Two companies can

develop separateidentities

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?


`

StrategicChoice

SuitabilityIs the proposed strategy suitable for thepresent situation and circumstances of theorganisation?i.e. Is it suitable given the SWOTanalysis?

AcceptabilityWill the proposed strategy meetthe objectives of the organisationand, therefore, be acceptable tothe major stakeholders?

FeasibilityHas the organisation got, or can it get,the necessary resources to carry out thestrategy?

Implementationof Plans

BudgetsC CoordinationR ResponsibilityU Utilisation of resourcesM MotivationP Planning and controlE Evaluation of performanceT Telling

Management By Objectives

Strategic

Tactical

Operational

Functional

Individual

Achievement of strategies

Greater focus on key areas

Better congruence

Better Motivation

Time Cost Commitment Too idealistic Maintaining motivation

Risk Cost/Benefit


Kanter’s prescription for creativity:

A Acceptance of changeN New IdeasI InteractionT Tolerance of failureA Acknowledge creative behaviour

Culture‘The way we do things around here’Change

Management

Lewin’s ForceField Analysis

Driving Forces Restraining Forces

Individual

Group

Organisational

Strengthen Weaken

Unfreeze Change Refreeze

Handy’s cultural types

Power

Role Task

Person

Cultural Strength Ceremonies Symbols Rituals Stories Heroes Slogans

ImplementationIssues

Learning Organisations

Characteristics: Participative policy making Informating Internal exchange Reward Flexibility Enabling structures Boundary workers as

environmental scanners

Learning Climate: Solicit expertise Empower workers Encourage experimentation Encourage the search for

knowledge Learn from experiences Learn from others Transfer knowledge Support operations Provide counselling and advice Use the organisations

resources on problemsidentified by workers

Employee commitment

Excellence Culture – Peters andWaterman

P Productivity through peopleA A bias for actionS Stick to the knittingS Simple structureC Close to the customerA Autonomy and entrepreneurshipS Simultaneous loose-tight propertiesH Hands on, value driven

Quality‘Fitness for use’

Qualitycontrol =reactive

TQM‘Get it rightfirst time’

Commitment

Communication

Continuousimprovement

Competence

6 C’s

Four costs of Quality: Appraisal Preventative Internal failure External failure

Continued on next page

Customers

Costs


ImplementationIssues (cont’d)

HRM

Guest modelof HRM

HRM HRM HRM Behavioural Performance FinancialStrategy Practices Outcomes Outcomes Outcomes Outcomes

Recruitment Appraisals Training Reward Job design Involvement Status and security

Commitment

Quality

Flexibility

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

InformationSystems

Technology

Implementation Issues (cont’d)

OrganisationalKnowledge

Management

BenefitsMotivatedworkforce

Staff understand org’ngoals & values

Increased ability tocompete & add value

People encouraged togenerate & use knowledge

Knowledge = closest wecan get to ultimate

‘competitive advantage’

Issues /Problems

Technologicalbarriers

Incompatible systems& processes

Social barriersFormat of

information

Org’n Structure

Errors in datatransfer

Politics

De-motivation

Systems

NetworksGroupware

Intranet

Extranet

DataWarehousing Large relational

database

Reports

Dimensionalanalysis

Data Mining -Turning data into

information

On-line dataretrieval

ArtificialIntelligence Graphical User

Interface Tools

Descriptivemodels

Predictivemodels

Classification

Clustering

Forecasting

Sequences

Associations

Turn tacit into explicit


Developing anIT Strategy

1. Identify business needs2. Identify IT gap3. Identify potential

opportunities

StrategicWeapon

Genericstrategies

Beat thefive forces Value

chain

Considerations(PICK)

Key businessareas

Cost

Implications

Performance

Earls 3 Levels ofIT Strategy

IS Strategy -Organisation of

systems

IT Strategy –Technology

infrastructure

IM Strategy –Supporting

managementprocesses (COPT)

Technology

PlanningOrganisation

Control

McFarlan & McKenney’sStrategic Grid

Support –No strategic value

Factory –See strategic valueof info system nowbut expect value to

decrease in thefuture

Turnaround –Expect info system

to becomestrategically

important in thefuture

Strategic –Depend on info

system forcompetitiveadvantage

Strategic impact of future systems

HighLow

Low

Strategicimpact ofcurrent

systems High

Support –Improve

managementeffectiveness but not

critical to thebusiness

High Potential –Innovative with high

future potential

Key Operational–Critical to sustainexisting business

Strategic –Critical to future

business success

Strategic importance in predicted competitiveenvironment

Low High

Low

High

Strategicimportancein currentcompetitiveenvironment

Peppard – ApplicationsPortfolio

Business ProcessRe-engineering

1. Work backwards fromoutcomes not tasks

2. Empower the end user3. Increase access to

databases4. Link parallel activities5. Capture information only

once

Radical & fundamentalchange for quantumleaps in performance


Checklist

OrganisationalStructure

Features ofOrganisation

Decisions

Speed

Quality Flexibility

Congruence

Employeemotivation

Careerpath

Motivation ofmanagers

AutonomyCentralised vs Decentralised

T Technology

O Ownership

P People

T Tasks

I Ideology

E Environment

S Size

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

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

Divisional 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

Implementation Issues cont’d

Matrix Breakdown of silo’s Shared knowledge Skill development Innovation and creativity× Dual command× Dilution of functional

authority× Time consuming meetings

Decentralisation

Advantages: Frees senior

management Better local decisions Better motivation Flexibility Training/career path

Disadvantages: Loss of control Loss of congruence Duplication of effort Extra costs of control

Span of control

Tall/Narrow Promotional opportunities Smooth progression

between levels More personal contact

Flat/Wide Encourages delegation Quicker, more informed

decisions Encourages participation

of lower levels Lower management costs Promotions real and

meaningful Closer contact between

senior management andlower levels

Mintzberg’s StructuralConfigurations

Strategic Apex

Middle Line

Operating core

Techno-structure

SupportStaff

Simple structure =entrepreneurial

Machine bureaucracy= functional

Professionalbureaucracy =decentralised

Divisional form

Adhocracy = matrix

Greiner’sGrowth Model

Growth throughCreativityDirection

DelegationCoordinationCollaboration

Revolutionary CrisisLeadershipAutonomy

ControlRed Tape

Psychological saturation


Marketing

Firm’s orientation

Productto meetneeds

ProductionSales

Marketing…identify, anticipate and satisfy

customer requirements

MarketingStrategy

Kotler’s Four Pillarsof Marketing

Target Markets

Customer needs

Coordinated marketing

ProfitabilityAnalyse environment

and competitors – PEST/ Porter’s five forces /

PROSAC / 4P’s

Market Segmentation andTarget Market

…division of the market intohomogenous groups of potentialcustomers who may be treatedsimilarly for marketing purposes

Geographic Demographic

o Ageo Gendero Incomeo Family life-cycle

Social class Psychological Education Hobbies

Undifferentiated

Differentiated

Concentrated

Marketing Research…systematic gathering,

recording and analysing of dataabout problems relating to the

marketing of goods and services

Desk research(secondary data)

InternalAccounts, Salesreports, Customercomplaints

ExternalCSO reports,Businessmonitors, Tradejournals,newspapers

Field Research (Primarydata)

Interviews, focus groups,questionnaires,

experiments, Testmarketing

Marketing Mix – 4P’s…set of controllable

marketing variables used toproduce desired response in

the target market

Product

Productmix

Product Life Cycle

Product qualitiesFeatures, options,range, warranty,packaging, branding

Place

Use of intermediaries: Economic criteria Control criteria

Promotion

Communications Mix:AdvertisingSales promotionPublic relationsPersonal selling

Price

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

A Awareness

I Interest

D Desire

A Action

Product

CompetitiveStrategies

Market Leader- largest market share

Market Challenger- runner-up, fighting toincrease share

Market Follower- runner-up, aiming tohold share

Market nicher- serve small segment, notpursued by larger firms

Brand Strategies Existing Product New Product

Existing Brand Line Extension Brand Extension

New Brand Multi-branding New Brand


ProfitableProducts orCustomers?

Product View

DPP – DirectProduct

Profitability

Profits from sales ofindividual products

Calculating DPP

Sales (price x number ofunits – returns)

LESS:

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

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

Improving DPP: Increase sales price Increase sales volume Reduce costs of

stocking Offer incentives

Evaluation of DPP: Too product focussed Easier and cheaper to cut price

than conduct DPP exercise Ignores relationships between

products

Customer View

CAP – CustomerAccount

Profitability

1. Analyse customer base and divide intosegments

2. Calculate annual revenues earnedfrom customer segments

3. Calculate annual costs of serving thesegment including the ‘hassle’ factor

4. Identify and retain ‘quality’ customers5. Eliminate or re-engineer unprofitable

customers

Single period view ofvalue of customer

Minimum order size Install telesales / EDI Charge service fees Impose flat order

charge Discriminatory pricing

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

Life-Cyclecustomer value

Consider: Present value of existing & future

purchases Probability of customer retention Probability of customer

purchasing new products Costs of initial attraction

Drawbacks: Hard to predict future behaviour Hard to factor in competitors Difficult to pinpoint life-cycle

stage Uncertainty of environmental

factors

CustomerRelationshipMarketing /

Management

Focus marketingresources onmaintaining &

enhancing existingcustomer 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


Business andProfessional

Ethics

Professional Ethics‘Self control, not self interest’

C Confidentiality

O Objectivity

P Professional due care

P Professional Competence

I Integrity

T Technical Standards

Corporate SocialResponsibility

Issues

Environment

Sustainability

Safety in the workplace

Consumer health and safety

Equal opportunities

Fair Trade

Honesty in Advertising

Views on Business Ethics

‘The business ofbusiness is business’

(Friedman)

Management to concentrate onmaximising profits andshareholder wealth.

Businesses have no duty tosociety.

Societal benefits will arise as aresult of commercial success.

Conflict of CSR with shareholder wealth Reduced revenues Increased costs Diverts funds from shareholders Distracts management

Enlightened Self-Interest

Firms should acknowledge their socialresponsibilities.

Benefits to Business

Avoid future Government policy

Attract ethicalinvestor funds

Relieve stress onmanagement

Competitiveadvantage

Recruitment

Innovation &ideas from

close links tocommunity

Reputationand branding Small company

advantage in thesupply chain

Potential problemsCompetitive disadvantage

Deciding what is ethical

Bad publicity from monitoring and enforcement

Disclosure of business information

No universal acceptance ofmorals & ethics

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 Independento Role on audit / remuneration

committeeso Corporate conscienceo Mentors to inexperienced execso Strategic value through expertise


P

The InternationalMarket Place

Reasons for growth ininternational business

Convergence of Markets

Cost advantagesEconomiesof scale

Countryspecific costs

PoliticalInfluences

Trend to Globalproducts

Objectives ofinternational

growth

Expand sales

Acquireresources

Diversifysources of

sales &supply

Generalrisks

PESTMarket Knowledge

Financial

PROSAC

Porter’sDiamond

‘NationalCompetitiveAdvantage’

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

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

Foreign Direct Investment Closer to market Retain profits More control Reduced operational conflicts× High financial risk× Staffing decision× Integration difficulties

Methods of International Expansion

Ethnocentric Multinational - Polycentric Global - Geocentric

Perceives foreign markets assimilar to domestic market

Products & marketing mixconstant

Standardisation to save time andmoney

Supply-driven policy

See overseas market asdistinctive

Customised products andmarketing mix

Increased overseas salesvolumes

BUT Fewer EOS giving higher costs,

so volumes not turned into profits

Standardise wherever possible,e.g. RnD, Branding

Market convergence may allowstandardised product

BUT Demand-driven Customised marketing mix where

necessary = GLOCAL

Exporting Joint venture, Franchising, Foreign Direct Investment

STAFFING

Overcomes lack of host skills,unified culture, Transferscompetencies

× Resentment by host, culturalmyopia

Alleviates cultural myopia,inexpensive

× Limits career mobility, isolates HQfrom subsidiaries

Efficient use of HR, builds strongculture and managementnetwork

× Subject to National immigrationpolicies, expensive

Firm structure, strategy, rivalry

Demandconditions

Factorconditions

Related and supporting industries

5 Forces


Review and Control

Profit Related Measures

Examples Gross margin Net margin Cost % sales Profit

Problem:no account taken of investedcapital used to generateprofits

Return OnInvestment

(ROI)

ResidualIncome (RI)

PBIT X 100 = %CE

Relative Measure %

PBIT(CE x imputed interest rate)

RI

Absolute Measure £’s

Problems: Sub-optimal

investmentdecisions

Deplete capitalassets too early

Problems: Absolute measure

poor forperformancecomparisons

Joint issues when used in isolation Backwards looking measures Short-termist decisions Open to easy manipulation of discretionary costs and

capital employed

ConclusionFinancial measures should not be used in isolation tomeasure performance but should be combined with

non-financial measures.

The Balanced Scorecard

Financial Perspective

Internal BusinessPerspective

Innovation andLearning Perspective

CustomerPerspective

1. Identify CSF’s2. Identify competences required for CSF’s3. Develop KPI’s for competences4. Measure competence5. Take action – continuous improvement

Benefits Longer-term

measures More difficult to

manipulate Measures

determinants andresults

Promotes goalcongruence

Includesstakeholders

PotentialDrawbacks

× Measures conflictwith each other

× Requires culturalchange

× Overload –‘paralysis byanalysis’

× Time and cost× No obvious

relationship withshareholder wealth

ShareholderValue Analysis

The business should bemanaged to increase

shareholder wealth – i.e. allactivities and processes

Economic ValueAdded (EVA®)

Adjusted NOPAT(Adjusted CE x imputed interest rate)

EVA

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

Transfer Prices: Marginal Cost – no incentive for

seller & inflated profit for buyer Full Cost (Cost Plus) – may be no

incentive for the buyer & noincentive for seller to control costs

Market price – no buyer incentive Opportunity Cost – usually best Centrally set – uncontrollable Negotiated – powerful divisions

cima paper 6 – strategic level

Documents