ACCA P3 - Business Analysis - Mapit Accountancy

ACCA P3 - Business Analysis

Workbook

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Lecture 1 - Strategy Formation


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Illustration 1

F is a leading manufacturer of plastics. Its major products are beer crates and small containers for food sold in supermarkets. Together these two product ranges constitute 90% of F’s business, the remainder coming from selling more technologically sophisticated products.

The company is faced with a number of difficulties and may have to issue a profits warning in the coming year. Although the profit levels have been uneven for the past five years, this is the first time that F will have to report significantly reduced profits.

F has been adversely affected by the aggressive marketing of foreign companies importing beer crates into the market, such that F’s market share has fallen from 80% to 60% in the past three years. Consolidation in the brewery industry has meant that profit margins for crate manufacturers have been squeezed.

The company is heavily dependent upon the home market, which accounts for 75% of its total sales. Exports have been mainly of food containers for supermarkets in neighbouring countries.

F has invested heavily in research and development (R&D) and, although there is one exciting proposition in electro-plastics, most expenditure has been on projects selected by R&D managers who have little commercial awareness. There is the possibility that some new products may be developed from the electro-plastics research.

F is highly centralised, with many decisions taken by the 20 members of the board of directors. The workforce is highly unionised, with a number of different unions represented. Each factory has several negotiating committees set up to agree pay and conditions. Negotiations are often time consuming and confrontational. This has resulted in very precise job definitions, which are strictly adhered to. This has further resulted in considerable inflexibility, together with a complicated system of labour grades.

The directors have had little communication with stock market analysts and investors, who have little knowledge of the company other than what is shown in the published accounts. An informal group of institutional shareholders has asked for a strategic review and has suggested that F should withdraw from the beer crate market.

Required:(i) Discuss the main difficulties faced by F.! ! ! ! ! ! ! ! ! ! ! (5 marks)

(ii) Identify and evaluate alternative strategies that F could adopt to address its difficulties and recommend those that are most appropriate! ! ! ! ! ! ! ! ! ! ! (12 marks)


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Solution

(i)F is faced by a number of difficulties at the present time.

The company's turnover and profits are being affected by the loss of home market share which, if not remedied, will lead to foreign companies dominating the market.

The price "war" that is occurring in the market for beer crates is also affecting turnover and profits. This is a very damaging state of affairs for F since the sale of beer crates constitutes a large part of its business.

The company has problems with labour relations and working practices which will be affecting efficiency in production processes and hence profitability. Unless this is resolved it will not be possible to remedy some of the other difficulties faced by F.

The R&D department in F is dysfunctional and developments are not achieving commercial success. This represents a high cost with little positive impact on the profitability of the company. Although there are exciting prospects, past performance suggests that these will not come to market unless changes are made.

F has problems with its institutional shareholders who it has failed to keep sufficiently informed of its operations. Although this does not have an immediate effect on profitability it will make it harder for F to make, or where necessary fund, changes to remedy its other difficulties.

(ii)

Home market price war An immediate priority must therefore be to stabilise, and if possible improve, profits in the company's existing markets. If price is a key factor in the marketing mix for beer crates, as it would appear, the company should:

keep its prices competitive as long as the price war lasts, in order to retain market share, and

try to reduce costs, in order to increase profitability.

Despite the suggestion from the institutional shareholders, F should not withdraw from its home beer crate market. The company is still the dominant manufacturer in its home market. Although the long term prospects for crates do not appear to be good, withdrawing from the home market would leave a gap in supply that a rival producer would inevitably fill.

The company should be wary of "inviting" a rival producer to take over a share of the market, and a strategic evaluation of beer crates as a product should be carried out first.The company should consider producing beer crates for other markets in the world. By exporting, F could achieve larger volumes and economies of scale, allowing it to compete more aggressively in the home market. This would be even more effective if F was to establish a manufacturing base in other countries. The fact that foreign companies are able to compete by importing crates to F’s market suggests that there are cost issues in F’s manufacturing process.


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The company appears to be heavily dependent on its home markets, and a strategy for developing other foreign markets should be considered. One way of doing this, which may be possible, is the acquisition of plastics manufacturers which already have a good market share in the target countries. Acquisition targets should either be crate manufacturers, to provide economies of scale, or companies operating in related product areas that can provide economies of scope. However, acquisitions will be difficult without the support of shareholders.

The issues with labour relations and working practices

An initiative ought to be made by the board to rationalise working practices within the company as a whole, and make them more flexible. The company is currently faced with rigid work practices, too many labour grades, rigid job demarcation and a cumbersome negotiating system.

This may well account for the cost structure that is impeding F’s performance in the market. The support of the workforce and unions should be sought, for agreement in principle to change and simplify these practices. Rationalising work practices and making them more flexible should:

help reduce operating costs; and

create some redundancies.

The matter will require careful negotiations with the workforce at individual factory level. In the short term, the costs of redundancies will probably off-set the labour cost savings but the long term benefits should be worth pursuing.

The issues with the R&D departmentThe market for beer crates would appear to be price sensitive, but there seem to be new product possibilities in the field of electro-plastics, where the market is presumably only just being created. Other elements in the marketing mix (particularly the product design itself) could be critically important. The company should develop a strategy of making R&D investments more "commercially aware". This could be done by

putting greater emphasis on marketing in the group, especially in the factories responsible for the new electro-plastic technology;

encouraging factory managers to find out what sort of products customers want; requiring R & D to invest the bulk of its funds into projects selected by the operating factories and

ensuring that the R & D is adequate to keep the company at the forefront of the new technological developments.

RecommendationIn summary, the company's strategy should beto protect existing markets and market shares by cutting and controlling costs, helped by a decentralisation policy and a reorganisation of work practices;

to widen its markets and not rely so heavily on the home market; and


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to try to exploit new technological developments by having a “market driven” R & D department. If the plastics price war ends and prices go up, or if sterling were to fall in value, making UK plastics relatively cheaper compared with foreign products, the company should be in a position to obtain better profits from either a bigger profit margin or a bigger market share.


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Lecture 2 - External Factors


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Illustration 1

D is an international logging company, which cuts down timber and supplies sawmills where the timber is seasoned and then cut to appropriate sizes for use in a range of industries. D will work with any timber, ranging from softwoods used in construction or paper manufacture to exotic hardwoods used in expensive furniture. Its usual approach is to secure the rights from a landowner, or in some cases a national government, to cut timber. This can often involve the payment of large initial cash deposits to these suppliers, money which D usually borrows. A logging team then cuts down the trees as quickly as possible and hauls the timber to a convenient river where it is floated to a sawmill. Moving on rapidly to the next site, the loggers usually leave considerable surface damage behind them.

Since an increasing proportion of the company’s work has been in the tropical rainforest, it has recently come under pressure from environmental groups that have protested that it is not socially responsible to act in this way. Whilst the softwood forests can be regenerated in a couple of decades by replanting, hardwoods in tropical forests take far longer to mature.

The Chief Executive of the company has argued that he is not concerned about these protests since, as far as he is concerned, the company always acts ethically, as it has the agreement of the national government in any country in which the company operates.A recent development in the timber industry has been the harvesting of timber from the bottom of reservoirs which have been created by flooding valleys. Although the capital equipment required for this approach is significantly more expensive than that used in conventional logging, the operating costs are lower. Waterlogged trees in reservoirs have balloons attached, are cut, float to the surface and are towed to a sawmill. The underwater process is quieter and less disruptive to wildlife and the environment.

It has been estimated that there are over half a billion trees, or 20 years’ supply, submerged in reservoirs across the world, but it can take considerable research and expense to find them. As long as the timber has remained submerged deeply enough, it is of the same quality as timber harvested from the land. There is currently only one company conducting underwater logging, although a number of other companies are also considering this development.

Some of the board of directors feel that D should pursue this underwater approach and abandon land based logging. The Chief Executive and one other director feel that the underwater approach carries too high a risk.

Required:

(i) Briefly explain the differences between business ethics and corporate social responsibility (CSR). " " " " " " " " " " (5 marks) (ii) Discuss the CSR issues relating to D’s business and how the company might improve its CSR position. " " " " " " " " " " (8 marks)


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Solution

(i)

Although the two terms, business ethics (BE) and corporate social responsibility (CSR)are often used interchangeably it is wrong to do so.

BE can be defined as ‘behaviour judged to be good, just, right, and honourable, based on principles or guides from a specific ethical theory’.

CSR is defined much more broadly as ‘The continuing commitment for business to behave ethically and to contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large’.

Therefore BE is only a component part of CSR. An alternative definition of CSR states that society can:

I. require business to discharge its economic and legal duties.

II. expect business to fulfil its ethical duties.

III. desire business to meet its philanthropic responsibilities.

It has been argued that philanthropy is not the best approach for CSR unless it is guided by principles which will develop the local population economically, and educationally.

(ii)

In the context of D’s logging business the chief executive argues that the company ‘always acts ethically since it has the agreement of the national government...’ This presupposes that the government itself is acting in the best interests of society. This is not always the case and much of the focus of both the OECD and WTO is on the unethical behaviour of governments as well as businesses. With a logging business, which has the potential to create considerable environmental damage in remote areas of a country, the possibility of unethical behaviour is high.

From a CSR perspective, D needs to think carefully about its business practices if it is to continue with land based logging. The ecological damage must be minimised and, once logging has finished, as much as practicable should be done to restore the habitat to its previous condition. In the event that the areas in which it operates have a population, D should be looking for ways to minimise the damage to the livelihoods and wellbeing of those people that live there. This could be done by providing education facilities, offering training for those who previously lived off the forest. If possible, it should consider replanting the area which has been harvested with appropriate trees to provide an element of sustainability.

Taking a more global perspective, D should work with the environmental groups that have criticised them. The company should be seeking to conduct its logging in sustainable forests and take advice to ensure that it minimises its environmental impact.Having said this, it must not be forgotten that D is a commercial organisation and must continue to make the best, sustainable, profit for its shareholders.


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Illustration 2

E is a multinational organisation and is one of the largest global producers of chocolate, coffee and other foodstuffs. E categorises the countries in which it operates as follows:Less developed countries, from which E sources raw materials, but where there is no established local market for the finished products.

Fully developed countries, into which E imports raw materials, manufactures, and serves the local and export markets.

In every country in which E operates, it follows the OECD (Organisation for Economic Cooperation and Development) guidelines for multinationals.

In the particular case of country F, a less developed country, E has helped the local farmers to organise themselves into cooperatives to produce their crops. E has also funded schooling for the children of both the farmers and their workers, built and staffed a hospital and has provided other welfare benefits. E considers itself to be a good ‘corporate citizen’ and is used as an example of good practice on the OECD website.

Although the farmers’ cooperatives are free to sell to E’s two main competitors, they tend not to do so because of the close and friendly working relationship that they have with E. Both of E’s main competitors are multinationals, but both are smaller than E.

E has recently been receiving some bad publicity in country F. The management of E feels that this is being organised by the government and the national labour union of country F.

The government of F is reasonably supportive of business, but won the last election with a narrow majority. The government is now under pressure to raise the standard of living of the population. An election is due within the next fifteen months. The national labour union, which is increasingly being supported by the main opposition party in country F, is extremely anti- business. It would like to see all foreign companies removed from country F and all foreign- owned assets, and co-operatives nationalised.

The government of country F has stated that the prices paid for cocoa beans are too low, and that country F is not gaining sufficient tax revenue from the exports. The government of country F has threatened to impose an export tariff on cocoa beans, unless prices are increased, and unless E opens a manufacturing facility in the country F. The management of E feels that it has been targeted by the government because it is the largest of the three multinationals operating in the country.

The national labour union of country F has argued that the farm workers are being victimised by the farmers, who have become too powerful because of the cooperatives. It states that the government of F should not allow the farmers to operate in this way.

The management of E does not want to build a factory because the transport costs from such a factory to the nearest market for finished products would force the company to operate the factory at a loss.

The Chief Executive of E is due to meet with government ministers from country F to discuss E’s future operations and involvement in the country.


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Required

(a) Explain the advantages to E of conducting a stakeholder analysis of its operations in country F." " " " " " " " " " " (4 marks)

(b) Produce a stakeholder analysis for E’s operations in country F." " " " " " " " " " " (14 marks)


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Solution

(a)

Although it appears that E has a relatively small group of stakeholders it would be in the interests of the board of directors to determine both the power and interest of each group and the relationships between them.

Any strategy that E tries to pursue in the negotiations with the government must ideally have the agreement and, preferably, the active support of the more powerful stakeholders. In the event that there is insufficient support amongst the stakeholders the strategy proposed by E will fail.

It is likely that this will happen since, on first consideration, the stakeholders seem to have vastly differing views on multinationals in general. With that in mind E should determine which stakeholder group will have the greater capability to disrupt the plans made by the organisation.

E will need to establish the power and interests of the various groups so that it can decide whether to accommodate, negotiate, manipulate or resist the claims of the various groups.

(b)

The principal stakeholders of E can be classified using a Mendelow framework by reference to their power and interest in the situation.

Powerful and interested

1. The government of the country F is powerful and could impose more stringent operating conditions on E. It would also most likely have the support of the opposition party in parliament to do so. Although business friendly, it must be seen to be taking a strong stand in its negotiations with E since there is an election soon and its position is relatively weak.

2. The opposition party in parliament is a powerful stakeholder since the party in power has a relatively small majority. It also has the cooperation of the national labour union. Its interest will be strong and can be considered hostile, since it may see this as an opportunity to become the government by taking a strong stance against F.

3. The national labour union is also powerful because of its close relationship with the opposition party and the relative weakness of the government in power. Its interest should be described as hostile since its stated intention is the removal of all multinationals from F.

4. The other multinationals operating within country F are powerful in that some of them are competitors to E and, if the relationship between E and the farmers deteriorates, they will capitalise on the situation. They will temper this with ensuring that all multinationals are not legislated against.


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Powerful and with low interest

1. The shareholders of E will be relatively powerful but their interest will be relatively low unless the impact of the loss of this source of supply will have a significant effect on the profits of E. Other than those shareholders who have a particular interest in ethical issues, this ‘local’ event is unlikely to have much impact on their thoughts.

Low power but high interest

1. The farmers have relatively little power in this situation since they are dependent upon E or one of the other multinationals to buy their crops. They are obviously extremely interested in the outcome since they currently enjoy a good working relationship with E from whom they receive considerable support.

2. The farm workers also have high interest but limited power to influence the situation. They are dependent on the farmers for their wages and therefore dependent upon the success of the farmers in dealing with E. Similarly to the farmers, were E to leave and the cooperatives be disbanded, they would probably have a reduced standard of living.

3. The OECD will be interested in the outcome of the negotiations as it has recognised that E, which is a global player, is an example of good practice. It would want to see E continue to operate in the way in which it currently does – so that it could continue to use E as an example. In the event that the company starts to make concessions, the OECD is not likely to be happy with the situation.


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Lecture 3 - Environmental Analysis


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Lecture 4 - External Environment I


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Illustration 1

B is a media company, publishing lifestyle magazines for the consumer market. These lifestyle magazines contain articles and advertisements about fashion, health and beauty products, homes, furniture, and hobbies and are bought by people aspiring to a high standard of living.

Increasingly, consumers are turning to other media for the information and entertainment traditionally provided by this type of magazine.

Traditionally, 60% of B’s revenue has been derived from selling advertising, the balance being provided by the cover price of each magazine. Over the last four years both the revenue and profits have declined as there has been a steady reduction in the sale of both advertising space and the number of magazines sold.

The industry is very dependent upon the level of discretionary disposable income. If this income is at a low level, fewer luxury goods are advertised. However, people still buy the magazines to read about these goods.

The company has tried to expand abroad but has failed, expensively, to achieve this. Similarly, attempts to enter other segments of the home market, particularly teenage magazines, have failed. Both of these failures have come as a surprise to the Board of Directors who thought that they understood the respective markets well enough to make the appropriate decisions.

New technology, in the form of digital media, has also affected the magazines industry. These changes have been felt in both production methods, such as broadband distribution of proof copies, and the choice of media, such as the Internet, available to consumers. To a large extent, the speed of these developments was a surprise to the directors of B.

Required:

Evaluate the benefits to B of implementing a process of systematic environmental analysis.


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Solution

B has suffered from a number of failures in the recent past that could have been avoided, or at least minimised, had it been more aware of the environment in which it was operating.

The fact that its customers are using alternative products, and that it has been surprised by the speed of development of new technology would suggest that it is too internally focussed and is not looking outside the organisation sufficiently.

Its knowledge of other similar markets, notably teenage magazines, is not as good as it has believed it to be. It would benefit from a more formal, and systematic, approach to the gathering and analysis of information external to the organisation.

This process, an environmental screening process, would enable it to gather information under the broad categories of PEST: Political, Economic, Societal and Technological. Alternatively it could use the categories described by one of the many other acronyms which exist for environmental factors.

Broadly speaking the benefits it would reap are:

Help the firm identify and capitalise upon opportunities rather than lose out to competitors. It would hopefully be aware of the increasing importance of other media to its customers. This is potentially a very significant benefit, as the organisation could otherwise find that its products became obsolete.

Acquire a base of objective qualitative information. It would then have a deeper understanding of the other market segments that it has attempted to enter. This could avoid significant cost as a result of the failure of future strategies.

Have the capacity to be more sensitive to the changing needs of its customers. Again, this should raise the company’s awareness of the other media to which its customers seem to be turning. It could also lead to a significant improvement in profitability, if B can satisfy its customers to a greater extent. It might also lead to competitive advantage through differentiation and/or focus.

Have information available for the strategy making process. Some of the decisions that B has made about market entry and diversification have been ill-informed. This should improve the quality of strategy formulation and, as a consequence, reduce risk.

Be provided with a good, broad based, education and awareness of the industry in which it operates and the related industries. If B had been doing this then the rate of technological change might not have been such a surprise. The primary purpose of environmental analysis is, therefore, to improve the quality of planning and decision making.


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Illustration 2

Based in a European country, BBB is a charity which raises funds to provide portable equipment to remove the poison arsenic from drinking water in villages, in less developed countries. Run by a Board of Trustees, the organisation operates on laissez faire management principles. There are few full-time paid employees and BBB is heavily dependent upon the work of volunteers. Although these volunteers are dedicated, many have said that they do not feel the organisation knows where it is going and have said that they are not confident about the future of BBB.

Funding comes from appeals to the general population, which are made through newspaper advertisements. BBB does not use the Internet to promote or raise donations and, generally, does not use available technology to any extent in its organisation. Additionally, BBB receives corporate donations, most of which come from old school friends of the trustees. There is no government funding.

Recently BBB has had difficulty in attracting donations and is at risk of not being able to carry on its work. The charity industry has become more competitive and many other organisations within it have become more aggressive in their marketing and promotion.None of the Board of Trustees has a commercial background. The Chairman of Trustees has recently been to a number of conferences where the value of foresight and the need to conduct a frequent and thorough ‘environmental analysis’ have been discussed.

The Chairman has accepted that there is a serious gap in the knowledge that the trustees have about the environment in which BBB operates. Recognising that BBB needs a more proactive approach to the environment in which it operates, your help as a management accountant has been sought.

Required

Using appropriate models, discuss how conducting a frequent and thorough environmental analysis would help the Board of Trustees of BBB.


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Solution

There are two main models of environmental analysis that BBB would need to apply to the environment in which it operates.

Firstly, Porter’s five forces model which considers

rivalry amongst existing firms; bargaining power of buyers; bargaining power of suppliers; threat of new entrants; threat of substitute products or services.

This model is primarily used for commercial organisations but there is relevance for BBB in that there are clearly rivals, its buyers can be conceived of as the donors who get personal satisfaction, there will be threats from new entrants and there are many substitutes for making donations to charities.

Thinking of the environment in these terms should help BBB to more rigorously identify changes which will impact upon it.

Rivalry There will be other existing charities which are providing similar aid to disadvantaged groups in the less developed world – BBB should be more aware of those groups. It can monitor their fund raising campaigns to better time its own advertisements and possibly learn from the approaches used by its competitors.

BuyersA closer look at its existing donors, particularly the corporate ones, to discover their values and why they give (and to who else they give) will help BBB better tailor its appeals.

New entrantsMonitoring the charity literature and the media in general for news of new charities starting to address the kind of issues that BBB tries to aid will make BBB better able to retain its donors.

SubstitutesClearly donors, both individual and corporate, have other things they could do with their funds. A better understanding of those alternative uses will help BBB appeal to donors to continue giving. This will be particularly true of corporate donors where corporate social responsibility considerations will come into play. Those donors may well be convinced to give to BBB rather than to enter more directly into the area of philanthropy.

Secondly, PEST analysis looks at the various influences on the environment in which the organisation operates:

Political/legal influences Economic influences Social and demographic patterns and values Technological forces.


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It has been suggested that PEST is an insufficiently detailed acronym to describe the macroeconomic environment and that PESTEL, where the two additional letters describe Ecological and Legal factors, adds more depth.

Practically this is irrelevant – as long as the organisation is aware of the need to monitor any important themes in the macro environment and changes to those themes.

Political BBB currently receives no funding from governments and this may be because it has never attempted to or because of past government policy. Carefully monitoring this policy at both national and E.U. level may identify opportunities for BBB to start receiving government funding.

Economic Economic influences will have an influence on BBB in that most charitable giving comes from discretionary disposable income and monitoring this will give a better idea when to launch appeals for funds. Monitoring bonus payments to those in the financial services industry and the profitability of individual firms might help target funding requests.

Societal BBB would also benefit from considering the demographics of the groups from which it seeks donations. Particular segments of the community, for instance school children, may be more persuadable in terms of donations. Similarly, if there are large groups of Diasporas from the affected countries it may well be able to target them for donations.

Technological In terms of technological factors BBB should be monitoring to see if there are more cost effective methods available to address the problem of arsenic in well water. Additionally, it should be looking for other ways to make its appeals for donations – at present it advertises in newspapers – the internet is well established now and may well provide a better way to attract donors. This would be particularly appropriate if it could persuade one of the corporate donors it was monitoring to fund a website for it.

In summary, BBB needs to formalise the process of information gathering and processing within the company so that it is better able to react to the environment in which it operates.


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Illustration 3

D is a printing company that was founded by three people 20 years ago. At that time, the company used a new technology which had been developed by one of the founders.

Another founder member was a finance professional. The third person is Mr Z, who has a strong, dynamic, personality. Mr Z has been the driving force behind the development and growth of the business to its present size of 350 employees. With a charismatic leadership style, Mr Z was very proud of the fact that he knew all employees by their first names and considered everyone to be part of one big team. Everyone understood exactly what the company stood for and how things should be done.

As the company has grown, Mr Z feels he is not in touch with newer members of staff and that they do not understand his, and the company’s, values.

In addition, the technology used by D is no longer considered innovative and there are a number of other competitors operating in exactly the same way. D is still market leader within the industry, but only by a few percentage points. Mr Z feels that the industry has reached the maturity stage of its lifecycle.

An acquaintance of Mr Z, a management consultant, has suggested that the company should have a published mission statement and a clear set of strategic objectives.

Required

Explain the characteristics of the maturity stage of the industry lifecycle.


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Solution

The industry lifecycle can be considered to have four stages. These are introduction, growth, maturity and decline.

The third stage, maturity, is characterised by:

Superior quality products with an increased degree of standardisation amongst product offerings from different competitors. In the case of D, the technology which was developed 20 years ago, is now in common usage.

Buyers are quite widespread and, as the product offering has become more commonplace, many more buyers are using the product. D, and its competitors, will have a wide range of customers and, since the product has become standardised, there will be relatively low switching costs for those buyers.

The nature of the competition will have intensified and there will start to be those competitors who leave the industry as the competition becomes fiercer. From its position of market leadership, D may decide that this is a time of opportunity and seek to acquire some of the companies that struggle, or at least gain the market share of those that leave the industry.

Margins will fall as buyers demand lower prices in exchange for their loyalty and as they come to understand the product better. Margins will also be impacted by increased advertising and marketing costs. For D, the challenge will be to maintain its market share and find some way, other than the technology, to demonstrate a sustainable competitive advantage.


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Illustration 4

B is an established publisher of training manuals and other training material for members of professional bodies and for personal development. The products are sold all over the world by major bookshops and online book vendors. Although the company has a website, it does not sell directly to colleges or private individuals.

Currently, all stages of the production and distribution processes are conducted within mainland Europe. All stages of these processes are conducted in-house by B.

Over the past five years, sales of B’s training manuals have declined and the company is expecting to make little, if any, profit in the coming year.

B’s manuals are of the traditional style, that is, an extensive amount of printed material bound in a single volume. An initial market study has shown that B’s training manuals do not appeal to readers, because they are under heavy time pressure and are unable to devote sufficient time to reading these manuals. The manuals, because of their bulk, are also considered to be difficult to work with.

There are three other direct competitors in the market, which is highly competitive. In this market the products are difficult to differentiate and profit margins are low. Although B has no firm evidence, the directors believe that all three of their competitors are more profitable than B. However, the directors are not aware that any of the competitors are operating in a different way to B, and their training manuals are virtually identical to those offered by B.

The directors of B believe that there are product development and market development opportunities that could be pursued. They also believe that the cost structure of the products could be improved. However, they are prepared to consider any reasonable alternative strategy that will improve the competitive position of the company.

Required

Explain how more detailed knowledge about B’s competitors would help the directors of B.


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Solution

Successful business strategy is about the allocation of an organisation’s resources to actions which will improve the long term financial performance by providing a competitive advantage. Without a good knowledge of the relative strengths and weaknesses of B and its competitors, or potential competitors, it is unlikely that those resources will be allocated in the most appropriate manner.

A more detailed knowledge of B’s competitors should provide the directors of B with:

A better understanding of the competitive advantages of each player in the industry;

An insight into competitors’ present and proposed strategies;

An informed basis for developing strategies to counteract and even out manoeuvre competitors’ strategies;

And, most importantly in the present situation, assistance with forecasting the likely outcomes of alternative potential strategies that they propose.

At present the directors of B suspect that B’s competitors are more successful than their own company. It is important that they know whether this is true or not since they may make decisions which are inappropriate if they do not have a clearer understanding of what appears to be becoming a more dynamic environment. With market research indicating that there needs to be changes in the product being offered because it is deemed to be old fashioned, the directors need to understand how well their competitors are performing and whether they are suffering the same problems as B.

The directors need to have a clearer understanding of the actions that B’s competitors are likely to make in the near future. Having determined these strategies, they are more likely to be able to take actions themselves which will make them more competitive than their rivals rather than just imitating what has been done by others.

With a clearer understanding of any potential weaknesses in B’s competitors, they should be better able to capitalise upon those weaknesses and gain an advantage either on the basis of cost or differentiation – although the latter is unlikely if B continues to produce conventional manuals.


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Lecture 5 - External Environment II


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Illustration 1

G supplies electronic components to the automobile industry by exporting from the home country in which it is currently based. The company has recently set up a research facility in the home country to develop hydrogen fuel cells. The concept of hydrogen fuel cells has attracted a great deal of interest from the environmental lobby since it offers the prospect of very environmentally friendly vehicles. The market for these vehicles is in the development stage and there have been relatively few sales so far for this new technology. G hopes that the current pressure from environmental groups and governments will lead to large volume sales.

Increasingly, electronic component manufacturers are under pressure to manufacture close to the locations of their customers, the automobile manufacturers.

The research and development (R&D) director has decided that there is a need to open a research facility abroad, to work in partnership with the facility in the home country and capitalise on the benefits that a foreign base could offer. If this venture were successful, G would open a manufacturing facility next to the proposed overseas R&D base.

The board of directors recognises that different countries will offer different potential advantages and disadvantages. It has been decided that the ideal characteristics and factors for the chosen country should be determined, so that potential choices can be screened effectively before a final decision is made.

Required

Advise what ideal characteristics and factors should be present in the chosen country.


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Solution

The ideal characteristics of potential countries can be explained by using Porter’s Diamond:

Firm strategy, structure and rivalry. There would need to be established national firms in the country competing for a strong home market for technologically advanced products. There should be an established automobile market with a number of national manufacturers who will be likely to buy the fuel cells once they are successfully developed.

Ideally, those manufacturers should be exporting to adjacent countries to increase the potential market for G’s products. An established capital market and long term planning horizons amongst the existing businesses are also important.

Demand conditions. Since G will be enjoying derived demand, the consumer market needs to be environmentally aware and sufficiently affluent to pay the premiums that these types of car command. This degree of sophistication is important since: Substantial demand will allow economies of scale and once the initial product development is completed, process development will become more important.

Once process development becomes more important there will be a greater emphasis on the export market by the automobile manufacturers which will allow G to enjoy even greater economies of scale.

Supplying a strong and varied demand will facilitate the innovation process by the information gained from purchasers who are critical and discerning.

Related and supporting industries. The country in which G chooses to open its R&D base should, ideally, have a number of other technologically innovative manufacturers based there. If there are world class suppliers of technology and components there will be a cluster effect on education and skill profiles of the work force. This should make initial recruitment of staff easier. There will also be the prospect of better commercial relationships with suppliers, and an easier transfer of expertise between G, automobile manufacturers, university research departments and suppliers.

Factor conditions. These can be considered as

Basic factor conditions which will include natural resources, raw materials, skilled and unskilled labour, and a pleasant environment. Since it is likely that G will want to transfer some staff to the research facility from its home market the attractiveness of the country will be important.

Advanced factor conditions are largely brought about by government decisions and policy. These would include infrastructure including an internet backbone, quality of university level education and research, high speed transport – particularly connections with potential export markets and the reputation of the civil society.


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The role of government. The majority of the factors above are dependent upon the nature and quality of the government. Policy decisions on business support, tariffs and trade, education, welfare, taxation and monetary policy will all have an impact upon the factors above and the attractiveness of the country to inward investment. Political and economic stability will be an issue that G will wish to consider.

Whilst the current government in a country may be doing all of the right things there is no guarantee that it will continue in power. The current government will need to be assessed as well as the strength, and views, of any credible political party opposition. Similarly there will be a need to consider the strength and views of any lobby groups and Non Governmental Organisations (NGOs) in the country and internationally who may not favour foreign direct investment.


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Lecture 6 - Internal Environment


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Illustration 1

C is a manufacturer of test equipment for electronic circuits. In the past, C was a dominant player in the international market. However, over the past three years, the company has found that its profits have declined as it has lost market share to other companies in the market.

C’s business model consists of the following stages:

1.C’s highly skilled engineers first visit client sites and, after discussions with the client’s engineers, identify and design the appropriate testing equipment to meet the client’s requirements. C’s engineers are still recognised as the best in the industry, and customers agree that they produce the most effective solutions to the increasingly complex problems presented by C’s clients. This stage of the process is seen as a very collaborative process between the engineers employed by C and the engineers employed by its clients.

2.In the laboratories at C, the equipment design goes through a fairly complicated process. Prototypes are developed, based on the discussions in stage. These prototypes are then tested. Once a final design is agreed, the plans are passed to the manufacturing department for production.

3.The manufacturing department of C then produces the appropriate equipment to the desired specification and installs it at the client’s site.

4.After the equipment has been installed, C conducts maintenance on an annual basis.It is standard practice within the industry for clients to pay a total price for design, manufacture and initial installation of the equipment and an annual maintenance charge after that. Total prices are quoted before design work commences. It is unusual for companies in the industry to maintain other manufacturers’ equipment.

Although clients recognise the high quality of the solutions provided, they are increasingly complaining that the overall prices are too high. Clients have said that although other suppliers do not solve their problems as well as C, they do charge less. As a result, C has reduced its prices to compete with other companies. There is a suspicion that the manufacturing and installation stages of the business are not contributing sufficiently to the business because the costs may be too high.

Some of the Board of Directors of C have recognised that this situation cannot continue and have recommended that a value chain analysis be conducted, to identify the way forward for C. The Board feels that it is important that it identifies which activities in the current business model actually add value and whether all of them should be continued. One of the directors has suggested that C should actually be a solutions provider and not a manufacturer.

Although most directors are in agreement with the proposed value chain analysis, the managing director has argued that value chain analysis is a bad idea. He says that he has heard a number of criticisms of the value chain model.

Explain the benefits that C might gain from conducting a value chain analysis.


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Solution

Benefits of Value Chain analysis:

The model provides a template for the analysis of the processes used to serve customers. By looking both at functional departments and the linkages between them it is possible to identify where value is added in the perception of the customers and where costs are incurred. The analysis will often lead to the elimination of costs that ‘add no value’ to the customer experience. For C, this should provide the company with a clearer picture regarding the value of the manufacturing function as perceived by its customers.

The model also has the potential to provide a clearer framework for the analysis of other companies operating within the same industry. As C is discovering that other companies in the industry are perceived to be more cost effective in terms of manufacturing, it can make use of the value chain framework to investigate why this is so.

The model will provide a common terminology for managers to use when describing the business model, in the analysis that must be made to decide how to remedy the situation in which C finds itself.

The model should provide a means by which C can determine the best approach to developing superior competitive performance. Porter developed the model to assist companies in finding ways to develop superior performance either by cost leadership or differentiation. C finds itself in a situation where it is being beaten on price by some of its competitors but is recognised as the provider of the best solutions to clients’ problems. A detailed value chain analysis should determine for C why this is the case, and should assist managers in the decision they have to make regarding the future focus of the company.

The use of the model can provide the basis for other, important, management techniques. Subsequent to a value chain analysis, C may decide that it wishes to continue to benchmark processes and performance against its rivals, to conduct a business process re-engineering project, to practice activity based management or to develop an information systems strategy. Since C may decide to outsource manufacturing, and to focus on design and service provision, this last technique may be particularly appropriate as it finds itself increasingly having to manage knowledge.

Conducting a value chain analysis will facilitate the development of performance metrics for C. Developing such measures will make it easier for C to clearly identify which aspects of its business model are not contributing to the overall profits of the organisation. Although C currently suspects that manufacturing and installation are the weakest parts of its operation, development of clear and appropriate metrics would make it far easier to recognise where value and profit are being added in the business model.


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Lecture 7 - Position Analysis


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Illustration 1

Briefly explain what is meant by ‘gap analysis’ in the context of strategic analysis.

Solution

In the context of strategic analysis, a gap is the difference between the organisation’s objective and its forecast (or extrapolated) level of attainment. A gap is often calculated for future sales revenue, profit, ROCE or market share.

Gap analysis is not just the identification or quantification of such a gap, it also includes explanation of why the gap arose, and possibly the identification and evaluation of strategies to “close the gap”. In this way, gap analysis forms a link between strategic analysis, strategic option identification and strategic choice.


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Illustration 2

B is a media company, publishing lifestyle magazines for the consumer market. These lifestyle magazines contain articles and advertisements about fashion, health and beauty products, homes, furniture, and hobbies and are bought by people aspiring to a high standard of living.

Increasingly, consumers are turning to other media for the information and entertainment traditionally provided by this type of magazine.

Traditionally, 60% of B’s revenue has been derived from selling advertising, the balance being provided by the cover price of each magazine. Over the last four years both the revenue and profits have declined as there has been a steady reduction in the sale of both advertising space and the number of magazines sold.

The industry is very dependent upon the level of discretionary disposable income. If this income is at a low level, fewer luxury goods are advertised. However, people still buy the magazines to read about these goods.

The company has tried to expand abroad but has failed, expensively, to achieve this. Similarly, attempts to enter other segments of the home market, particularly teenage magazines, have failed. Both of these failures have come as a surprise to the Board of

Directors who thought that they understood the respective markets well enough to make the appropriate decisions.

New technology, in the form of digital media, has also affected the magazines industry. These changes have been felt in both production methods, such as broadband distribution of proof copies, and the choice of media, such as the Internet, available to consumers. To a large extent, the speed of these developments was a surprise to the directors of B.

Describe the essential stages that should be included in a scenario planning process that could be introduced by B.


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Solution

Stages of scenario planning

Define the scope of the scenario. B will need to decide what knowledge is most important to it. Considerations of the most important markets and products and the time frame it wishes to consider (that is how far into the future) should be paramount. It will need to decide whether the scenario is to be focussed on a specific issue, such as the impact of the internet on the advertising side of the business or a more blue sky approach where it asks a question such as; ‘what is the future of the publishing industry?’

Identify the major stakeholders. A consideration of who the main players are in its industry and how they are likely to drive change over the period under consideration. For B this would most probably include advertisers, its competitors and other media producers such as the internet, newspapers and, possibly, commercial radio and television.

Identify the basic trends affecting the industry. Taking the factors that were discovered in the environmental analysis and considering how they may change in the future, B would most probably want to look particularly at technological changes in the media such as the increasing use of the internet by consumers. Since it is very dependent upon the economy for its advertising revenue it would also consider the trends in the economy which would affect discretionary disposable income.

Identify the key uncertainties. Of the basic trends that have been identified B needs to decide which are the key uncertainties. These will be the ‘drivers for change’ which will shape the future of the industry. In the case of B this would certainly include the rate of take up of new media and the decline of print media. There will be some trends which can be taken as ‘givens’ such as their direction, and strength, can be fairly accurately forecast over the timeframe of the scenarios – the age profile would be an example.

Construct initial scenario themes, or skeleton outlines. Possible future worlds are created by crafting the key uncertainties together into coherent themes. Usually two alternative scenarios are produced. B might develop one scenario where the economy is depressed and there is not a rapid uptake of new media. This would be internally consistent since it would be difficult to fund the capital investment necessary to build the infrastructure necessary for broadband penetration. The alternative might feature a booming economy with many people turning to new media and online sources of articles and information about the products and services which B advertises and features.

Check for plausibility and internal consistency. Effective scenarios are both internally consistent and plausible. This means that the directions that the trends have taken in a scenario could, logically, happen together and the events described could happen within the timescale chosen. The examples given in 5 are internally consistent and, if it were to be suggested that they happened within the next three – four years they would be plausible.

Develop learning scenarios. The next stage would be to ‘flesh out’ the scenarios so that they become full descriptions of the industry and conditions that would prevail in the future timeframe envisioned. This is often done by writing a piece of narrative and B might flesh out the rapid take up of technology and the booming economy by describing a couple using the internet to plan the furnishing of their home and other aspects of their lifestyle. The scenario describing a booming scenario could describe a period of a month in the life


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of a couple furnishing their new home and giving detail of the methods they used to identify, and purchase, their furnishings.

Identify research needs. Having written the scenarios B will be better able to decide which elements of the environment it needs to monitor more closely to be better prepared for the future. Amongst the factors it might want to consider would be the number of households signing up for broadband internet connections within its market segment. This would, hopefully, give more warning of an impending shift to ‘new media’.

Identify sources of competitive advantage that might occur under each scenario and make decisions that would lead to the company being flexible enough to cope with either outcome. For instance B recognising from the two scenario themes that the Internet might, or might not, be a threat in the future could establish a website alongside the existing print magazines and start to train some of its journalists to be able to write for both media.


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Lecture 8 - Strategic Choice I


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Illustration 1

GHK is a restaurant chain consisting of eight restaurants in an attractive part of a European country which is popular with tourists. GHK has been owned by the same family for the previous15 years and has always traded at a profit. However, a number of factors have meant that GHK is now in danger of making a trading loss. There has been a substantial drop in the number of tourists visiting the region whilst, at the same time, the prices of many of the foodstuffs and drinks used in its restaurants has increased. Added to this, the local economy has shrunk with several large employers reducing the size of their workforce.

The owners of GHK commissioned a restaurant consultant to give them an independent view of their business. The consultant observed that the eight restaurants were all very different in appearance. They also served menus that were very different, for example, one restaurant which was located on a barge in a coastal town specialised in fish dishes, whereas another restaurant 20 miles away had a good reputation as a steak house. The prices varied greatly amongst the restaurants; one restaurant in a historic country house offered ‘fine dining’ and was extremely expensive; yet another located near a busy railway station served mainly fast food and claimed that its prices were ‘the cheapest in town’.

Three of GHK’s restaurants offered a ‘middle of the road’ dining experience with conventional menus and average prices. Some of the restaurants had licences which enabled them to serve alcohol with their meals but three restaurants did not have such licences. One restaurant had a good trade in children’s birthday parties whereas the restaurant in the historic country house did not admit diners under the age of 18.The consultant recommended that GHK should examine these differences but did not suggest how. The owners responded that the chain had grown organically over a number of years and that the location, style and pricing decisions made in each restaurant had all been made at different times and depended on trends current at that time.

Advise the owners of GHK how the application of Porter’s Three Generic Strategies Model could assist them in maintaining or improving the profitability of their restaurants.


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Solution

Porter’s ‘Three Generic Strategies Model’ was developed in 1980 and suggests can come about by adopting one of the following policies:

Overall cost leadership: the firm is the lowest cost producer relative to its competitors.

Differentiation: the firm can create something which is unique and for which consumers willpay a premium.

Focus: the firm serves a narrow strategic target more effectively than its competitors who are competing more broadly.

Porter asserts that each generic strategy requires different attributes and, therefore, it is unlikely that any firm can pursue more than one generic strategy simultaneously and be successful. He cautions against firms becoming ‘stuck in the middle’.

As well as Porter’s model being used analytically, it can also be used pro-actively to help a firm design its competitive strategy. In the case of GHK no coherent strategy has been followed with respect to its eight restaurants.

A preliminary analysis suggests that the following strategies are being followed:

Overall cost leadership: (the firm is the lowest cost producer relative to its competitors), at the restaurant near the busy railway station.

Differentiation: (the firm can create something which is unique and for which consumers will pay a premium) at the ‘fine dining’ restaurant in the historic country house.

Focus: (the firm serves a narrow strategic target more effectively than its competitors who are competing more broadly) at the fish restaurant, the steak restaurant, the restaurant offering children’s birthday parties.

Stuck in the middle: three ‘middle of the road’ restaurants with conventional menus and average prices.

The generic strategy which GHK decides to follow will be linked to a marketing strategy. It is not necessarily the case that GHK is wrong to follow a number of generic strategies because if each restaurant is taken as a strategic business unit it will have a particular catchment area from which it draws its customers and looked at in isolation that strategy might be the optimal one for that restaurant. However, a systematic examination of each restaurant using the logic of Porter’s model and examining the basis by which that restaurant competes and whether this will yield a long-term competitive advantage will be invaluable.

With respect to the restaurant near the busy railway station, if this is attempting to compete on the basis of being the lowest cost producer and, therefore, charging its customers the lowest prices, it is doubtful that this can give a long-term competitive advantage. The prices of a restaurant’s inputs, mainly food and labour, are set within their local markets and available to any competitor. The technology and processes of restaurants are mature ones and it is unlikely that GHK could innovate in this area to secure competitive advantage.


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The three restaurants which are ‘stuck in the middle’ should be given immediate attention as Porter’s model suggests they are unlikely to be successful.

If the owners of GHK use Porter’s ‘Three Generic Strategies Model’ it will give them an appreciation of the basis upon which their various restaurants compete and should prompt them to make modifications to their strategy and attempt to secure long-term competitive advantage.

It may be the case that GHK treat each of its restaurants as a strategic business unit and, therefore, employ a number of different generic competitive strategies. Alternatively, GHK may wish to trade as a homogenous entity which would imply it would use only one of the three generic competitive strategies to avoid being ‘stuck in the middle’.


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Illustration 2

XZY, a publicly quoted company has expanded rapidly since its formation in 2005. Its rapid growth rate, based on a broad range of well-regarded products manufactured and sold exclusively within Asia, has led to high profits and an ever increasing share price. However, in the last year, XZY has found its growth rate difficult to sustain. XZY’s core strategy has been described by its CEO as ‘selling what we know to who we know’. However, this view has been criticised by a number of financial analysts and journalists who have warned that if XZY’s growth rate is not maintained its share price will fall and the value of the company will reduce. XZY has a functional organisational structure and currently employs around 800 employees. The number of employees has grown by 20% since 2008.

Evaluate, using Ansoff’s product market scope matrix, the alternative strategies XZY could follow to maintain its growth rate in profits and share price.

Solution

Ansoff has four cells in his matrix which is formulated with axes based on:

•! present and new products•! present and new markets

The CEO has described XZY’s strategy as being based on ‘selling what we know to who we know’. Although this has been a successful strategy in the past in terms of profitability and share price, XZY is now finding growth difficult to sustain.This suggests that one of the cells of the matrix, Market Penetration, is approaching the point where it cannot offer any further growth to XZY.In the context of Ansoff’s matrix the remaining options are:Product development: this implies the launch of new products to existing markets. XZY would need to analyse the cause of its reduced growth. If it is because its existing products are coming to the end of their life-cycles, then launching new products in its existing markets could be an appropriate way forward.If the slow-down in growth is due to some structural problem with Asian markets, for example recession, then offering new products to existing markets may not restore growth.Market development: this option would mean that XZY would offer its existing products to new markets, for example Australia and Europe. This would be appropriate if the products were still vibrant and the reason for the slow-down in growth was that the Asian markets had become saturated or were suffering from structural problems.Diversification: according to Ansoff’s matrix XZY’s remaining option would be to diversify which would commit XZY to making new products for new markets which could restore growth; for example, XYZ could offer a business service within Europe.Each of the options above implies moving into new areas, to a greater or lesser extent, and so represents increased risk for XZY with diversification being the riskiest.The CEO, who has a fiduciary duty to act in the best interest of XZY’s shareholders, should examine whether it is necessarily a bad thing if the company’s growth rate slows down. It could be better from the shareholders’ viewpoint than the endless pursuit of growth which, in the long-term, is an unrealistic aspiration.


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Lecture 9 - Strategic Choice II


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Illustration 1

JKL is a small European company based in the south of the UK which employs 35 people. It has an annual revenue of €9 million. One aspect of its recently formulated strategy is an aspiration to expand into a neighbouring country, France, by means of organic growth.

The reason that JKL’s strategy for expansion is based on organic growth is due to JKL’s past experience. Two years ago, the directors of JKL negotiated the purchase of a UK business, LMN, located in the west of the UK. At the time of this acquisition, LMN was regarded by JKL as having complementary capabilities and competences. However, within a short time after the acquisition, JKL judged it to have been a failure and LMN was sold back to its original owner at a loss for JKL.

JKL employed consultants to analyse the reasons for the failure of the acquisition. The consultants concluded that the failure had happened because:

1. JKL and LMN had very different accounting and control systems and these had not been satisfactorily combined;2. JKL and LMN had very different corporate cultures and this had posed many difficulties which were not resolved;3. JKL had used an autocratic management style to manage the acquisition and this had been resented by the employees of both companies.

The consultants recommended that JKL should consider the use of change agents to assist in any future acquisitions.

JKL has learnt that a French competitor company, XYZ, may shortly be up for sale at a price which would be very attractive to JKL. XYZ has a very good reputation in its domestic market for all aspects of its operations and its acquisition would offer JKL the opportunity to widen its skill set. None of JKL’s staff speaks fluent French or is able to correspond in French. A small number of XYZ’s staff speak English fluently but none of its staff are able to correspond in English.

Discuss how JKL could grow their business by:

(i) Organic Growth(ii)Acquisition


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Solution

Organic growth

JKL has chosen in its strategy to grow organically. It has been influenced in this choice because of its recent experience with an acquisition which resulted in failure. It could be argued that organic growth is less risky than growth by acquisition.

This is substantiated by the empirical evidence which demonstrates in the majority of cases when a company is acquired, it is the acquired company that benefits financially to the detriment of the acquiring company.

Organic growth is usually achieved by reinvestment of profit which is then applied to the development of the company’s strengths. Therefore, organic growth will happen at a pace commensurate with the organisation’s ability to absorb and benefit from it.

However, if organic growth is achieved by reinvestment then the speed of growth will be constrained to an extent by the amount of profits available for reinvestment. Organic growth will be suitable for a company where the culture is one of gradualism rather than radicalism.

Acquisition

In many ways, an evaluation of growth by acquisition is the opposite of organic growth. Growth by acquisition can be fast, radical and transformational. It can offer opportunities to a company which otherwise would not be available.

Thus, an acquisition target may have unique competences and capabilities, for example, it may own patents, licences and commercial and brand franchises, which are otherwise unavailable.

Acquisition gives JKL the possibility of eliminating a competitor. However, the biggest downside to any acquisition is the empirical evidence which demonstrates that most acquisitions do not benefit the acquirer.


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Illustration 2

DDD is a biotechnology company which develops drugs. It was founded seven years ago by three scientists when they left the university medical school, where they had been senior researchers. The Company employs 10 other scientists who joined from different universities. All of these employees are receiving relatively low salaries but participate in a share option scheme. This means that when DDD is successfully floated on the stock exchange they will receive shares in the company.

DDD currently has a number of new, innovative drugs in development, but the earliest any of these drugs might come to market is two years from now. It is expected that there would be one successful drug launched in most years after that for at least six years. However, successful drug launches are never guaranteed, due to the speculative nature of biotechnology and the long period of clinical trials through which any new drug must pass.

DDD has to invest a significant amount of resources into the development of each potential drug, whether they are successfully launched or not. Currently, it has 12 drugs in development, a number of which may not be successfully launched. Due to the speculative nature of the industry, companies such as DDD are unable to obtain bank loans on commercial terms.

DDD is funded by an exclusive arrangement with a venture capital company. However, there is only sufficient cash in place to maintain the present level of activity for a further nine months. The venture capital company owns 15% of the equity of the company. The rest is owned by the three founders. It has always been the intention of the venture capital company and the founders that, once the company has a sufficient number of drugs in production and on the market, the company would be floated on the stock exchange. This is expected to happen in five years’ time.

Recently there have been a number of approaches to DDD which might solve its cash flow problems. The three founders have identified the following options:

1. The venture capital company has suggested that it will guarantee the cash flow until the first drug is successfully launched in commercial quantities. However, it would expect its equity holding to rise to 60% once this offer is accepted.

2. A large pharmaceutical company has offered to buy DDD outright and retain the services of the three founders (in research roles) and a few of the staff.

3. Another biotechnology company has offered to enter into a merger with DDD. This company has also been established for seven years and has one drug which will be launched in six months. However, of the four other potential drugs it has in development, none are likely to be commercially viable for 5 years. This company would expect the three founders to stay with the newly merged company but feels a rationalisation of the combined staff would be needed.

Describe the ‘Suitability, Feasibility and Acceptability (SFA) framework as used for evaluating strategic options. Evaluate the option to take up the venture capital using the framework.


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Solution

There are three tests in the Suitability Feasibility Acceptability framework used to evaluate strategic options. These are:

The suitability test. This should be used to determine whether the option is the most appropriate given the circumstances in which the organisation currently finds itself. The primary considerations will relate to the firm’s particular strengths and weaknesses, any competitive advantage which it may be enjoying at this point in time, and the environment in which it is operating. Options should be considered in terms of how well they will capitalise upon strengths, cure weaknesses, reduce perceived threats and take up opportunities.

The feasibility test. This test should be used to decide whether the organisation is actually able to carry out the suggested option successfully in terms of its resource capability and its previous track record in completing similar strategic options. An assessment should be made of the quality of the data that has been used to assess the suitability of the option.

The acceptability test. This test should be used to assess the attractiveness of the particular option to the various stakeholders identified by the organisation. Any strategy which conflicts with the values and interests of powerful stakeholders is unlikely to be successful. The evaluation should be based on a thorough evaluation of all stakeholders in terms of their power, interests and values.

Accept further venture capital

Suitability. This option will allow DDD to carry on with the work it has been doing and launch at least one drug commercially. It corrects the weakness of limited cash flow but adds little to the company’s strengths. Certainly it will help it take up the opportunity of the first commercial launch and subsequent launches until the planned float in five years’ time. From that perspective this option is suitable.

Acceptability. However, the acceptability of this option is not so clear cut. The founders will see a large reduction in their shareholding and there will also be a dilution of the rewards available to the employees once the company floats. Some of the employees may choose to leave if they feel that continuing to work on a low salary with a reduction in the promised reward in five years’ time is not worth it. As yet there are no customers to consider and in fact the relationship with any outside stakeholders is unlikely to be affected. The venture capital company must be happy with the option since it has suggested it.

Feasibility. There are no problems with the feasibility of this option.


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Lecture 12 Pricing Strategy


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Test Your Knowledge

If you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. What are the downsides of full-cost plus pricing?

2. What are the benefits of marginal-cost plus pricing?

3. What are the downsides of marginal-cost plus pricing?

4. When is it appropriate to undertake a strategy of Price Skimming?

5. When is it appropriate to undertake a strategy of Penetration Pricing?

6. What are complementary products?

7. What is price discrimination?

8. What conditions must exist for price discrimination?

If you’ve successfully answered all of the above questions then you’re ready to do the exam questions below:

None yet - New syllabus area!


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Test Your Knowledge Answers

If you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. What are the downsides of full-cost plus pricing?

It ignores demand in the market which may well set the price.An absorption rate is needed to absorb fixed costs.

2. What are the benefits of marginal-cost plus pricing?

It’s a quick and simple method.The mark up on products can be varied and set based on the variable cost.It makes managers aware of the concept of contribution.

3. What are the downsides of marginal-cost plus pricing?

Again, it ignores demand.The price must be set to ensure that the fixed costs are covered as they are not included in the marginal cost.

4. When is it appropriate to undertake a strategy of Price Skimming?

When the product is new and innovative.When there is high demand for the product.When the price elasticity of demand is unknown.To ensure that the cash invested in the product is recouped.When a product has a shortened life cycle.

5. When is it appropriate to undertake a strategy of Penetration Pricing?

When a company wishes to establish barriers to entry.To shorten the life cycle of the product.To create economies of scale.When the price elasticity of demand is elastic.


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6. What are complementary products?

Products which are bought and used together i.e. the sale of one depends on the sale of another.

7. What is price discrimination?

Charging a different price to different customers for the same product.

8. What conditions must exist for price discrimination?

There must be identifiable segments to charge.There must be no chance of a black market.There should be no potential for a black market to become established.


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Lecture 13 - Measuring Performance


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Illustration 1

DD is a research company operating in the computer hardware industry. It has been established for three years. The company employs 30 scientists and engineers working in three research teams. One of those teams has invented an innovative processor which is significantly faster than any processor that is currently available commercially. It is likely that the new processor will be usable in computers used for industrial and, possibly, gaming purposes. The other teams are working in similar areas, developing processors.

Although all of the researchers have done new and innovative work, which has led to a number of published academic papers, no patents have been filed since the company started. Therefore, none of DD’s innovative products has ever become commercially available.

The company is privately funded by an entrepreneur (Mr X), who made $350m from the sale of his previous computer business.

Mr X has, to date, allowed his research staff to conduct research which is focused on creativity rather than commercial viability. He does not want to lose any of the current research staff but now wants to encourage them to be more commercially aware.

Mr X has decided that the company must now capitalise upon the innovative computer processor that one of the DD teams has invented. He intends that some of the focus should shift to the development of commercially available products rather than purely research activities.

Mr X recognises that this will be a significant change in strategy and culture for the company and that the change will require significant planning and management. Mr X intends to hire marketing staff and five additional engineers to bring the processor, and any other potential products, to market as soon as possible.

Currently there is no performance measurement system in place within the company. Mr X believes that the Balanced Scorecard might be the best performance measurement system for DD.

(i) Explain the components of the Balanced Scorecard model.

(ii)Recommend, with reasons, two measures that DD should use in each of the components of the Balanced Scorecard model.


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Solution

(i)

The balanced scorecard combines financial and non-financial measures of performance and is claimed to be a technique for implementing the mission and objectives of the business strategy.

There are four perspectives in the model:

1. The financial perspective. This should consist of measures that answer the question ‘to be financially successful how should we appear to our shareholders?’ Typical measures would relate to improved returns, increased sales turnover, increased asset utilisation, return on capital employed, generation of cash flow or economic value added.

2. The customer perspective. This should consist of measures that answer the question ‘to achieve our vision, how should we appear to our customers’? Typical measures would relate to customer profitability, capturing new markets, customer satisfaction, customer retention, new customer acquisition, customer response time and extending the product range.

3. The internal business process perspective. This should consist of measures that answer the question ‘To satisfy our shareholders and customers, what business processes must we excel at’? Typical measures would relate to product design, product development, post sales service, reduced stock levels, improved lead times and other measures of efficiency.

4. The learning and growth perspective. This should consist of measures that answer the question, ‘to achieve our vision, how will we sustain our ability to change and improve’? Typical measures would relate to the ability of staff, information systems and knowledge transfer, the development of new products, the modification of existing products, and ideas and suggestions from employees.

(ii)

The measures that DD may choose to use for each of the perspectives are as follows:

The financial perspective1. NPV of R&D accomplishments/ R&D expenditure. This should give an indication of how

successful the development process is. Although there will be a delay in using this metric it does look to the long term future of the organisation.

2. Cash flow. Since DD currently has no sales the cash flow will be negative, a return to a positive cash flow will be an indicator of success of the new strategic direction.

3. Time taken for new products to break even. This will measure the effectiveness of the development process for DD and also the effectiveness of the new marketing department in identifying opportunities for new products which have significant potential.

4. Return on capital employed. DD is a commercial organisation and, ultimately, the founder will wish to see a return on his investment.


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The customer perspective

1. Market share. The market for processors is highly competitive but, if the processor is truly innovative, then it should capture market share from the firms currently in the market.

2. Net sales of products developed in the last 12 months compared to total sales. This would provide an ongoing measure of the continuing effectiveness of both the research and the development efforts of DD.

3. Feedback from customers. Since DD is a relatively new company, building customer relationships will be of significant importance. Therefore, measuring its reputation amongst its customers will be very important.

The internal business process perspective1. Time spent on development as a percentage of total time. As the intention of DD is to

change the emphasis of the researchers to development rather than blue sky research this will be a useful control measure to determine the success of the initiative.

2. Number of patents filed. At present the researchers are publishing academic papers from their research but are not filing patents which would indicate the commercial viability of their work. This measure would be a good indication of the shift in emphasis.

3. Lead time for development from concept to market. DD is seeking to redirect its researchers to be better developers and, as such, will want to measure their efficiency in turning ideas into tangible products.

The learning and growth perspective1. $ spent per patentable discovery. This would provide a measure of the effectiveness of

the development activity of the researchers in DD.

2. Number of design modifications or re-works. This will measure the efficiency of the development process which should improve as the researchers become more adept at commercialising their discoveries.

3. Number of joint authored academic research papers. DD does not want to discourage blue sky research – only to shift the emphasis. Measuring the number of jointly authored research papers will indicate the relative importance of both blue sky research and collaborative work.


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Lecture 14 - Performance I


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Illustration 1

BackgroundAybe, located in Country C, was formed by the merger of two companies in 2001. It is a listed company which manufactures, markets and distributes a large range of components throughout Europe and the United States of America. Aybe employs approximately 700 people at its three factories in Eastern Europe and supplies products to over 0·5 million customers in 20 countries. Aybe holds stocks of about 100,000 different electronic components.

Aybe is regarded within its industry as being a well-established business. Company Ay had operated successfully for nearly 17 years before its merger with Company Be. Company Ay can therefore trace its history back for 25 years which is a long time in the fast moving electronic component business.

The company is organised into three divisions, the Domestic Electronic Components division (DEC), the Industrial Electronic Components division (IEC) and the Specialist Components division (SC). The Domestic and Industrial Electronic Components divisions supply standard electronic components for domestic and industrial use whereas the Specialist Components division supplies components which are often unique and made to specific customer requirements. Each of the three divisions has its own factory in Country C.

Organisational structureAybe is organised along traditional functional/unitary lines. The Board considers continuity to be a very important value. The present structure was established by Company Ay in 1990 and continued after the merger with Company Be. Many of Aybe’s competitors have carried out structural reorganisations since then.

In 2008, Aybe commissioned a review of its organisational structure from a human resource consultancy. The consultants suggested alternative structures which they thought Aybe could employ to its advantage. However, Aybe’s Board felt that continuity was more important and no change to the organisational structure took place.

The business environment in AsiaAybe has taken advice from a number of expert sources about market prospects in Asia. The research concluded Asian markets have excellent potential for growth and profitability, because of increasing industrialisation, for one of Aybe’s divisions, IEC. The markets are fast- moving and highly adaptive. Some countries in Asia are highly entrepreneurial whilst in others there is much involvement of the State in business.

In some countries there is a mixed economy. In general, Asia encourages free markets but this is also allied to a requirement in some countries for local involvement in any business enterprise. Most Asian countries make extensive use of sophisticated information systems and information technology. A considerable amount of outsourcing from Western countries has taken place to Asia’s benefit.

Although this had originally been in areas of manufacturing, outsourcing has now developed extensively and many service and administrative functions have also been outsourced to Asia. All of these influences have led to a variety of organisational structures in Asian business.


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Director of OperationsAybe is organised along traditional functional lines and one of the most important departments is ‘Operations’. The director with responsibility for this department is the Director of Operations. The Director of Operations had recently joined Aybe and one of the reasons for his appointment was his experience in managing the electronics division of a multinational company in China.

He is very energetic and ambitious and had been supported in his appointment at Aybe by the Non-Executive Director (NED) who chairs the Nominations Committee. This NED considers that the Director of Operations has the potential to become the Chief Executive Officer (CEO) of Aybe within the next five years.

Expansion of electronic components business into AsiaPrior to 2010, the IEC division of Aybe had carried out a limited amount of business in Asia. The results of this business are shown in the column ‘Actual 2009’.Aybe’s Management Accountant has prepared a forecast for the period 31 December 2010 to 2014 which shows the incremental effects of expansion into Asia of products from the IEC division.

Aybe has been fortunate in that the Asian government in the country where it intends to trade has granted a tax ‘holiday’ for eight years to new overseas businesses. This means that Aybe’s operations will not be liable to tax. Country C has a double taxation treaty with the Asian country.


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Solution

In order to evaluate the suitability of Aybe’s current organisational structure for its proposed expansion into Asian markets, its salient features are described and compared to the environmental conditions which Aybe is likely to encounter in Asia.Currently, Aybe has an organisational structure which 'is organised along traditional functional lines’.

This is similar to many companies and is reflected in the composition of the Board of Directors, for example, there is a Finance Director and an Operations Director. It would be reasonable to expect that Aybe has departments corresponding to the different functions carried out within its business; for example, there will probably be a Marketing department and a Production department.

These departments would have established zones of authority and responsibility and would benefit from periodic reporting of their results including performance against budget targets.

However, such a structure has disadvantages. Over time it can become stagnant and bureaucratic and it may be hard for enterprise to flourish in such a culture. This could be the situation within Aybe which has not engaged in re-organisation unlike many of its competitors: this could imply a resistance to change.

There are other disadvantages in Aybe’s structure. The functional departments do not necessarily reflect the value-creating processes within Aybe. Thus, the demarcation of the divisions by their products is necessarily an arbitrary one and, in practice, some products may overlap more than one division.

The functional structure may also lead to a ‘silo’ mentality where employees only think and are concerned about their particular part of Aybe. This tendency could be to the detriment of Aybe’s efficiency and profitability and lead to lower customer satisfaction. Aybe had maintained the same structure since 1990 although many of its competitors had reorganised since then.

In 2008 consultants had suggested alternative structures for Aybe but it had still not changed. These factors strongly imply that by 2010 Aybe's organisational structures had become outdated.

The environment within Asia has some environmental conditions which throw into question the suitability of Aybe’s current organisational structure for doing business there. These are:

‘The markets are fast-moving and highly adaptive’. If Aybe’s organisational structure has led to stagnation and bureaucracy, this may make the current structure unsuitable as it will not be able to respond speedily and flexibly to the business environment.

‘Some countries in Asia are highly entrepreneurial’. If Aybe’s structure has led to a culture where enterprise does not flourish, Aybe may encounter difficulties in highly entrepreneurial countries as entrepreneurs do business in ways that Aybe may not be accustomed to; for example, entrepreneurs are often very decisive and expect this quality from others. Aybe may not be able to accommodate this.


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(In some countries)...’there is much involvement of the State in business’. This may create problems for Aybe but they will not necessarily be ones to do with the organisational structure.

‘In some countries there is a mixed economy’. Aybe has a record of doing business in both America and Europe and should have experience of doing business where the Government is also involved in business; for example, in the UK the Government controls the nuclear power industry and some of the railways.

‘Asia encourages free markets’. This should not create difficulties for Aybe.(In some countries there is) ‘ a requirement ..for a local involvement in any business enterprise’. In such a country, Aybe may be obliged to accommodate a local presence in ownership and possible local representation on its Board and in its workforce. In order to satisfy this requirement Aybe would have to change its organisational structure.

As Aybe will face a variety of new environmental conditions in Asia, its current organisational structure is likely to be unsuitable.


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Lecture 15 - Performance II


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Illustration 1

EEE is a divisionalised company, based in F, where it is quoted on the stock exchange. EEE manufactures and sells small electrical equipment products. As a country, F is more highly developed than the neighbouring countries. EEE has enjoyed a strong home market and has exported to the neighbouring countries.

EEE has had a reputation for producing high quality products. Recently, it has come under increasing competitive pressure from new, privately held, companies based in the neighbouring countries.

It appears that competitors based in these neighbouring countries have been selling lower quality products than EEE and have been undercutting it quite significantly in terms of price. Sales in both EEE’s home and export markets have been badly affected by the actions of these competitors in the neighbouring countries.

EEE has looked at a number of possible solutions to this situation and has decided to acquire a manufacturing company in one of the neighbouring countries and move all of its production there, completely closing the manufacturing division in F. This would mean that EEE would purchase one of the companies that has recently become a competitor. EEE would maintain its present divisionalised structure within its home country F and treat the acquired company as a new division.

The Board of Directors recognises the need to carefully select a suitable acquisition target company. The Board also recognises that careful consideration will need to be given to the most suitable approach to performance management once the acquisition has been made. The Board is considering an approach based on either Return On Investment (ROI) or Residual Income (RI).

(i) Discuss the difficulties that EEE may experience with the performance measurement of its divisions, post acquisition.

(ii)Discuss the disadvantages that EEE may experience if it chooses to use ROI as its primary performance measure.


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Solution

(i)

Once the new subsidiary is established as part of EEE there will be a need to manage a multinational multidivisional company, an experience which EEE presumably has not had before.

There are a number of difficulties that may be experienced regardless of the performance measures that EEE decides to implement.

It will be worth remembering that there may well be different economic conditions in the different countries together with different legal frameworks.

Additionally, there may be different trading conditions and cultures, although this may not be the case bearing in mind that the countries are adjacent.

This may present problems to EEE in its choice of a performance measurement and management system, since the management of the new subsidiary may not be used to control of this kind. This may be exacerbated by the fact that the acquired company has previously been a private company.

With this in mind, it is likely that EEE will decide to use a relatively straightforward technique initially.

While EEE could adopt a simple profit based measure, ROI and RI are both superior techniques since they will both take into account the capital base employed in the division.

However, there are a number of difficulties which both ROI and RI may cause since both are still essentially profit based measures.

• Managers may choose not to invest in the future since such lack of investment would reduce their capital assets and therefore improve their performance indicators.

• The figures presented by different divisions may not be comparable because of differences in accounting conventions concerning the valuation of assets and the classification of various categories of expenditure.

• The geographical location of the business may affect the cost of both investment assets and the returns recorded. This may well depend on the availability and cost of plant and equipment.

• Although EEE will have a common depreciation policy across the divisions the age of the assets used will affect the results and may distort comparisons.

• The use of financial control measures does not make it easy for the corporate centre to shape the future of the whole organisation. This will be particularly true if EEE decides to base the reward system of the divisions on these measures.

• By their nature these measures are historical and therefore not appropriate for guiding strategy making for EEE.


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Additionally there are differences between ROI and RI which may help EEE decide which is the most appropriate.

(ii)

Should EEE choose to use ROI as the primary performance measure, there are a number of disadvantages of which it needs to be aware.

• The use of ROI may lead managers to ignore profitable opportunities because their ROI is less than the ‘target’ or current ROI. This would not be the case with RI as long as the imputed cost of capital for the division was less than the return achieved by the opportunity.

• Managers may be encouraged to start a project that has a high ROI and which, therefore, increases the average ROI for the division even if the project does not cover the cost of capital. This would not happen with RI where the project would show a negative return.

• In general RI is more flexible than ROI since different imputed rates of interest can be used to reflect the different inherent risk of projects in different areas.

On balance, if EEE intends to use either ROI or RI rather than a more forward looking method, then RI will offer more flexibility but may need more explanation to the divisional managers.


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Lecture 16 - IT & Strategy


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Illustration 1

GHK is a restaurant chain consisting of eight restaurants in an attractive part of a European country which is popular with tourists. GHK has been owned by the same family for the previous15 years and has always traded at a profit. However, a number of factors have meant that GHK is now in danger of making a trading loss. There has been a substantial drop in the number of tourists visiting the region whilst, at the same time, the prices of many of the foodstuffs and drinks used in its restaurants has increased. Added to this, the local economy has shrunk with several large employers reducing the size of their workforce.The owners of GHK commissioned a restaurant consultant to give them an independent view of their business. The consultant observed that the eight restaurants were all very different in appearance. They also served menus that were very different, for example, one restaurant which was located on a barge in a coastal town specialised in fish dishes, whereas another restaurant 20 miles away had a good reputation as a steak house. The prices varied greatly amongst the restaurants; one restaurant in a historic country house offered ‘fine dining’ and was extremely expensive; yet another located near a busy railway station served mainly fast food and claimed that its prices were ‘the cheapest in town’. Three of GHK’s restaurants offered a ‘middle of the road’ dining experience with conventional menus and average prices. Some of the restaurants had licences which enabled them to serve alcohol with their meals but three restaurants did not have such licences. One restaurant had a good trade in children’s birthday parties whereas the restaurant in the historic country house did not admit diners under the age of 18.The consultant recommended that GHK should examine these differences but did not suggest how. The owners responded that the chain had grown organically over a number of years and that the location, style and pricing decisions made in each restaurant had all been made at different times and depended on trends current at that time.

(i) Advise the owners of GHK how the application of Porter’s Three Generic Strategies Model could assist them in maintaining or improving the profitability of their restaurants.

(ii)Advise how GHK could employ a range of organisational information systems to support whichever generic strategy it chooses to adopt.


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Solution

(i)

Porter’s ‘Three Generic Strategies Model’ was developed in 1980 and since then has gained international dissemination. The model analyses how firms can achieve competitive advantage which Porter suggests can come about by adopting one of the following policies:

Overall cost leadership: the firm is the lowest cost producer relative to its competitors.

Differentiation: the firm can create something which is unique and for which consumers willpay a premium.

Focus: the firm serves a narrow strategic target more effectively than its competitors who are competing more broadly.

Porter asserts that each generic strategy requires different attributes and, therefore, it is unlikely that any firm can pursue more than one generic strategy simultaneously and be successful. He cautions against firms becoming ‘stuck in the middle’.

As well as Porter’s model being used analytically, it can also be used pro-actively to help a firm design its competitive strategy. In the case of GHK no coherent strategy has been followed with respect to its eight restaurants. A preliminary analysis suggests that the following strategies are being followed:

Overall cost leadership: (the firm is the lowest cost producer relative to its competitors), at the restaurant near the busy railway station.

Differentiation: (the firm can create something which is unique and for which consumers will pay a premium) at the ‘fine dining’ restaurant in the historic country house.

Focus: (the firm serves a narrow strategic target more effectively than its competitors who are competing more broadly) at the fish restaurant, the steak restaurant, the restaurant offering children’s birthday parties.

Stuck in the middle: three ‘middle of the road’ restaurants with conventional menus and average prices.

The generic strategy which GHK decides to follow will be linked to a marketing strategy. It is not necessarily the case that GHK is wrong to follow a number of generic strategies because if each restaurant is taken as a strategic business unit it will have a particular catchment area from which it draws its customers and looked at in isolation that strategy might be the optimal one for that restaurant. However, a systematic examination of each restaurant using the logic of Porter’s model and examining the basis by which that restaurant competes and whether this will yield a long-term competitive advantage will be invaluable.

With respect to the restaurant near the busy railway station, if this is attempting to compete on the basis of being the lowest cost producer and, therefore, charging its customers the lowest prices, it is doubtful that this can give a long-term competitive advantage. The


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prices of a restaurant’s inputs, mainly food and labour, are set within their local markets and available to any competitor. The technology and processes of restaurants are mature ones and it is unlikely that GHK could innovate in this area to secure competitive advantage.

The three restaurants which are ‘stuck in the middle’ should be given immediate attention as Porter’s model suggests they are unlikely to be successful.If the owners of GHK use Porter’s ‘Three Generic Strategies Model’ it will give them an appreciation of the basis upon which their various restaurants compete and should prompt them to make modifications to their strategy and attempt to secure long-term competitive advantage.

It may be the case that GHK treat each of its restaurants as a strategic business unit and, therefore, employ a number of different generic competitive strategies. Alternatively, GHK may wish to trade as a homogenous entity which would imply it would use only one of the three generic competitive strategies to avoid being ‘stuck in the middle’.

(ii)

StrategicIn order to decide which of the generic strategies would be appropriate, GHK will require information to construct a PEST analysis. It will need detailed market and demographic information, for example, to decide whether a particular restaurant has access to a hinterland of customers who are willing to pay a premium price.

This would then indicate the suitability of a differentiation strategy. Marketing research could then indicate the type of differentiation for which these customers are willing to pay a premium. It could be the case that the differentiation strategy would be suitable not only for the restaurant in the historic country house but also for the fish and the steak restaurants.

Statistics of market share would demonstrate GHK comparative position. The degree of success of the strategy it was following would be monitored by periodic reporting of market share.

GHK owners could utilise an executive information system to help them in their decision- making. Inputs to this system would include both their own researches and data and also data from specialist external databases.

If GHK wanted to pursue a strategy of overall cost leadership (although the answer in (a) suggests that this is unlikely to be successful) an information system which tracked market prices for restaurant supplies would be required.

GHK could use information systems to help it determine the most appropriate generic competitive strategy for its business. However, it should also recognise that the information systems which it chooses to deploy can, of itself, be a source of competitive advantage for its business.

An example of this could be that GHK, through its PEST and market research, may identify profitable groups of customers whose needs are not being met at present, such as vegans.


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GHK may be able to construct a website offering a booking service for restaurants in its regions and link this with an affinity or loyalty card. This would then generate valuable current data about the restaurant which GHK could incorporate in its strategic review processes.

OperationalAt the operational level there is much that good information systems and management accountancy can contribute to a successful generic strategy for GHK. Porter’s ‘Three Generic strategies model’ is essentially about achieving and maintaining competitive advantage: that is out-performing its rivals.

For its basic requirements GHK would require a comprehensive database, allied to a system for capturing real-time operational data, and a reporting package.

Given these requirements, GHK could address such important parameters as its capacity utilisation. The management accountant using real-time information could provide timely information about the number of customers served each day.

This information could be further analysed to reveal variations in demand by both day and time: Which day are we busiest? What time of day is the quietest? Such analysis could be presented in management accounting reports and would assist in decisions such as: At what times should the restaurants be open? Is it worth opening every day of the week?

The restaurants could also equip its waiters with PDA’s (Personal Digital Assistants)to record orders and ‘Smart-tills’ to record and analyse its sales receipts. At the operational level GHK could use proprietary industry software to cost and plan its menus. These functions could be integrated to order ingredients and monitor stock levels.

This information allied to the real- time information about orders and sales would enable real-time profitability information to be generated by the management accountant.

The results emanating from the operational level would indicate the degree of success of the generic strategy. It would also indicate either the continuance of that strategy or could suggest that it was time for a strategic review and a possible change of strategy.


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Lecture 17 - E-Business


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Illustration 1

IntroductionAAA is a small manufacturer of replacement machine components for machinery used in the mining and oil exploration industries. It is based in an African country. It was formed in 1952, as a partnership between two engineers, and incorporated in 1977. AAA now employs 120 staff, and has an annual turnover equivalent to one million US dollars. AAA is proud to offer the very highest levels of customer service. Much of the machinery used by AAA’s customers is quite old and, as a result, components are no longer available from the original equipment manufacturers (OEMs), most of which are large multinational companies. AAA mostly supplies parts directly to the end-users but also receives a small but significant proportion of its business from OEMs, who then supply the components to their customers.

The current business modelAAA has always run its business in a very traditional way. The sales manager receives most orders by telephone or fax. The order specifies the OEM part number that the component is to replace. If AAA has previously supplied that component, the sales manager checks the price list and tells the customer the price. AAA holds very low levels of finished goods inventory, and then only of the most commonly ordered components.Where AAA needs to make a component for the first time, an AAA ‘estimator’ (a qualified engineer, responsible for producing an estimate of the material and labour involved in manufacturing the item) obtains the original drawings of the component, either from AAA’s extensive archives or from the OEM.

The estimator then produces detailed engineering drawings, a list of materials and parts required, and an estimate of the labour hours likely to be used at each stage of the manufacturing process. The estimate is passed to a costing clerk in the accounts department who calculates the likely product cost (labour, materials and overheads), adds a ‘mark-up’ of 50%, and advises the sales manager of the price. If the customer accepts the price, an order is passed to the production department, which schedules and completes the work. If the actual cost of production is significantly different from that estimated, the price list is amended to reflect the actual manufacturing cost.

Very occasionally, a customer sends (or brings in) an old component, which cannot be traced back to an OEM. The sales manager gives the component to an estimator, who dismantles the component and produces the necessary engineering drawings and estimate. This process is called ‘reverse engineering’, and is common in the component manufacturing industry. Reverse engineering currently accounts for about 5% of AAA’s business.

When an order is fulfilled, the component is delivered to the customer, together with an invoice. Most customers pay within 30 days, by cash or cheque. AAA does not have a problem with bad debts. An increasing proportion of AAA’s business is now transacted in US dollars, as African currencies tend to be unstable.

AAA prides itself on the personal service it provides. The close contact it has with its customers means that AAA receives a significant amount of repeat business. AAA has never advertised its services, but grew significantly until 2005 as a result of ‘word of mouth’ recommendations by satisfied customers. AAA, however, has not experienced growth for the last two years, although turnover and profit have remained stable.


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AAA uses only very basic Information Systems (IS), and reports its performance using a simple comparison between budget and actual, which is produced using a spreadsheet package. AAA’s accounting system is not automated, and transactions are recorded in traditional ledgers.

Project E: Computerised accounting and e-commerce systemsThe sales manager of AAA has noticed that customers are increasingly mentioning that they would like to be able to order online. He knows that there has been a significant growth in business-to-business (B2B) e-commerce in recent years. The sales manager has recognised that in order to grow and to make a move into e-commerce possible, AAA’s accounting system will have to be updated to a computerised one.Having spoken to a number of potential suppliers, the sales manager has now received a proposal from SSS, a local company, to supply tailored ‘off-the-shelf’ systems for both accounting and e-commerce. SSS has provided a detailed breakdown of its proposal, to be known as Project E, which is summarised below.

The sales manager believes that, following implementation of the new systems (likely to be 12 months from contract agreement) e-commerce should lead to an increase in the company’s turnover of 10% in its first year of operation. Thereafter, the turnover resulting from e- commerce should grow at a rate of 10% each year for the foreseeable future.The sales manager also thinks that any increase in indirect costs as a result of this higher volume of business will be fully offset by a reduction in administration workload as a result of the new computerised accounting system. The gross margin earned from e-commerce business can therefore be used as the effective cash inflow for evaluation purposes. The current turnover of AAA is, as stated earlier, $1 million a year. The mark-up on products sold by e-commerce will be the same as at present (that is, 50%).

However, the sales manager thinks that a cautious approach should be taken to the evaluation of the proposal, and that any benefits after 5 years from implementation should be ignored. AAA has a weighted average cost of capital (WACC) of 15%.

Briefly explain how e-business has impacted on the way business is conducted.

Briefly discuss how a new Information Systems (IS) strategy might impact upon corporate, business and functional strategies.

Evaluate the strategic and competitive benefits to AAA of the proposed e- commerce system.

Discuss how AAA might use its e-commerce system to increase the volume of business from ‘reverse engineering’ projects.


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(i)

E-business and businessElectronic business (e-business) represents a fairly new method of conducting business transactions. In addition to buying and selling or exchanging products, it also facilitates the provision of services and information, usually through communication systems such as the Internet, intranets and extranets.

The key drivers of e-business are that it has the potential to:

Provide a range and quality of services, meet customer demands, assist in retaining customers and gain competitive advantage by maximising revenue.

Improve the effectiveness, and reduce the cost, of supply chains.

Improve knowledge management, cost reduction, differentiation and focus.

E-business has now impacted to such an extent that, in some cases, it is the only viable business model.

(ii)

IS strategy and other strategies

In theory, the IS strategy of an organisation is an example of ‘functional strategy’. As such, the IS strategy should be a tool to ensure implementation and achievement of the corporate and business strategies. For example, a business strategy of cost reduction might lead to an IS strategy of automation of core processes.

However, it is increasingly common for IS strategy to ‘drive’ the organisation’s strategies in a way that most other functional strategies could not. As such, the IS strategy can become the ‘change trigger’ that requires a significant change in both the corporate strategy of the organisation, and other business and functional strategies. For example, the decision to adopt e-commerce as an IS strategy would have repercussions throughout the organisation:

• At the corporate level, use of the Internet necessarily leads to a market development strategy of ‘going global’.

• E-commerce might require a shift in business strategy from cost leadership to differentiation-focus.

• At the functional level, the logistics, accounting and/or production systems might have to change to meet the demands of e-commerce.

There is, therefore, a complex relationship between IS strategy and corporate strategy. IS strategy can either be an implementation tool or a change trigger.

(iii)

Strategic and competitive benefits of e-commerceThe main strategic and competitive benefits to AAA are likely to be the following:


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• To expand the marketplace to national and international. This is a potentially significant strategic benefit. The development of an e-commerce system will immediately mean that AAA becomes a global company. As mining and oil exploration are also global businesses, this should lead to the growth that AAA seeks. However, AAA must ensure that it has the capacity and operational systems to be able to respond to any increase in demand, as failure to meet customer expectations could lead to a loss of reputation. AAA must also recognise that an e-commerce system that prices products in US dollars might be unattractive to customers in Africa, and could lead to a reduction of ‘local’ business.

• To decrease the cost of creating, distributing, storing and retrieving paper-based information. This is a potentially significant competitive benefit (assuming rivals do not offer the same services). It should be possible for AAA to archive all of its order, delivery, and specification data, and also (possibly) its engineering drawings. This should save time and cost in the sales and estimating functions, as storage costs would be vastly reduced and retrieval times speeded up. However, AAA would not be able to do this for any reverse engineering services, as each job is unique and there would be no drawings.

• To improve image, service and access to information. This is a potentially significant strategic and competitive benefit. E-commerce should improve response times and customer service levels, in addition to allowing most customers to ‘pick’ components from the website by OEM name and part number. Products requiring reverse engineering could not, of course, be ordered and purchased online. Improved response times would directly support the organisation’s strategy of ‘personal service’, but AAA must ensure that the e-commerce system is adequately supported by human customer service systems.

• To reduce the time between delivery and payment, and other administrative ‘drag’. Again, this benefit might be significant to AAA as it might find that customers are willing to pay ‘with order’ rather than 30 days after delivery. However, trade customers might prefer to have credit accounts, so any benefits might be reduced. If payment was taken with order, AAA would have to make it clear that delivery would not be, in most cases, ‘from stock’.

• To increase productivity and flexibility, and to reduce transport costs. Although this is a theoretical benefit of e-commerce, AAA currently appears to perform well in these areas. Any benefit might, therefore, be minimal.

• To allow the reduction of inventory and the development of ‘pull’ supply chain management. This is already the way AAA organises its business so, once again, any benefits might be marginal.

(iv)

Reverse engineeringThe development of e-commerce might allow AAA to increase the amount of reverse engineering it carries out, despite the fact that such business could not be transacted online. AAA might consider the following:


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• Any new e-commerce system could be used to advertise and promote the full range of services provided by AAA. Customers who purchase ‘off the shelf’ components might not be aware of the reverse engineering services provided by AAA.

• AAA might use an online chatroom or forum system to allow customers to share information between themselves, and with AAA technical staff. This would bring further opportunities to promote reverse engineering services.


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Lecture 18 - Knowledge Management


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Illustration 1

Distinguish between data mining and data warehousing.

Solution

Data mining is a process to discover new, meaningful information from data collected by organisations so that decision makers can learn as much as possible from valuable data assets. Usually, using advanced information technologies, knowledge can be discovered in databases that can lead to useful insights into customer behaviour and lead to increased sales through superior performance.

Data mining uses a broad set of tools to automatically analyse data and answer user defined questions. Many companies already use computers to capture details of business transactions such as credit and debit card purchases, retail sales and warranty claims. Data mining techniques help those companies to identify useful patterns of behaviour and relationships between the data that might otherwise have gone undetected.

By contrast, data warehousing relates to the effective storage of data. The concept has been described as a single, complete and consistent store of data obtained from a variety of sources and made available to users. The emphasis is on the data being available in an understandable fashion that can be used in a business context.

As such, a data warehouse is a database that:

• is organised to serve as a neutral storage area; • is used by data mining and other applications; • meets a specified set of requirements; • uses data that meet a predefined set of business criteria.

In summary, data warehousing relates to the storage of data and data mining to the analysis of that data.


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Illustration 2

IntroductionAAA is a small management consultancy practice, based in the capital city of an African country. Since 2004, AAA has grown significantly. In 2008 AAA earned a fee income of US$ 2.8 million (2004: US$ 1.6 million), and profit after tax of US$ 0.6 million (2004: US$ 0.4 million).

AAA now employs a total of 14 consultants (including the partners) and 11 support staff. The support staff mainly work in administration, finance, research and marketing roles. AAA’s accounts for 2008 showed net assets of US$ 1.1 million (2004: US$ 1.0 million).

The business of AAA

AAA has a number of clients in financial services, manufacturing, construction, retail and logistics. Most of AAA’s clients can still be regarded as Small and Medium Enterprises (SMEs), but a few of them have now grown to become large and successful organisations. Indeed, AAA now has three clients in the ‘top ten’ of the country, ranked by turnover.In all projects, AAA ensures that the staff of the client organisation are fully involved in the consultancy process. Client staff are normally included as members of the project team, thus ensuring that the project has greater acceptance from the client organisation. As a result of this approach, AAA has a reputation for successful projects and has achieved some client referral and repeat business.

The staff retention problemUntil 2007, AAA had never ‘lost’ a key employee. The partnership was, and still is, viewed as a caring and loyal employer, at least matching the market rate in terms of salaries and benefits. The partners were confident that staff loyalty would continue, as AAA was still growing and provided both interesting and challenging projects and opportunities for career progression.

The partners were shocked when, in 2007, two consultants resigned to join rival consultancy firms. In 2008, another consultant left, this time to join a client organisation as director of finance. So far this year, a consultant resigned to set up his own business, and another chose not to return to the partnership at the end of an interim management assignment with a client. Although AAA has recruited suitably qualified replacements for the staff who have left, the cumulative effect of all these losses is that about a third of all AAA consultants have been with the firm for less than five years.

Mr AmitMr Amit is the partner of AAA responsible for administration, marketing and IT. He is keen to use AAA itself as a ‘pilot study’, with a view to offering knowledge management consultancy services to AAA’s clients. Mr Amit has found some information about knowledge management on the internet, part of which is reproduced below.

“Definition: Knowledge Management (KM) is the use of an organisation’s Intranet to allow staff to record their knowledge so it can be accessed by others. It is a modern IT solution to improve communication and facilitate organisational learning.”

Project resourcingWhen AAA begins a new consultancy project, the designated project manager ‘recruits’ the consultancy team from those consultants who are not engaged in another project. Staff are allocated to projects on a ‘first come, first served’ basis, so it is common for project


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managers to find that some of the consultants with the greatest experience in the required specialist areas are already engaged on another project and are thus unavailable.

Discuss the definition of Knowledge Management that Mr Amit obtained from the Internet.

Discuss the three main potential benefits of Knowledge Management to AAA.

Solution

(i)

The information provided suggests that “Knowledge Management (KM) is the use of an organisation’s Intranet to allow staff to record their knowledge so it can be accessed by others. It is a modern IT solution to improve communication and facilitate organisational learning.”

I have a number of concerns with this definition:

“Knowledge Management (KM) is the use of an organisation’s Intranet...” implies that KM requires an Intranet to work. This is not necessarily the case. Whilst the use of an Intranet will normally increase the effectiveness of any KM introduction, it is by no means a pre-requisite. KM is about sharing knowledge – an Intranet is just a tool to facilitate this.

“...to allow staff to record their knowledge so it can be accessed by others.” Whilst this may be true for ‘explicit’ knowledge, much of the higher level knowledge within organisations is ‘tacit’ – that is, incapable of being recorded. There are ways that tacit knowledge can be shared, without being recorded, such as mentoring and coaching.

“It is a modern IT solution...” KM is definitely not an ‘IT solution’. It is an organisation- wide, cultural change programme. Viewing it as an IT solution runs the risk of investing in expensive hardware and software for relatively little benefit.

“...to improve communication and facilitate organisational learning.” Whilst these are likely effects of a KM programme, there is a much greater purpose. KM should fundamentally change the way the organisation operates, and impact on every aspect of its business.

(ii)

The three main benefits of KM to AAA are likely to be as follows:

1. The development of a significant and sustainable competitive advantage. Consultancy is a knowledge-based business and a KM programme will allow AAA to provide its clients with better solutions more quickly. If the consultants are unwilling to share knowledge with one another, how can they share knowledge effectively with AAA’s clients? KM will also allow less experienced consultants to have access to the knowledge stock of experienced staff, thus allowing AAA to place better project teams with clients.


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2. The reduction of knowledge loss. If a KM implementation is successful, staff will share knowledge with each other and record the explicit aspects of that knowledge for use by others. The knowledge stock becomes an asset of AAA rather than remaining in the heads of individual staff. If a consultant leaves, the vast majority of their knowledge will be retained.

3. Reduced staff turnover. Staff in KM organisations are generally more satisfied, more highly motivated, and therefore less likely to leave. Consultancy staff often enjoy learning as much as they do advising clients. KM allows staff to learn continuously from their colleagues.


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Lecture 19 - Managing Supply Chain


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Illustration 1

B is a public company that operates 100 supermarkets in a European country. There are a number of other supermarkets operating in the country and the market is fiercely competitive. All of the supermarkets find it difficult to generate any customer loyalty and have found that customers are very price sensitive.

Like all other supermarkets in the country, B suffers a higher staff turnover than other retail outlets and this is recognised as one of the reasons for relatively low customer satisfaction and retention.

The marketing director has suggested that the company would benefit from introducing a credit card that its customers could use in its supermarkets and in other retail outlets within the country. At present, although all supermarkets in the country accept credit cards for payment for goods, no other supermarket offers its own credit card.

The marketing director claims that, in addition to the appeal to the customers, the credit card would allow B to gather large quantities of data about its customers. He feels this would offer advantages in terms of data mining, data warehousing and relationship marketing.

You are the management accountant for B. The finance director has said that she is unfamiliar with these techniques and has asked you to provide some explanations and advice in the context of B’s business.

(i) Describe relationship marketing in the context of B’s business applying the “six markets” model.

(ii)Recommend, with reasons, strategies that B can use to develop relationship marketing and improve customer loyalty.


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Solution

The six markets model suggests that relationship marketing should extend beyond the customer and consider a broader picture. The six markets are described as follows:

• Customer markets. These are the buyers of the final product and remain the objective of a firms marketing efforts. In the case of B, this would be the customers who shop at the supermarket and purchase the goods from the shelves.

• Referral markets. These are institutions and individuals who refer, and hopefully, recommend the customer to us. This might simply be a neighbour of a customer who says how good the store is or may be a newspaper which writes a good review of the experience in the store.

• Supplier markets. This relates to the partnerships with suppliers that are, increasingly, replacing the adversarial relationships that have traditionally existed between suppliers and supermarkets. As B attempts to build customer loyalty, it will need to be sure of supplies and the development of new products based on the information that it gathers from its data mining exercise.

• Recruitment markets. As B tries to build better relationships with its customers, it will need the right staff to do so. If B has built a strong relationship with all of the sources of staff which can range from recruitment agencies to schools, it is likely to find it easier to recruit the most appropriate staff for its needs.

• Influence markets. There are organisations which will be able to influence customers in their choice of both products and the places where they buy them. These are often watchdog groups, or consumer associations whose role is to protect customers’ interests. If they hold a favourable view of B, it will be to the benefit of the company.

• Internal markets. Within an organisation there are a number of departments and those departments will deal with each other on a regular and frequent basis. If they operate in the spirit of cooperation and collaboration, it is likely that they will work more efficiently and effectively and provide the customer with a better experience. In the case of B, the closer the buying department, the market analysis department and the departments that are actually customer facing work together, the better the customers are likely to be served.

(ii)

There are a number of strategies that are used to develop relationship marketing within an organisation. Those that are specifically relevant to B are:

• Develop incentive schemes for the staff that encourage customer retention. For example, staff could be rewarded based on the outcomes of customer satisfaction surveys. Similarly, all bonuses should be group based, emphasising that customer retention is a key task for everyone. This could be measured by the frequency with which customers returned to shop in B.

• Reduce staff turnover to maintain customer loyalty and ensure consistent service standards in the supermarket branches. As customers see the same, welcoming


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faces in their branch of the supermarket, they will be more inclined to return to that store rather than to that of a competitor.

• Adopt quality procedures which monitor and influence all aspects of the customer relationship. This would involve introducing total quality management programmes and a significant investment in the training of staff.

• Have regular contact with customers to assess satisfaction and take appropriate action, ensuring that the customer is aware that the action has been taken. This could be done by focus groups with particular segments of the customer base, those families with new babies for instance.

• Use data mining techniques to develop detailed information on customers’ buying tastes and habits and make this available to those staff responsible for development of new products.

• Use the same information to target promotions and offers to specific customers’ tastes and needs. Those families with school age children could be targeted with appropriate promotions in the month prior to the school year starting.

• Develop affinity devices such as credit cards, magazines and user clubs to build loyalty.

• Develop benefits programmes linked to customer loyalty such as discounts for repeat purchases.


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Lecture 20 - Marketing


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Illustration 1

Introduction The Accounting Education Consortium (AEC) offers professional accountancy education and training courses. It currently runs classroom-based training courses preparing candidates for professional examinations in eight worldwide centres. Three of these centres are also used for delivering continuing professional development (CPD) courses to qualified accountants. However, only about 30% of the advertised CPD courses and seminars actually run. The rest are cancelled through not having enough participants to make them economically viable.

AEC has developed a comprehensive set of course manuals to support the preparation of its candidates for professional examinations. There is a course manual for every examination paper in the professional examination scheme. As well as being used on its classroom-based courses, these course manuals are also available for purchase over the Internet. The complete set of manuals for a professional examinations scheme costs $180·00 and the web site has a secure payment facility which allows this to be paid by credit card.

Once purchased, the manuals may be downloaded or they may be sent on a CD to the home address of the purchaser. It is only possible to purchase the complete set of manuals for the scheme, not individual manuals for particular examinations. To help the student decide if he or she wishes to buy the complete manual set, the web site has extracts from a sample course manual. This sample may be accessed, viewed and printed once a student has registered their email address, name and address on the web site.AEC has recently won a contract to supply professional accountancy training to a global accounting company. All students working for this company will now be trained by AEC at one of its worldwide centres.

Web siteThe AEC web site has the following functionality: Who we are: A short description of the company and its products and services. Professional education courses: Course dates, locations and standard fees for professional examination courses. This schedule of courses is printable. Continuing professional development: Course dates, locations and standard fees for CPD courses and seminars. This schedule is also printable. CPD catalogue: Detailed course and seminar descriptions for CPD courses and seminars. Downloadable study material: Extracts from a sample course manual.

Visitors to the site wishing to access this material must register their email address, name and address. 5,500 people registered last year to download study material. Purchase study material: Secure purchase of a complete manual set for the professional scheme. Payment is by credit card. On completion of successful payment, the visitor is able to download the manuals or to request them to be shipped to a certain address on a CD. At present, 10% of the people who view downloadable study material proceed to purchase. Who to contact: Who to contact for booking professional training courses or CPD courses and seminars. It provides the name, email address, fax number, telephone number and address of a contact at each of the eight worldwide centres.

Marketing strategyThe marketing manager of AEC has traditionally used magazines, newspapers and direct mail to promote its courses and products. Direct mail is primarily used for sending printed course catalogues to potential customers for CPD courses and seminars. However, she is


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now keen to develop the potential of the Internet and to increase investment in this medium at the expense of the traditional marketing media. Table 1 shows the percentage allocation of her budget for 2008, compared with 2007. The actual budget has only been increased by 3% in 2008.

Percentage allocation of marketing budget (2007–2008)

! ! ! 2007" " 2008Advertising ! ! 30% 40%Direct mail ! ! 10%! ! 30%Sponsorship !! 10%! ! 10%Internet! ! 50%! ! 20%

Explain, in the context of AEC, how the marketing characteristics of electronic media (such as the Internet) differ from those of traditional marketing media such as advertising and direct mail.

Solution

A key characteristic of traditional marketing media such as advertising and direct mail is that it is predominantly a ‘push’ technology where the media is distributed to customers and potential customers. There is limited interaction with the customer and indeed, in the case of advertising and to a lesser degree direct mail, there is no certainty that the intended recipient actually received the message. In contrast, the new media, particularly the Internet, is predominantly a ‘pull’ technology – the customer having initiated the visit to the web site. This may lead to subsequent push activities, such as sending e-mails to people who have registered their interest on the site, but the initial communication is a pull event. The marketing manager must be careful that, by switching so much of her budget to pull technologies, she does not forego opportunities to find new customers – or reinforce her message – through established push technologies. She must ensure that the company’s web site is established in such a way that sufficient people find it, and that when they do, they are prepared to record enough details to allow subsequent push activities.

Dave Chaffey examines the difference between traditional and new marketing media in the context of six ‘I’s; interactivity, intelligence, individualisation, integration, industry restructuring and independence of location. Four of these are used in this answer.Interactivity is a significant feature of the new media, allowing a long-term dialogue to develop between the customer and the supplier. In the context of the web site, this is likely to be through e-mails, providing the customer with information and special offers for their areas of specific interest. To initiate this dialogue the web site must capture information such as e-mail address, name, age, gender and areas of interest. The AEC site only collects such information for people who wish to view downloadable study material. This is too restrictive and it will probably exclude all the potential CPD customers. AEC needs to consider ways of making it easier and worthwhile for visitors to the site to register their details. There is no evidence of AEC contemplating the potential use of interactive digital TV or mobile phones to establish long-term dialogues with their customers.


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Intelligence has also been a key feature of the new media – allowing the relatively cheap collection of marketing research data about customers’ requirements. This is routinely available from web logs and these logs need to be viewed and analysed using appropriate software. This type of analysis is rarely available in the traditional media. For example, AEC does not know how often their training course catalogue is accessed and which pages are looked at. It only knows which training courses are eventually bought. With the new media the company is able to see which services and products are accessed and also to measure how many of these are turned into actual sales. This conversion rate may be an important source of information – for example, why are certain web pages often visited but few sales result – is it a problem with the web page? – is it a problem with the product? An understanding of visit patterns allows the organisation to focus on particular products and services. This analysis should already be available to AEC but there is no evidence that it uses it or is even aware of it.

The new media also permit the marketing to be individualised, geared to a particular market segment, company or individual person. In the context of AEC this individualisation could be achieved in at least two ways to reflect clear market segmentation. AEC has recently won a contract to supply professional accountancy training to a global accounting company. All students working for this company will now be trained by AEC in one of its worldwide centres. At present this company and its students will be served through a generic web site. However, the flexibility of the new media means that a site could be developed specifically for this requirement. The whole site would be geared, and branded, towards the requirements of the global accounting company. Information that is irrelevant to that customer, such as CPD, would not appear on the site. This individualised approach should strengthen the relationship with the customer. Similarly, individuals may have their own access customised as a result of the profile that they have entered. So, for example, if they have already stated that they are currently sitting the professional stage of an examination scheme then only information relevant to that stage will be presented to them when they log in. This is an example of the principle of mass customisation that was only available in a limited form in the traditional media. AEC does not exploit this at present, but uses a generic web site that looks and feels the same, whoever the user is.

Finally, the new media provide independence of location allowing the company to move into geographical areas that would have been unreachable before. The Internet effectively provides a world wide market that is open 24 hours per day, seven days per week. It is difficult to think of any traditional media which would have permitted this global reach so cheaply. Furthermore, the web site might also omit the actual physical location of the company because there is no requirement for information to be physically sent to an address. It should also be impossible for the potential customer to gauge the size of the supplying company. AEC has exploited this to some extent as it serves a world-wide market from no clear geographical centre. However, the absence of on-line course booking means that certain physical contact details have to be provided and these might undermine the global perspective.


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Lecture 21 - Roll of Process


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Illustration 1

Explain, using Harmon’s process-strategy matrix, how the complexity and strategic importance of process initiatives can be classified.

Solution

LDB could assess the priority of the three initiatives on the process-strategy matrix suggested by Paul Harmon. The matrix has two axes. The vertical axis is concerned with process complexity and dynamics. At the base of the vertical axis are simple procedures often with simple algorithms while at the top are complex processes which may require negotiation, discussion and complicated design.

On the horizontal axis is the strategic value of these processes. Their importance increases from left to right with low value processes concerned with things that must be done but which add little value to products or services. On the extreme right of this axis are high value processes which are very important to success and add significant value to goods and services. From these two axes, Harmon categorises four quadrants and makes suggestions about how processes should be tackled in each quadrant.

Low strategic importance, low process complexity and dynamicsThis quadrant contains relatively straightforward stable processes which add little business value. They are processes that must be done in the company but add nothing to the company’s value proposition. These processes need to be automated in the most efficient way possible. They are often called ‘commodity processes’ and are suitable for standard software package solutions and/or outsourcing to organisations that specialise in that area.

Low strategic importance, high process complexity and dynamicsThis quadrant is for relatively complex processes that need to be done but do not add significant value to the company’s products or services. They are not at the heart of the company’s core competencies. Harmon suggests that these should be outsourced to organisations which have them as their core business.

High strategic importance, low process complexity and dynamicsThese processes lie in the lower right quadrant of the model. They tend to be relatively straightforward processes which, nevertheless, have a significant role on the organisation’s activities. They are central to what the business does. The aim is to automate these, if possible, to gain cost reduction and improve quality and efficiency.

High strategic importance, high process complexity and dynamicsFinally, in the top right hand quadrant are high value, complex processes which often include human judgement and expertise and are often very difficult to automate. Harmon suggests that these might be the focus of major process redesign initiatives focusing on business process improvement through the improved performance of the people undertaking those processes.


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Illustration 2

Branch rationalisation project Four years ago Lowlands Bank acquired Doe Bank, one of its smaller rivals. Both had relatively large local branch bank networks and the newly merged bank (now called LDB) found that it now had duplicated branches in many towns. One year after the takeover was finalised, LDB set up a project to review the branch bank network and carry out a rationalisation that aimed to cut the number of branches by at least 20% and branch employment costs by at least 10%. It was agreed that the project should be completed in two years. There were to be no compulsory staff redundancies. All branch employment savings would have to be realised through voluntary redundancy and natural wastage.

LDB appointed its operations director, Len Peters as the sponsor of the project. The designated project manager was Glenys Hopkins, an experienced project manager who had worked for Lowlands Bank for over fifteen years. The project team consisted of six employees who formerly worked for Lowlands Bank and six employees who formerly worked for Doe Bank. They were seconded full-time to the project.

Project issues and conclusionDuring the project there were two major issues. The first concerned the precise terms of the voluntary redundancy arrangements. The terms of the offer were quickly specified by Len Peters. The second issue arose one year into the project and it concerned the amount of time it took to dispose of unwanted branches. The original project estimates had underestimated how long it would take to sell property the bank owned or to re-assign or terminate the leases for branches it rented. The project board overseeing the project agreed to the project manager’s submission that the estimates had been too optimistic and they extended the project deadline for a further six months.

The project team completed the required changes one week before the rearranged deadline. Glenys Hopkins was able to confirm that the branch network had been cut by 23%. Six months later, in a benefits realisation review, she was also able to confirm that branch employment costs had been reduced by 12%. At a post-project review the project support office of the bank confirmed that they had changed their project estimating assumptions to reflect the experience of the project team.

Potential process initiativesLDB is now ready to undertake three process initiatives in the Information Technology area. The IT departments and systems of the two banks are still separate. The three process initiatives under consideration are:

1. The integration of the two bespoke payroll systems currently operated by the two banks into one consolidated payroll system. This will save the costs of updating and maintaining two separate systems.

2. The updating of all personal desktop computer hardware and software to reflect contemporary technologies and the subsequent maintenance of that hardware. This will allow the desktop to be standardised and bring staff efficiency savings.

3. The bank has recently identified the need for a private personal banking service for wealthy customers. Processes, systems and software have to be developed to support this new service. High net worth customers have been identified by the bank as an important growth area.


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The bank will consider three solution options for each initiative. These are outsourcing or software package solution or bespoke development.

The branch rationalisation was a successful project.

Recommend and justify a solution option for each of the three process initiatives.

Solution

In the context of LDB, the following is suggested. Clearly these are value judgements and credit will be given for coherently argued answers which do not match the examiner’s conclusions.

–! The integration of the two bespoke payroll systems currently operated by the two banks into one consolidated payroll system. Payroll has to be produced but does not add significant value to the end-customer. It is unlikely that the recipients of the system (the bank staff) will notice any difference if a new system is implemented. The bank is considering re-developing this process because of the high cost of updating and maintaining two separate systems. This appears to be of low strategic importance. From the case study it is not clear how complex the payroll requirements are or how difficult it will be to transfer data from the current systems to a new solution. The most obvious approach is to suggest that a standardised software package is bought and data transferred to this solution. It appears sensible to undertake this work using the in-house IT departments who will be familiar with the current systems and so should be able to undertake accurate data mapping and successful data transfer to the new system. However, if this is difficult and time-consuming, there might be some benefit in outsourcing the solution and data transfer problems to a specialist software provider, allowing internal IT to concentrate on more strategic applications.

–! The updating of all personal computer hardware and software to reflect contemporary technologies and the subsequent maintenance of that hardware. The bank is perhaps looking for efficiency savings through the standardisation of the desktop. Again, this does not appear to directly give value to the bank’s customers. Consequently, this also appears to be of low strategic importance. However, it could be of relatively high complexity, particularly when considering the maintenance of hardware. There seems a clear case for outsourcing this process to a specialist technology company who can bring all hardware and software up to date and then maintain it at that level.

–! The development of processes, systems and software to support private banking. This appears to be of high strategic importance and high complexity. It delivers services to end-customers who the bank has identified as a source of business growth. Elements of human judgement and interaction will be required when providing this service. The fulfilment of personal requirements for the wealthy customer will bring variety, risk and reward. The development of processes, systems and software to support private banking should have high priority and should be developed in-house. The success of such an operation should deliver handsome profits to LDB. This may mean that, given resources are finite, the development of the new payroll system should be outsourced to a specialist in that functional area.


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Lecture 22 - Lean Systems & Innovation


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Illustration 1

C is one of several insurance companies which offer insurance policies covering general risks relating to individuals and families. Cost efficiency is a major factor in the success of the companies in this industry. Competition is fierce.

Over the past three years C has seen the volume of business increase but profits have remained static due to declining margins.

Although some of the processes within C are computerised, most of the processes which involve communication with customers are still paper-based. Responses from telephone enquiries involve paper-based communications both with the enquirers and internally within C. Additionally, sales staff visit potential customers in their homes to try to sell them insurance policies for their homes and their possessions. These transactions are again paper-based. This process is often slow and has led to complaints both from customers and from the company’s sales staff.

C has also been receiving a regular, and increasing, number of complaints from current and potential customers about errors in the paperwork that they receive.

The Board of Directors of C has announced that there is a need for a business process re- engineering exercise to be conducted with the intention of modernising the business. The intention is to streamline the business model as much as possible and to increase the profitability of the company. C intends to computerise almost all of the work done within the company.

A number of staff have expressed concern about business process re-engineering and its implications for those who work at C.

Explain the stages involved in implementing a BPR exercise that might be undertaken by C.


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Solution

C intends to conduct a BPR exercise to streamline the business model in operation. This is being done to improve the customer experience by reducing the error rate and by speeding the process generally. Additionally, C will want to improve the margins on the business to increase the profitability.

The stages that the BPR process should go through are as follows:

1. Clearly set the scope of the project re-design. The company wishes to improve the transactions between customers and sales staff. These sales staff operate both in the office, by telephone, and in the potential customers’ homes. The process will involve recording the customers’ details, the nature of the risk to be covered and providing a quote for the variety of options that can be provided by C.

2. Analyse the existing process & reasons for change. In the case of C the change levers that make the process improvement necessary are the declining margins, the increased error count, the customer dissatisfaction, and the fiercely competitive nature of the industry. The existing processes within C will need to be comprehensively mapped and understood. Once this has been comprehensively recorded and understood it is possible to look for areas where IT/IS could be incorporated to improve the efficiency of the operation.

3. Develop the process vision. C needs to have a clear idea of what it wishes to achieve by the improvement process. There should be targets set at the beginning of the exercise which will specify the speed with which enquiries will be answered, the acceptable level of errors, the level of customer satisfaction and the margins that should be achieved on the business conducted.

4. Design and prototype the new process. The proposed new system can then be developed and tested on a relatively small part of the operation. Before the trial commences there should be thorough training of the staff to be involved. As a result of those trials there may be adjustments necessary before the system can be rolled out across the whole of C.

5. Manage the implementation of the new process. There will be a need for training of all staff that would be affected by the proposed process changes. Those who were involved in the testing stage should be used as product champions to assist in the training and familiarisation process.


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Lecture 23 - Change Management


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Illustration 1

WAL is a manufacturer of biscuits which it sells to retailers. Its current year’s revenue of £120 million represents approximately 3% of the UK market. WAL has a centralised marketing information system based on a software package bought in 2005. This package is financial accounts orientated: the only management information provided to support the marketing staff consists of reports showing revenue, profit, inventory value, receivables and payables balances. WAL’s marketing staff and the Marketing Director, M, have complained that they are not provided with information such as customers’ profitability, market share and market growth which would support their strategic decision-making.

They consider the inadequacies of the current marketing information system to be so serious that they would like a Big Bang change which would mean moving straightaway to a new marketing information system that would give them the information they need. They feel WAL is being left behind by its competitors and is losing customers.

The Company Secretary, R, manages WAL’s IS/IT staff. R was responsible for buying the existing marketing information software in 2005 and he would also be responsible for the procurement of its replacement. R has identified three possible solutions to meeting the marketing staff’s needs: the first two are evolutionary, the third would be a 'Big Bang'.

Solution 1Modification: the existing marketing information system would be redesigned by WAL’s in- house IS/IT staff to meet the needs of the marketing staff. Although WAL’s IS/IT staff have limited experience of the type of work which would be required, they are confident the redesign could be done within a year. The IS/IT staff are unsure of the cost.

Solution 2Development: WAL’s in-house IS/IT staff would develop new bespoke software to meet the marketing staff’s needs. The IS/IT staff have stated that ‘because WAL’s needs are unique, costs can only be roughly estimated. However, this solution is likely to be considerably more expensive than the 'Modification' solution. The final cost would be dependent upon the length of the project. It should take a minimum of six months to develop new software but it might take as long as two years. We have little experience of software development but are very enthusiastic about trying’.

Solution 3Purchase: WAL could purchase the biscuit industry standard marketing information system software: this would be an expensive purchase but the product is well proven. Some of WAL’s marketing staff have experience of using this software in other companies, are very appreciative of its benefits and believe it would help them considerably in their jobs. The software supplier claims that ‘90% of the biscuit industry uses our product and if you buy it we guarantee to have it working inside WAL within three months of you buying it’.

R believes that he represents the majority of opinion within the IS/IT staff who very much prefer that change should be evolutionary. They would be very resistant to change if it was carried out in any other way. R also pointed out that WAL has experience of 'Big Bang' organisational change in the recent past which failed because WAL’s culture didn’t change to reflect this.

R stated, ‘It looks straightforward to go out and buy a software package but it’s a lot more complicated than people think and it’s my department that would have to do all the work.


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(i) Explain the circumstances in which it would be appropriate to use

1. Evolutionary change. 2. 'Big Bang' change.

(ii) Evaluate each of the three solutions proposed by R. and suggest which should be adopted.


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Solution

The case for change to WAL’s software-based marketing information system seems to have been accepted by the two main parties which will be affected by the change: the marketing staff and the Company Secretary, R.

What is in dispute is the speed of the required change. The marketing staff want change to be revolutionary: to happen straightaway. R is opposed to revolutionary change and has suggested three possible solutions.

The first two of these would be evolutionary, i.e. not be immediate: purchase would be revolutionary, i.e. quick, but R is sceptical about its effectiveness.

1. Evolutionary change is appropriate when it's a proactive response to anticipated changes in the environment. However, in the case of WAL’s marketing information system the changes in the environment have already happened: WAL is ‘being left behind by its competitors and is losing customers’.

2. Big Bang/Revolutionary change is likely to be forced and reactive because of changing competitive conditions which is the situation in which WAL finds itself.

The case for revolutionary change to WAL’s marketing information system seems to be dominant, that is, it should happen. However, a caveat needs to be noted because of R’s opposition and WAL’s previous experience of failed change.

(ii)

Solution 1 - ModificationThis solution relies upon WAL’s in-house IS/IT staff who have limited experience of the work which would be required and they are ‘unsure of the cost.’ Despite their lack of relevant experience the IS/IT specialists are confident that they could complete the work within a year.

The judgement that this project could be completed within a year is questionable because of the staff’s lack of experience. The staff’s uncertainty about the cost means that WAL may pay excessively for this project's completion.

As this solution relies upon modifying what is an inadequate system, the final result may not meet WAL’s marketing staff’s needs: neither will it present them with a quick enough remedy to the current system’s inadequacies.

An important advantage of this solution is that it would fit the preference of R and the IS/IT staff for evolutionary change. As these are people who would be closely affected by the change to the marketing information system their views should be taken into consideration.

SummaryThis solution is not recommended because the lack of certainty about its duration, cost and ability to meet its users’ needs.

Solution 2 - Development


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WAL’s IS/IT staff would like the opportunity to develop new bespoke software themselves to meet the marketing staff’s needs. If this solution was adopted it could have a positive motivational effect on the IS/IT staff. This solution would also meet the preference expressed by R for evolutionary change although it would not satisfy the marketing staff’s need for a rapid change.

They have stated that ‘because WAL’s needs are unique, costs can only be roughly estimated. However, this solution is likely to be considerably more expensive than the 'Modification' solution. The final cost would be dependent upon the length of the project. It should take a minimum of six months to develop new software but it might take as long as two years. 'We have little experience of software development but are very enthusiastic about trying’.

SummaryThis solution has an uncertain duration and cost. It is dependent upon WAL’s IS/IT staff who have little experience of software development. For these reasons, this solution is not recommended.

Solution 3 - PurchaseWAL could buy the biscuit industry standard software. This software is expensive but there would be a boundary put upon its cost which would be its contractual price. This provides WAL with certainty.

The software is a proven product and some of WAL’s marketing staff have experience of using this software in other companies, are very appreciative of its benefits and believe it would help them considerably in their jobs. The software supplier claims that ‘90% of the biscuit industry uses our product’. This suggests that this software would be readily accepted by its users. If the supplier’s claim about having the software working within three months is a valid one, this solution would meet the need of the marketing staff for a revolutionary, rapid change.

As WAL does not currently use the biscuit industry marketing information software it may be operationally at a competitive disadvantage: the Purchase solution would put WAL on an equal footing, in this respect, with its competitors.

However, R is resistant to the Purchase solution and has indicated that the majority of IS/IT staff prefer evolutionary change and would be resistant to this solution. R was responsible for buying the current marketing information system and may feel that its proposed replacement is a criticism of the decision he made in 2005.

As R would make the decision about Purchase he would not want to be responsible for a failure. Although there is a high failure rate for software projects this would be a consideration for all three options so it should not preclude the Purchase option.R also believes that many of his staff would be resistant to this option and he would have to deal with the problems this would create.

SummaryThe Purchase option would give WAL the biscuit industry standard marketing information software. It would have a known cost and a guaranteed time span for implementation. This software should be readily accepted by marketing staff and would remove a possible source of competitive disadvantage.


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Although the Purchase solution is likely to provoke some resistance to change within WAL it is the recommended solution because of its speed, known cost and its proven ability to meet the needs of WAL’s marketing staff.


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Illustration 2

Introduction Frigate Limited is based in the country of Egdon. It imports electrical components from other countries and distributes them throughout the domestic market. The company was formed twenty years ago by Ron Frew, who now owns 80% of the shares. A further 10% of the company is owned by his wife and 5% each by his two daughters.

Although he has never been in the navy, Ron is obsessed by ships, sailing and naval history. He is known to everyone as ‘The Commander’ and this is how he expects his employees to address him. He increasingly spends time on his own boat, an expensive motor cruiser, which is moored in the local harbour twenty minutes drive away. When he is not on holiday, Ron is always at work at 8.00 am in the morning to make sure that employees arrive on time and he is also there at 5.30 pm to ensure that they do not leave early.

However, he spends large parts of the working day on his boat, although he can be contacted by mobile telephone. Employees who arrive late for work have to immediately explain the circumstances to Ron. If he feels that the explanation is unacceptable then he makes an appropriate deduction from their wages. Wages, like all costs in the company, are closely monitored by Ron.

Employees, customers and suppliersFrigate currently has 25 employees primarily undertaking sales, warehousing, accounts and administration. Although employees are nominally allocated to one role, they are required to work anywhere in the company as required by Ron. They are also expected to help Ron in personal tasks, such as booking holidays for his family, filling in his personal tax returns and organising social events.

Egdon has laws concerning minimum wages and holidays. All employees at Frigate Ltd are only given the minimum holiday allocation. They have to use this allocation not only for holidays but also for events such as visiting the doctor, attending funerals and dealing with domestic problems and emergencies. Ron is particularly inflexible about holidays and work hours. He has even turned down requests for unpaid leave. In contrast, Ron is often away from work for long periods, sailing in various parts of the world.

Ron is increasingly critical of suppliers (‘trying to sell me inferior quality goods for higher prices’), customers (‘moaning about prices and paying later and later’) and society in general (‘a period working in the navy would do everyone good’). He has also been in dispute with the tax authority who he accused of squandering his ‘hard-earned’ money. An investigation by the tax authority led to him being fined for not disclosing the fact that significant family expenditure (such as a holiday for his daughters overseas) had been declared as company expenditure.

Company accountantIt was this action by the tax authority that prompted Ron to appoint Ann Li as company accountant. Ann had previously worked as an accountant in a number of public sector organisations, culminating in a role as a compliance officer in the tax authority itself. Ron felt that ‘recruiting someone like Ann should help keep the tax authorities happy. After all, she is one of them’.


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Ann was used to working in organisations which had formal organisational hierarchies, specialised roles and formal controls and systems. She tried to install such formal arrangements within Frigate. As she said to Ron ‘we cannot have everyone working as if they were just your personal assistants. We need structure, standardised processes and accountability’. Ron resisted her plans, at first through delaying tactics and then through explicit opposition, tearing up her proposed organisational chart and budget in front of other employees. ‘I regret the day I ever made that appointment’, he said. After six months he terminated her contract. Ann returned to the tax authority as a tax inspector.

Required:The cultural web allows the business analyst to explore ‘the way things are done around here’.

Analyse Frigate Ltd using the cultural web or any other appropriate framework for understanding organisational culture.


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Solution

The cultural web is a representation of the taken-for-granted assumptions, or paradigm, of an organisation. The question specifically references the cultural web, but any framework that is appropriate for understanding the culture of an organisation can be used.

Symbols such as logos, offices, cars, titles, language and terminology are a shorthand representation of the nature of the organisation. At Frigate, the adoption of the term ‘Commander’ by its managing director, Ron Frew, and his use of naval terminology is indicative of how he wishes to be perceived and the way he wants the company to run. Indeed the name of the company itself reflects his naval obsession. The main symbol of his success is the motor cruiser that Frew owns and moors at the local port. The irony is that Frew actually has no naval experience. He is acting out a stereotype of how he perceives naval life to be.

Power structures are also likely to influence the key assumptions of an organisation. The most powerful groupings within the organisation are likely to be closely associated with core assumptions and beliefs. At Frigate, power is centred on one person. Leadership comes from a person who holds strongly held views, opinions and beliefs.The organisational structure is likely to reflect power and show important roles and relationships. At Frigate, there is little formal structure and Ann Li’s attempt to put one in place was opposed.

Control systems, measurements and reward systems emphasise what is important to monitor in the organisation. Frew is primarily concerned with cost control. Emphasis is on punishment (making deductions from wages for late arrival), rather than reward, which fits his naval stereotype. There appear to be few formal process controls and relationships with both customers and suppliers are confrontational. Ann Li’s attempt to install formal controls throughout the organisation was resisted by Frew.

Routines and rituals define the ‘way we do things around here’. For Frew there is a distinction between the routines of staff (must arrive on time, minimum holidays with no flexibility) and the rules that apply to himself – flexible working, long holidays, the expectation that employees will help him with his personal life.

The stories told by members of an organisation are usually concerned with success, disasters, heroes, villains and mavericks. It appears that Frew is the hero, seeing off lazy staff, unscrupulous suppliers (trying to sell me inferior quality goods for higher prices), problematic customers (moaning about prices and paying later and later) and bureaucratic officials (squandering my hard-earned money). These are identified as the villains. He even extends his stories to society as a whole, believing that a period working in the navy would do everyone good.

Finally, the company paradigm summarises and reinforces the other elements of the cultural web. Underpinning all of this is Frew’s belief that the company is run for his own gratification and that of his immediate family. The benefits he receives and the lifestyle he enjoys is his reward for being a risk taker in a hostile environment which is always trying to limit him. He appears to see expenditure on his family (such as share gifts and holidays) as perfectly acceptable.


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Lecture 24 - Managing Change


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Illustration 1

WAL is a manufacturer of biscuits which it sells to retailers. Its current year’s revenue of £120 million represents approximately 3% of the UK market. WAL has a centralised marketing information system based on a software package bought in 2005. This package is financial accounts orientated: the only management information provided to support the marketing staff consists of reports showing revenue, profit, inventory value, receivables and payables balances. WAL’s marketing staff and the Marketing Director, M, have complained that they are not provided with information such as customers’ profitability, market share and market growth which would support their strategic decision-making.

They consider the inadequacies of the current marketing information system to be so serious that they would like a Big Bang* change which would mean moving straightaway to a new marketing information system that would give them the information they need. They feel WAL is being left behind by its competitors and is losing customers.

The Company Secretary, R, manages WAL’s IS/IT staff. R was responsible for buying the existing marketing information software in 2005 and he would also be responsible for the procurement of its replacement. R has identified three possible solutions to meeting the marketing staff’s needs: the first two are evolutionary, the third would be a 'Big Bang'.

Solution 1Modification: the existing marketing information system would be redesigned by WAL’s in- house IS/IT staff to meet the needs of the marketing staff. Although WAL’s IS/IT staff have limited experience of the type of work which would be required, they are confident the redesign could be done within a year. The IS/IT staff are unsure of the cost.

Solution 2Development: WAL’s in-house IS/IT staff would develop new bespoke software to meet the marketing staff’s needs. The IS/IT staff have stated that ‘because WAL’s needs are unique, costs can only be roughly estimated. However, this solution is likely to be considerably more expensive than the 'Modification' solution. The final cost would be dependent upon the length of the project. It should take a minimum of six months to develop new software but it might take as long as two years. We have little experience of software development but are very enthusiastic about trying’.

Solution 3Purchase: WAL could purchase the biscuit industry standard marketing information system software: this would be an expensive purchase but the product is well proven. Some of WAL’s marketing staff have experience of using this software in other companies, are very appreciative of its benefits and believe it would help them considerably in their jobs. The software supplier claims that ‘90% of the biscuit industry uses our product and if you buy it we guarantee to have it working inside WAL within three months of you buying it’.

R believes that he represents the majority of opinion within the IS/IT staff who very much prefer that change should be evolutionary. They would be very resistant to change if it was carried out in any other way. R also pointed out that WAL has experience of 'Big Bang' organisational change in the recent past which failed because WAL’s culture didn’t change to reflect this.

R stated, ‘It looks straightforward to go out and buy a software package but it’s a lot more complicated than people think and it’s my department that would have to do all the work.


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Advise how WAL could overcome the resistance to change which would arise if Solution 3, the purchase solution, were to be adopted.


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Solution

R, who has an influential position as Company Secretary, appears to be resistant to change, in general, unless it is done slowly and incrementally. He claims that this view is shared by a sizable body of opinion within WAL. He has also pointed out that WAL has experience of change in the recent past which failed because WAL’s culture didn’t change and also that it would be his department that would have to do all the work. R has expressed serious anxieties based on his past experience, the amount of work a new software package represents and, if he is right, some of these anxieties are shared by others within WAL.

Unless R’s views are taken into account he may prove a serious obstruction to the change process and prevent it happening. Two of the solutions which R has proposed, Modification and Development, may not be genuine responses to the marketing staff’s requirements but may be ways of postponing change.

Kotter and Schlesinger proposed the following six point approach for dealing with resistance to change.

1. Education and communicationR and his IS/IT colleagues need to be convinced that the limitations of the existing software package are a serious constraint upon WAL. Given that R and his staff are likely to be concerned for WAL’s success, if they can be persuaded that the old software is obsolete then they might be prepared to accept a faster rate of change, and, purchase the industry standard software. R’s point about the need for cultural change is also valid and WAL needs to take this into account.

R’s concerns, and those of people who think like him, should be acknowledged and provision made within the replacement project plan to deal with the issues raised by them.

2. Participation and involvementBecause of R’s position he would be intimately involved in the Purchase solution. This means he would have every opportunity to be involved with the project. R could use his position to involve other members of his staff. The impetus for the change has come from outside R and his IS/IT colleagues: such a change cannot be imposed but will necessarily require the active participation and involvement of R and the IS/IT staff. If they are given opportunities to participate in the purchase of the new software this should increase their commitment to the change and make it more likely to work.

3. Facilitation and supportR was responsible for buying the original software program in 1985 and will be responsible for buying the replacement one. It could be that the source of R’s resistance is because he anticipates he will have problems implementing the new software and adjusting to the new demands inherent within it. R may be helped by having some of the responsibility for the project being shared with other staff within WAL. He may also need to be reassured that his personal position will not be jeopardised. Similarly, support could be offered to any of the IS/IT staff who need it, if, for example, they lack skills to deal with the new software. In such a case they could be offered training.

4. Negotiation and agreementR’s resistance could be reduced if he is allowed to negotiate the degree of his involvement in the project. If R can be made to feel empowered rather than threatened his attitude


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could change. The IS/IT staff may also feel threatened by the forthcoming change: R has reported that a majority of these staff prefer change to take place incrementally. The Purchase solution represents revolutionary change but it may be possible for IS/IT staff to be reconciled to this change. For example, based on what R has reported there is a minority of IS/IT staff who are not opposed to revolutionary change: perhaps these could be tasked with the introduction and implementation of the new marketing information system software. The majority of staff who prefer evolutionary change could be used in parts of WAL’s business where either no change or gradual change is contemplated.

5. Manipulation and co-optationThis approach can be used when other approaches won’t work or are too costly. However, CIMA members should be very cautious in case this conflicts with CIMA’s ‘Code of Ethics’ or with general business ethics. Further, WAL may be trying to conduct its business ethically and may feel that manipulation and co-optation lie outside the scope of ethical business.

This approach may work in the short-term but may have adverse long-term consequences. Further, although it might be possible to manipulate R into accepting the changes this could rebound on WAL later if R realises he has been manipulated.

6. Explicit and implicit coercionThis method relies on the use of power, or the threat of force to enforce change. This method would not generally be recommended for a CIMA member as it conflicts with the spirit of the Code of Ethics although not any particular written section. However, there may be occasions where coercion is justifiable as with any ethical dilemma a choice has to be made between the lesser of two evils.

Kotter and Schlesinger published their model in 1979 since when it is arguable that what is acceptable business behaviour has changed.


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Illustration 2

MMM is a university whose mission is 'to be the best'. It has a wide range of educational activities and is organised into six departments:1. Arts 2. Medicine 3. Law 4. Engineering 5. Natural Sciences 6. Theology

Each of the six departments above is controlled by a senior manager, known as a Head who has operational responsibility for their department’s activities throughout the university.

On the advice of management consultants, it has now been decided to reorganise the University and establish the following three new departments which will replace the current six departments listed above:

1. Student experience: this includes teaching, welfare, progression, pass rates and quality for both undergraduates and postgraduates.

2. Research: this includes academic research and commercial research. 3. All profit-making activities other than commercial research.

Each of the new departments will be managed by one of the existing Heads. MMM wants to introduce a control system for its Heads and departments that will measure their performance against strategic and operational targets using quantitative and qualitative criteria. MMM’s executive board has the following objectives for the new control system:

To develop the Heads' motivationTo encourage the Heads to accept responsibility for achieving strategic and operational targets To encourage activities that generate income from external activities

MMM's executive board believes that the departmental reorganisation and the introduction of the new control measures will require cultural change within the university.

Discuss the role that a change agent could play in the change process in MMM.


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Change agentIn order to progress these changes MMM will need to assign the responsibility for implementation to a person or a group of people. The person/people with this responsibility could be assisted by a change agent.The change agent could come from within the university or could be an external person or organisation, for example, a management consultant could be employed. However, the change agent's role, ‘per se’, would not be the implementation of the changes: rather it would be the facilitation of them.A change agent would normally be able to assist in the change process in MMM by:• Defining the problem: for example, what to do with three 'surplus' Heads.• Examining the causes of the problem(s): the reduction in the number of departments.• Diagnosing how this can be overcome: offering redeployment.• Offering alternative solution: severance terms.• Devising implementation strategies: when, how, where the surplus Heads will be

redeployed.• Disseminating what has been learnt from this change process: MMM could use this

experience to help it with future changes.


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Lecture 25 - Project Management I


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Illustration 1

A clothing company sells 40% of its goods directly to customers through its website. The marketing manager of the company (MM) has decided that this is insufficient and has put a small team together to re-design the site. MM feels that the site looks ‘amateur and old-fashioned and does not project the right image’. The board of the company has given the go-ahead for the MM ‘to re-design the website’. The following notes summarise the outcomes of the meetings on the website re-design. The team consists of the marketing manager (MM), a product range manager (RP), a marketing image consultant (IC) and a technical developer (TD).

Meeting 1: 9 July attended by MM, RP, IC and TD The need for a re-designed website to increase sales volume through the website and to ‘improve our market visibility’ was explained by MM. IC was asked to produce a draft design.

Meeting 2: 16 August attended by MM, RP, IC and TD IC presented a draft design. MM and RP were happy with its image but not its functionality, suggesting that it was too similar to the current site. ‘We expected it to do much more’ was their view.

Meeting 3: 4 September attended by MM, RP and IC IC produced a re-drafted design. This overall design was agreed and the go-ahead was given for TD to produce a prototype of the design to show to the board.

Meeting 4: 11 September attended by RP, IC and TD TD explained that elements of the drafted re-design were not technically feasible to implement in the programming language being used. Changes to the design were agreed at the meeting to overcome these issues and signed off by RP.

Meeting 5: 13 October attended by MM, RP, IC and TD The prototype re-design was demonstrated by TD. MM was unhappy with the re-design as it was ‘moving too far away from the original objective and lacked functionality that should be there’. TD agreed to write a technical report to explain why the original design (agreed on 4 September) could not be adhered to.

Meeting 6: 9 November attended by MM, IC and TD It was agreed to return to the 4 September design with slight alterations to make it technically feasible. TD expressed concerns that the suggested design would not work properly with all web browsers.

At the board meeting of 9 December the board expressed concern about the time taken to produce the re-design and the finance director highlighted the rising costs (currently $25,000) of the project. They asked MM to produce a formal cost-benefit of the re-design. The board were also concerned that the scope of the project, which they had felt to be about re-design, had somehow been interpreted as including development and implementation.

On 22 December MM produced the following cost-benefit analysis of the project and confirmed that the word ‘re- design’ had been interpreted as including the development and implementation of the website.


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Year 1 2 3 4 5

Costs 50,000 10,000 10,000 10,000 10,000

Benefits* 0 15,000 25,000 35,000 35,000

*These benefits are extra sales volumes created by the website’s extra functionality and the company’s increased visibility in the market place.*These benefits are extra sales volumes created by the website’s extra functionality and the company’s increased visibility in the market place.*These benefits are extra sales volumes created by the website’s extra functionality and the company’s increased visibility in the market place.*These benefits are extra sales volumes created by the website’s extra functionality and the company’s increased visibility in the market place.*These benefits are extra sales volumes created by the website’s extra functionality and the company’s increased visibility in the market place.*These benefits are extra sales volumes created by the website’s extra functionality and the company’s increased visibility in the market place.

Meeting 7: 24 February attended by MM, RP, IC and TD A partial prototype system was demonstrated by TD. RP felt that the functionality of the re-design was too limited and that the software was not robust enough. It had crashed twice during the demonstration. He suggested that the company delay the introduction of the re-designed website until it was complete and robust. MM declared this to be impossible.

ConclusionThe re-designed website was launched on 1 March. MM declared the re-design a success that ‘had come in on time and under budget’. On 2 and 3 March, numerous complaints were received from customers. The website was unreliable and did not work with a particular popular web browser. On 4 March an emergency board meeting decided to withdraw the site and reinstate the old one. On 5 March, MM resigned.

Most project management methods have an initiation or definition stage which includes the production of a document that serves as an agreement between the sponsors and deliverers of the project. This may be called a project initiation document or a project charter. Defining the business case is also an important part of the initiation or definition stage of the project.

Explain how a business case and a project initiation document would have helped prevent some of the problems that emerged during the conduct of the website re-design project.


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Solution

The production of initial documentation concerning the business case and initiation of the project would have addressed many of the issues that subsequently arose in the website re-design. This documentation would typically include:

A summary of the business justification of the project. These are the business objectives that have been defined in the business case to justify the project.

The scope of the project, defined in terms of project objectives and ultimate deliverables.

Constraints and targets that apply to the project.

Project roles and responsibilities, for example; the definition of the project sponsor and the project manager. It is useful if this part of the document specifies the level up to which named individuals (or roles) can authorise:

The commitment of resources The sign-off of deliverables Changes to project objectives and deliverablesChanges to constraintsResources committed to the projectRisks and assumptions associated with the project.

These are considered below in the context of the clothing company’s website re-design project.

The business justification of the projectThe MM does specify business objectives such as ‘increase sales revenue’ and ‘improve market visibility’ (see meeting 1) but these are poorly defined objectives in that they are not quantified. A formal cost-benefit analysis undertaken at the start of the project would have forced the MM to quantify how much sales would increase and by when. The MM would also have been required to document the assumptions behind these predictions and to demonstrate a causal link between the functionality of the website and sales volume. The other suggested objective, improve market visibility, also requires further specification and quantification. The MM provides no evidence of current market visibility (and what this actually means) and how its improvement will be measured. Some research is needed to quantify market visibility and to set realistic targets for its improvement. The statement of the project’s business benefits is an important issue in contemporary project management. It is suggested that these benefits are kept constantly under review to ensure that the project has not strayed from its original justification. Furthermore, at the end of the project, the business benefits have to be reviewed to assess whether they have been realised. Because the MM has not specified measurable objectives in advance, the success of the project is impossible to assess. There is no benchmark to assess it against.

The scope of the projectOn at least two occasions there appears to be confusion about the scope of the project. The TD originally produces a design that is too like the current site, ‘We expected it to do much more’ (meeting 2). However, the most significant misunderstanding about scope is between the board and the MM. It concerns the interpretation of the scope of the word ‘re-design’. The board appears to perceive that re-design does not include the development


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and implementation of the software, while the MM holds the opposite view. The scope of the re-design would have been clarified in a project initiation document.

Constraints that apply to the projectConstraints are often defined in terms of cost and time. The absence of a formal cost-benefit analysis for this project has already been recognised, so costs (and budget) were not formally agreed at the start of the project. There is also no evidence that a projected delivery time for the project was agreed at the start of the project. Indeed, it was the elapsed time, as well as the escalating cost, that first caused the board to be alarmed about the website re-design project. It also appears that the TD had technical constraints in mind which were also not articulated. These emerged in meeting 4 and caused delays documented in meetings 5 and 6. Again, technical constraints should have been documented in the project initiation document.

Project roles and responsibilitiesAlthough it is not clearly stated, it appears that the sponsor of the project is the MM. However, at one critical point of the project the RP makes a decision to accept a design (meeting 4) which is subsequently overturned by the MM. This confusion of responsibility causes both cost and delay. If project roles and responsibilities had been properly defined, then it would have been recognised that the RP did not have sufficient authority to sign-off deliverables. Furthermore, the formal allocating of roles would have also meant that a project manager would have been nominated with the responsibility of delivering the project. In the scenario there is never any clear indication of who is playing the role of project manager and this is a major flaw.

Resources committed to the projectThere is no evidence that the resources available to the project had been identified and documented at the start of the project. Problems only begin to emerge late in the project when the Board’s decision to launch on 1 March prompts the TD to express concern that there are not enough developers to deliver the system on time.

Risks and assumptions associated with the projectMost project management methods suggest that risks should be formally documented and managed. Each risk is identified and its potential effect quantified. For each significant risk, avoidance actions are suggested which are steps that can be taken to prevent the risk from occurring. Mitigation actions are also defined for each risk. These are steps that can be taken to reduce the impact of the risks if they occur. Again there is no evidence to show that this has been done. As problems emerged in the project they were dealt with on an ad hoc basis. A consideration of risk at the outset of the project can lead to changes in how the project is conducted. For example, the risk of poor scoping of requirements could have prompted a more formal definition of requirements scope (an avoidance action).

Initial project structure and arrangements for management controlThis is an initial project structure describing how the project will be broken down into stages with an associated list of project milestones. It is a very high-level plan which provides a context for the detailed plans that will follow. There is no evidence of such a structure in the website re-design project and so the absence of detailed planning (see below) goes unnoticed. The project initiation document might also include management control information concerning, for example, progress reporting and monitoring arrangements. If these had been defined in advance then their absence (see below) would have been clear in the actual project.


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Lecture 26 - Project Management II


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Illustration 1

HomeDeliver is a nationwide company that sells small household goods to consumers. It produces an attractive, comprehensive catalogue which it distributes to staff known as catalogue supervisors. There are 150 of these supervisors in the country. Each supervisor has approximately 30 part-time home-based agents, who then deliver the catalogue to consumers in their homes. Agents subsequently collect the catalogue and any completed order forms and forward these forms to their supervisor. Payment is also taken when the order is collected.

Payment is by cash or cheque and these payments are also forwarded to the supervisor by the agent. At the end of the week the supervisor returns completed order forms (and payments) to HomeDeliver. Order details are then entered into a computer system by order entry administrators at HomeDeliver and this starts an order fulfilment process that ends with goods being delivered directly to the customer. The supervisors and the agents are all self-employed. HomeDeliver rewards supervisors on the basis of how many agents they manage. Agents’ reward packages are based on how many catalogues they deliver and a commission based on orders received from the homes they have collected orders from.

In August 2010 HomeDeliver decided to replace the physical ordering system with a new electronic ordering system. Agents would be provided with software which would allow them to enter customer orders directly into the computer system using their home personal computer at the end of each day. Payments would also be paid directly into a HomeDeliver bank account by agents at the end of each day.

The software to support the new ordering system was developed in-house to requirements provided by the current order entry administrators at HomeDeliver and managers concerned with order fulfilment and invoicing. The software was tested internally by the order entry administrators. At first, both the specification of requirements and initial software testing progressed very slowly because order administrators were continuing with their normal operational duties. However, as project delays became more significant, selected order administrators were seconded to the project full-time. As a result the software was fully acceptance tested by the end of July 2011, two months behind schedule.

In August 2011 the software was rolled out to all supervisors and agents. The software was claimed to be easy to use, so no formal training was given. A large comprehensive manual with colour screenshots was attached as a PDF to an email sent to all supervisors and agents. This gave detailed instructions on how to set up and use the software.Unfortunately, problems began to appear as soon as the agents tried to load and use the software. It was found to be incompatible with one particular popular browser, and agents whose computers used that browser were advised to use an alternative browser or computer. Agents also criticised the functionality of the software because it did not allow for the amendment of orders once they had been submitted. It emerged that customers often contacted agents and supervisors to amend their order prior to it being sent to HomeDeliver. This was no longer possible with the new system. Many agents also claimed that it was not possible to enter multiple orders for one household. However, HomeDeliver confirmed that entering multiple orders was possible; it was just not clear from the software, or from the instructions provided, how this could be achieved.


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Most of the agents were reluctant to print off the manual (preferring to read it on screen) and a significant number claimed that they did not receive the email with the manual attachment. Agents also found quite a number of spelling and functionality errors in the manual. At certain points the software did not perform in the way the manual stated that it would.

Internal standards at HomeDeliver require both a post-project and a post-implementation review.

HomeDeliver does not have a benefits management process and so a benefits realisation review is inappropriate. However, it does feel that it would be useful to retrospectively define the benefits to HomeDeliver of the new electronic ordering system.

Identify and discuss the potential benefits to HomeDeliver of the new electronic ordering system.


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Solution

The potential benefits to HomeDeliver of the new electronic ordering system might include: –! Staff savings from the reduction or elimination of order administrators at ! HomeDeliver. This benefit should be relatively easy to quantify.–! Staff savings from reduced catalogue supervisor costs. In the new system, ! supervisors appear to have significantly less work and so each supervisor should ! be able to co-ordinate more agents. However, supervisors are currently rewarded ! on the basis of how many agents they administer. So savings could only be made if ! this contractual arrangement was changed.–! Improved cash flow, because money is now sent daily rather than at the end of the ! week. Improved cash flow will reduce borrowing costs or increase investment ! income. This benefit should be relatively easy to quantify.–! The system should lead to the customer receiving their goods more quickly. Orders ! are entered at the end of the day, not in the week after the order has been placed. ! This is a benefit for the customer, not HomeDeliver. However, it could be argued ! that improved customer service may lead to more customers and, because there is ! less elapsed time between order and delivery, to fewer cancelled orders. It would be ! relatively difficult to quantitatively predict both of these benefits in advance.


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Lecture 27 - Project Management III


120



Illustration 1

Explain briefly the difference between the project sponsor and the project manager.

Solution

The project sponsor is usually a senior member of the management team, often the person with the most to gain from the success of the project and the most to lose from the failure.

The project sponsor will direct the project and is the chief decision maker on behalf of the organisation.

The project manager leads the project team on a day-to-day basis to ensure that the project runs smoothly and that effectiveness and efficiency is achieved.

Illustration 2

ASW is a software house which specialises in producing software packages for insurance companies. ASW has a basic software package for the insurance industry that can be used immediately out of the box. However, most customers wish ASW to tailor the package to reflect their own products and requirements. In a typical ASW project, ASW’s business analysts define the gap between the customer’s requirements and the basic package.

These business analysts then specify the complete software requirement in a system specification. This specification is used by its programmers to produce a customised version of the software. It is also used by the system testers at ASW to perform their system tests before releasing it to the customer for acceptance testing.

One of ASW’s new customers is CaetInsure. Initially CaetInsure sent ASW a set of requirements for their proposed new system. Business analysts from ASW then worked with CaetInsure staff to produce a full system specification for CaetInsure’s specific requirements. ASW do not begin any development until this system specification is signed off. After some delay (see below), the system specification was eventually signed off by CaetInsure.

Since sign-off, ASW developers have been working on tailoring the product to obtain an appropriate software solution. The project is currently at week 16 and the software is ready for system testing. The remaining activities in the project are shown in figure 1. This simple plan has been put together by the project manager. It also shows who has responsibility for undertaking the activities shown on the plan.

The problem that the project manager faces is that the plan now suggests that implementation (parallel running) cannot take place until part way through week 28. The


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original plan was for implementation in week 23. Three weeks of the delay were due to problems in signing off the system specification. Key CaetInsure employees were unavailable to make decisions about requirements, particularly in the re-insurance part of the system. Too many requirements in this module were either unclear or kept changing as users sought clarification from their managers. There have also been two further weeks of slippage since the sign-off of the system specification.

The CaetInsure contract had been won in the face of stiff competition. As part of securing the deal, the ASW sales account manager responsible for the CaetInsure contract agreed that penalty clauses could be inserted into the contract. The financial penalty for late delivery of the software increases with every week’s delay. CaetInsure had insisted on these clauses as they have tied the delivery of the software in with the launch of a new product. Although the delay in signing off the system specification was due to CaetInsure, the penalty clauses still remain in the contract. When the delay was discussed with the customer and ASW’s project manager, the sales account manager assured CaetInsure that the ‘time could be made up in programming’.

The initial planned delivery date (week 23) is now only seven weeks away. The project manager is now under intense pressure to come up with solutions which address the project slippage.

Evaluate the alternative strategies available to ASW’s project manager to address the slippage problem in the CaetInsure project.

Solution

The project manager could request an extension to the deadline The case study scenario suggests that early delays in the project were caused by the absence of key CaetInsure staff and changes in user requirements in the re-insurance module. These delays meant that the full system specification was signed off three weeks later than initially agreed. Unfortunately, the delivery date of the whole project was not re-negotiated at this point as it was suggested that ‘time could be made up’ during the programming stage.

Furthermore, the marketing department of CaetInsure had already announced the launch of a new product to coincide with the implementation of the software and they did not want to change these dates. However, the project manager could now return to CaetInsure and inform them that it had not been possible to catch up with the proposed schedule and to remind them that the initial slippage had been caused by them.

Although the deadline date is associated with a product launch it is unlikely that this is crucial. It is not a matter of life and death. It might be irksome to delay the launch by a few weeks, but it is unlikely that many people will notice or indeed care about it. There are many significant successful products which have been released long after their intended release date. In many ways it is an artificial deadline.

However, there are at least three problems associated with this suggestion. The first is that the delay is now longer than the three weeks incurred at the specification stage. Consequently, the project manager will have to explain that there have been further delays to the project. Secondly, the project manager will have to be very confident about his revised delivery date.


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The project plan does not explicitly contain any time for programmers fixing faults found in system and acceptance testing and it seems very likely that faults will be found in this testing. Finally, some negotiation will have to take place on the late delivery penalty clause charges the sales account manager agreed in the initial contract. If some (or all) of these clauses are enacted then the profitability of the project will be significantly affected.

The project manager could consider a functional reduction in the scope of the software solution.The scenario suggests that the re-insurance functionality has been a problem throughout the project. There may also be unresolved issues in other parts of the software. However, it must be remembered that the ASW product is a proven software solution, bespoke development is only concerned with customising the basic product to fulfil certain customer requirements. Therefore it is likely that there are large areas of the software that can be successfully delivered to the customer. The key issue here is whether this reduced functionality will fulfil the requirements associated with the proposed new product which CaetInsure intends to launch. If it does then the delivery of a partial solution does not have a significant business impact and the product launch can go ahead as planned. The project manager needs to discuss this with the customer as quickly as possible. He has to be sure that the reduced scope does indeed fulfil these requirements and, if it does, to focus testing, migration and document production on these parts of the software. He will also have to estimate the delivery time of the second phase of the software that fulfils the complete user requirement.

There are three elements of this suggestion that the project manager should bear in mind. Firstly, the impact of reduced scope on the penalty clauses of the contract. It would appear harsh to deliver a part solution but to still be fully penalised for not delivering the total solution. Consequently some contract renegotiation is necessary. Secondly, there will be an unexpected overhead associated with delivering a second phase which contains the full product. This is the overhead of regression testing, making sure that changes made to the product in the second release do not unintentionally affect the software solution that has already been delivered. Finally, the specification of data migration programs will have to be reviewed to see if they need to be changed in the light of the reduced functionality. Any changes will affect data migration programs which are currently being written or tested.

The project manager could consider taking steps which might reduce the quality of the productA number of options might be considered around the testing of the software. One option is to considerably reduce system testing and hand over the software to acceptance testing ahead of the proposed schedule. The point has already been made that the software is essentially a package that has to be tailored for specific functions. Consequently, large areas of the software have been tested before, much of it by actual users out in the businesses that are using this solution.

Programs for the CaetInsure version will have been unit tested by programmers before they have been released to system testers and so no area of the system is untested, although there will be areas that have not been independently tested. Another option is to reduce the scope of system testing, focusing it on testing functionality rather than usability (which will be one focus of acceptance testing) and performance (which can be difficult to perform effectively in a software house environment where the user’s actual hardware configuration cannot be easily mimicked). A further option is to execute system and acceptance testing in parallel.


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There are a number of issues with this approach which the project manager needs to consider. The first is that the acceptance testers are likely to find significantly more faults than they would if full system testing had preceded acceptance testing. This can lead to a reduction in customer confidence which could jeopardise the whole project. Secondly, faults identified by both system and user acceptance testers have to be carefully managed. Configuration management becomes a very significant issue and appropriate version control of the software is an essential overhead. Confidence is undermined by the constant releases of new versions of the software, some of which, due to poor configuration management, contain faults which have already been reported and fixed in earlier versions of the software.

The project manager might consider requesting more resourcesFinally the project manager may request further resources for the project. The current project plan is at a high level of detail. It does not show how many system testers are actually working on the system or how many technical authors are writing the documentation. It may be possible to add more resources and so reduce the elapsed time of the activity. Resources might also be asked to work smarter or work longer. For example, testing might be prioritised so that the most important areas of the software from the user’s perspective are tested first. It may also be possible to automate certain areas of testing or to outsource it to specialist testing companies. Programmers might be asked to focus more on static testing (which is particularly effective at finding faults) and to work overtime to beat their deadlines.

However, the project manager must be aware that adding resources to a late running project often slows the project down as established members of the project team explain requirements, standards and procedures to any newcomers. A key factor here will be the precision of the requirements. If these are well specified then it should be possible to add testing staff reasonably effectively, or indeed to outsource testing to countries where it can be conducted relatively cheaply. It may also be possible to bring in technical authors and automated testing tools specialists who can speed up these activities. Programming is more of an issue. It will be very difficult to bring new programmers up to speed. However, it may be possible to transfer resources from other projects and to support the established programmers by providing appropriate hardware and software.

Finally, the addition of resources to the project will have an impact on project profitability. The project estimate will have assumed a certain commitment of resources. Adding resources will reduce the profit margin and indeed, in the extreme, may make the project itself unprofitable.


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Illustration 3

Explain the purpose of each of the following: a post-project review, a post-implementation review and a benefits realisation review.

Solution

(i)

A post-project review takes place once the project has been completed. In fact, it can often be the last stage of the project, with the review culminating in the sign-off of the project and the formal dissolution of the project team. The focus of the post-project review is on the conduct of the project itself, not the product it has delivered. The aim is to identify and understand what went well and what went badly in the project and to feed lessons learned back into the project management standards with the aim of improving subsequent project management in the organisation.

A post-implementation review focuses on the product delivered by the project. It usually takes place a specified time after the product has been delivered. This allows the actual users of the product an opportunity to use and experience the product or service and to feedback their observations into a formal review. The post-implementation review will focus on the product’s fitness for purpose. The review will not only discuss strategies for fixing or addressing identified faults, but it will also make recommendations on how to avoid these faults in the future. In this instance these lessons learned are fed back into the product production process.

A benefits realisation review also takes place after the product has been delivered. It is primarily concerned with revisiting the business case to see if the costs predicted at the initiation of the project were accurate and that the predicted benefits have actually accrued. In effect, it is a review of the initial cost/benefit analysis and any subsequent updates made to this analysis during the conduct of the project. It may be part of a post-implementation review, although the long-term nature of most benefits means that the post-implementation review is often held too soon to properly conduct benefits realisation.

In fact, it can be argued that benefits realisation is actually a series of reviews where the predicted long-term costs and benefits of the business case are monitored. Again, one of the objectives is to identify lessons learned and in this case to feed these back into the benefits management process of the organisation.


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Lecture 28 - Forecasting & Analysis


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Illustration 1

The following information applies to a product:

Total Cost Level of Activity

26,000 20,000

21,000 10,000

Calculate the split between fixed costs and variable costs using the high/low method.

Solution

High/Low MethodHigh/Low MethodHigh/Low Method

Total costs at high level of activityTotal costs at high level of activity 26,000

Total costs at low level of activityTotal costs at low level of activity 21,000

DifferenceDifference 5,000

Total units at high level of activityTotal units at high level of activity 20,000

Total units at low level of activityTotal units at low level of activity 10,000


Variable cost per unit Difference in CostsDifference in Units

5,000 10,000 = $0.50

Fixed Costs $26,000 - (20,000 x 0.5) $16,000


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Illustration 2

ABC have the following total costs and units of production for the six month period in question.

Total Costs Units $ January 13,600 2,100February 15,800 2,800March 14,500 2,200April 16,200 3,000May 14,900 2,600June 15,000 2,500

Analyse the data into fixed and variable costs using linear regression analysis

Solution

X$‘000

Y$‘000

XY$‘000

X2$‘000

2.1 13.6 28.56 4.41

2.8 15.8 44.24 7.84

2.2 14.5 31.9 4.84

3.0 16.2 48.6 9

2.6 14.9 38.74 6.76

2.5 15.0 37.5 6.25

15.2 90 229.54 39.1


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b (Variable Cost Per Unit)b (Variable Cost Per Unit)

b = (6 x 229.54) – (15.2 x 90.0)(6 x 39.10) – 15.22

b = (1,377.24 – 1,368)(234.6 – 231.04)

b = 9.243.56

b = $2.60

a (Total Fixed Costs)a (Total Fixed Costs)

a = 90 _ (2.6)(15.2))6 6

a = 8.41

a = $8,400


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Illustration 3

Using the information in illustration 2 calculate the correlation coefficient and the percentage change in costs that can be explained by changes in the level of activity.

Solution

X$‘000

Y$‘000

XY$‘000

X2$‘000

Y2$‘000

2.1 13.6 28.56 4.41 184.96

2.8 15.8 44.24 7.84 249.64

2.2 14.5 31.9 4.84 210.25

3.0 16.2 48.6 9 262.44

2.6 14.9 38.74 6.76 222.01

2.5 15.0 37.5 6.25 225

15.2 90 229.54 39.1 1354.3

r = Correlation Coefficientr = Correlation Coefficient

r = (6 x 229.54) – (15.2 x 90.0)√[(6 x 39.10) – 15.22) (6 x 1354.3 - 902)]

r = (1,377.24 – 1,368)√[(234.6 – 231.04) (8125.8 - 8100)]

r = 9.249.58

r = 0.96

r2 = 0.93

93% of the costs can be explained by the units produced.93% of the costs can be explained by the units produced.


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Illustration 4

A business has had the following costs over the last year:

Quarter Costs $‘000

1 150

2 192

3 206

4 245

Calculate the average growth in costs over the year.

Solution

Average Growth[n√Value in most recent period / Value in period 1] -1

[3√(245/150)] -1

17.7%


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Illustration 5

A business has had the following sales over the last 5 years:

Year Sales $‘000

1 160

2 195

3 220

4 245

5 270

Calculate the average growth in sales over the year.

Solution


[4√(270/160)] -1

19%


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Illustration 6

A business has had a 12% increase in sales results each year over the last 5 years. The sales in the current period were $100,000.

Predict the sales for the following year.

Solution

Sales PredictionSales Prediction

Sales in current year $100,000

Trend in sales +12%

Forecast sales for following year 112,000


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Illustration 7

A business has had a trend of sales increases of 5% per quarter over the last 5 years. The seasonal variations for each quarter are shown below

Quarter Seasonal Variation

1 25,000

2 -10,000

3 55,000

4 -70,000

The sales in Q4 of the current year were $100,000.

Forecast the sales for each of the 4 quarters of the next year.

Solution

Quarter Trend Seasonal Variation Forecast

Q4 Current Period 100,000

1 105,000 25,000 130,000

2 110,250 -10,000 100,250

3 115,763 55,000 170,763

4 121,551 -70,000 51,551

Total Annual Sales 452,563 0 452,563


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Illustration 8

A business has had a trend of sales increases shown by the formula Y = 100 + 5X where Y = Sales in thousands and X is the quarter number.

X1 was Quarter 1 of 2009 making X5 Quarter 1 of 2010.

The seasonal variation is as shown below:


1 1.10

2 0.94

3 1.06

4 0.90

Forecast the sales for each of the 4 quarters of 2011.

Solution

Quarter X 5X Y = 100 + 5X(Trend in sales $‘000)

If Q1 in 2010 was an X value of 5, Q2 2010 would be X = 6 and so on until 2011 Q1 which would be X = 9If Q1 in 2010 was an X value of 5, Q2 2010 would be X = 6 and so on until 2011 Q1 which would be X = 9If Q1 in 2010 was an X value of 5, Q2 2010 would be X = 6 and so on until 2011 Q1 which would be X = 9If Q1 in 2010 was an X value of 5, Q2 2010 would be X = 6 and so on until 2011 Q1 which would be X = 9If Q1 in 2010 was an X value of 5, Q2 2010 would be X = 6 and so on until 2011 Q1 which would be X = 9

1 100 9 45 145

2 100 10 50 150

3 100 11 55 155

4 100 12 60 160


1 145 1.10 160

2 150 0.94 141

3 155 1.06 164

4 160 0.90 144

Total Annual Sales 610 4 609


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Test Your Knowledge

If you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. The total costs of production at ABC Co. are $25,000 when 5,000 units are produced

and $35,000 when 7,000 units are produced. Calculate the total fixed costs and the variable cost per unit.

2. Why might regression analysis be used by a business?

3. Are there any problems with regression analysis?

4. ABC Co. had sales of $435,000 in 2005 and $500,000 in 2010. Calculate the average growth in sales each year between 2005 and 2010.

5. What are the 4 elements of time series analysis?

6. A business has had a 7% increase in sales results each year over the last 5 years. The sales in the current period were $200,000. Predict the sales for the following year.

7. A business has had a trend of sales increases of 3% per quarter over the last 5 years. The seasonal variations for each quarter are shown below


1 35,000

2 -20,000

3 27,000

4 -42,000


Forecast the sales for each of the 4 quarters of the next year and the total sales for the year..

8. Are there any problems with time series analysis?


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Test Your Knowledge Answers

If you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. The total costs of production at ABC Co. are $25,000 when 52,000 units are produced

and $35,000 when 79,000 units are produced. Calculate the total fixed costs and the variable cost per unit.

High/Low MethodHigh/Low MethodHigh/Low Method

Total costs at high level of activityTotal costs at high level of activity 35,000

Total costs at low level of activityTotal costs at low level of activity 25,000


Total units at high level of activityTotal units at high level of activity 79,000

Total units at low level of activityTotal units at low level of activity 52,000


Variable cost per unit Difference in CostsDifference in Units

10,000 27,000 = $0.37

Fixed Costs $25,000 - (52,000 x 0.37) $5,760

2. Why might regression analysis be used by a business?

To separate out fixed and variable costs.To establish relationships between different costs etc. in the business.

3. Are there any problems with regression analysis?

The relationship must be linear to use it to predict anything.If results are outside the range of the data tested it will be less reliable.It’s based on historic data so using it to predict the future may well not be appropriate.If a small amount of data is used in the analysis it will be less reliable.It assumes that Y can be predicted from X which is not always the case.


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4. ABC Co. had sales of $435,000 in 2005 and $500,000 in 2010. Calculate the average growth in sales each year between 2005 and 2010.


[5√(500,000/435,000)] -1

2.8%

5. What are the 4 elements of time series analysis?

Trend - Underlying long term movement.Seasonal variation - Short term movements due to seasonal factors.Cyclical variation - Longer term cycles of movement.Random - Unexpected fluctuations due to unpredictable events.

6. A business has had a 7% increase in sales results each year over the last 5 years. The sales in the current period were $200,000. Predict the sales for the following year.

Sales PredictionSales Prediction

Sales in current year $200,000

Trend in sales +7%

Forecast sales for following year 214,000


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7. A business has had a trend of sales increases of 3% per quarter over the last 5 years. The seasonal variations for each quarter are shown below


1 35,000

2 -20,000

3 27,000

4 -42,000


Forecast the sales for each of the 4 quarters of the next year and the total sales for the year.


4 Current Period 500,000

1 515,000 35,000 550,000

2 530,450 -20,000 510,450

3 546,364 27,000 573,364

4 562,754 -42,000 520,754

Total Annual Sales 2,154,568 0 2,154,568

8. Are there any problems with time series analysis?

The future is inherently unpredictable.All of the results are based on historic data which is not necessarily a good predictor of future results.Random events are ignored.All forecasting requires the use of judgements which are not necessarily correct.


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Lecture 29 - Interpretation of Financial Statements


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Illustration 1

2011 2010

ASSETS $‘000 $‘000

Non Current Assets 1000 1000

Inventory 300 400

Receivables 200 300

Cash 300 200

1800 1900

LIABILITIES

Ordinary Shares 800 800

Reserves 200 100

Long term Liabilities 700 900

Payables 100 100

Overdraft -

1800 1900

$‘000 $‘000

Revenue 1000 1200

COS 800 1100

Gross Profit 200 100

Other Costs 100 90

Net Profit 100 10

All sales are made on credit.

Required:

Calculate the Inventory, Receivables and Payables days for Inter Ltd. in each of the 2 years as well as the current and quick ratios.


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Solution

Item Working 2011 Working 2010

Inventory Period 300/800 x 365

137 400/1100 x 365

133

Collection Period 200/1000 x 365

73 300/1200 x 365

92

Payables Period 100/800 x 365


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Illustration 2

X1 X2 X3

Non Current Assets 500 700 1000

Current Assets 150 200 300

650 900 1300

Ordinary Shares ($1) 300 300 300

Reserves 100 280 430

Loan Notes 150 200 300

Payables 100 120 270

650 900 1300

Revenue 3000 3500 4200

COS 2000 2400 3200

Gross Profit 1000 1100 1000

Admin Costs 300 350 400

Distribution Costs 200 250 300

PBIT 500 500 300

Interest 100 150 220

Tax 120 90 50

Profit After Tax 280 260 30

Dividends 100 110 30

Retained Earnings 180 150 0

Share Price $3.30 $4.00 $2.20


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Using the information on the previous page calculate and comment on the following Ratios:

I. Return on Capital EmployedII. Return on EquityIII. Gross MarginIV. Net MarginV. Operating MarginVI. Revenue GrowthVII. GearingVIII. Interest CoverIX. Dividend CoverX. Dividend YieldXI. P/E Ratio


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Solution

ROCE

X1 X2 X3

Equity + LT Liabilities

Shares 300 300 300


LT Loan Notes 150 200 300

Capital Employed 550 780 1030

Non Current Assets + Net Current Assets

Non Current Assets 500 700 1000

Net Current Assets (Current Assets - Current Liabilities)

(150 - 100) = 50 (200 - 120) = 80 (300 - 270) = 30


Total Assets - Current Liabilities

Total Assets 650 900 1300

Current Liabilities 100 120 270


PBIT 500 500 300

Return on Capital Employed

PBIT / Capital Employed

(500 / 550) = 90.91%

(500 / 780) = 64.10%

(300 / 1030) = 29.13%


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X1 X2 X3

Return on Capital Employed (ROCE) 90.91% 64.10% 29.13%

In the first year the ROCE was 90.91%. At first glance this would appear to be a good return, however without industry averages or prior period information we are unable to tell if this is the case.In the first year the ROCE was 90.91%. At first glance this would appear to be a good return, however without industry averages or prior period information we are unable to tell if this is the case.In the first year the ROCE was 90.91%. At first glance this would appear to be a good return, however without industry averages or prior period information we are unable to tell if this is the case.In the first year the ROCE was 90.91%. At first glance this would appear to be a good return, however without industry averages or prior period information we are unable to tell if this is the case.

In year X2 the ROCE is 64.10%. This is a fall of 29.5% from the previous year indicating that the business in not able to make the same return on it’s assets that it has previously been able to do.In year X2 the ROCE is 64.10%. This is a fall of 29.5% from the previous year indicating that the business in not able to make the same return on it’s assets that it has previously been able to do.In year X2 the ROCE is 64.10%. This is a fall of 29.5% from the previous year indicating that the business in not able to make the same return on it’s assets that it has previously been able to do.In year X2 the ROCE is 64.10%. This is a fall of 29.5% from the previous year indicating that the business in not able to make the same return on it’s assets that it has previously been able to do.

In the year X3 the ROCE is 29.13%. This is a fall of 54.55% indicating that there may be some serious underlying problems which are affecting the ability of the business to generate the return on capital previously generated.




ROE

X1 X2 X3


Ordinary Shares 300 300 300


Total 400 580 730

Return on Equity (PAT / Ord Shares + Reserves)

(280 / 400) = 70%

(260 / 580) = 44.8%

(30 / 730) = 4.1%

In the first year the ROE was 70%. At first glance this would appear to be a good return, however without industry averages or prior period information we are unable to tell if this is the case.In the first year the ROE was 70%. At first glance this would appear to be a good return, however without industry averages or prior period information we are unable to tell if this is the case.In the first year the ROE was 70%. At first glance this would appear to be a good return, however without industry averages or prior period information we are unable to tell if this is the case.In the first year the ROE was 70%. At first glance this would appear to be a good return, however without industry averages or prior period information we are unable to tell if this is the case.

In year X2 the ROE is 44.8%. This is a fall of 36% from the previous year indicating that the business in not able to make the same return on the shareholders funds that it has previously been able to do.In year X2 the ROE is 44.8%. This is a fall of 36% from the previous year indicating that the business in not able to make the same return on the shareholders funds that it has previously been able to do.In year X2 the ROE is 44.8%. This is a fall of 36% from the previous year indicating that the business in not able to make the same return on the shareholders funds that it has previously been able to do.In year X2 the ROE is 44.8%. This is a fall of 36% from the previous year indicating that the business in not able to make the same return on the shareholders funds that it has previously been able to do.

In the year X3 the ROE is 41%. This is a fall of 8.4% indicating that the business may be having difficulty generating the returns it was able to do previously.In the year X3 the ROE is 41%. This is a fall of 8.4% indicating that the business may be having difficulty generating the returns it was able to do previously.In the year X3 the ROE is 41%. This is a fall of 8.4% indicating that the business may be having difficulty generating the returns it was able to do previously.In the year X3 the ROE is 41%. This is a fall of 8.4% indicating that the business may be having difficulty generating the returns it was able to do previously.


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Margins

X1 X2 X3

Revenue 3000 3500 4200

Gross Profit 1000 1100 1000

PAT 280 260 30

PBIT 500 500 300

Gross Margin (Gross Profit / Revenue) (1000 / 3000) = 33.33%

(1100 / 3500) = 31.42%

(1000 / 4200) = 23.89%

Net Margin (PAT / Revenue) (280 / 3000) = 9.3%

(260 / 3500) = 7.4%

(30 / 4200) = 0.7%

Operating Margin (PBIT / Revenue) (500 / 3000) = 16.66%

(500 / 3500) = 14.28%

(300 / 4200) = 7.1%

The Gross Margin is 33.33% in X1 and holds reasonably steady in X2 at 31.42%. However in X3 the Gross Margin falls to 23.89% indicating that the business has either had to cut prices to sell the greater volume it has, or the cost of it’s purchases have gone up.




The Net Margin is 9.3% in X1 but begins to fall in X2 with 7.4% achieved, before falling dramatically to 0.7% in X3. The main reason for this is the fall in Gross Profit as other costs have risen in line with expectations given the increase in sales. However another point to note is that interest costs have risen with the increase in long term loans. The extra interest costs have put pressure on the business.




The Operating Margin dropped slightly in X2 to 14.28% from 16.66% the previous year - a fall of almost 15%. In X3 the Operating Margin fell away to 7.1%, a decrease of over 50%. This is due to the decreasing Gross Margin achieved as well as rises in the other expenses.





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Gearing

X1 X2 X3

Debt 150 200 300

Equity Number of Shares

300 300 300

Share Price 3.30 4 2.20

Market Value (300 x 3.30) = 990

(300 x 4) = 1200

(300 x 2.20) = 660

Gearing (Debt / Equity) (150 / 990) = 15%

(200 / 1200) = 16.66%

(300 / 660) = 45.45%

Gearing levels in year X1 are 15%. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem excessive.Gearing levels in year X1 are 15%. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem excessive.Gearing levels in year X1 are 15%. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem excessive.Gearing levels in year X1 are 15%. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem excessive.Gearing levels in year X1 are 15%. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem excessive.

In year X2 gearing increases slightly to 16.66%, an increase of 11% from year X1. This is due to debt levels increasing to 200 from 150, although this is offset by the increase in the share price from $3.30 to $4.





In year X3 gearing increases dramatically to 45%, an increase of over 180%. This is due to debt levels rising to 300 from 200 and the share price dropping to $2.20 due to the deteriorating results of the business.






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Interest Cover

X1 X2 X3

PBIT 500 500 300

Interest 100 150 220

Interest Cover (PBIT / Interest) (500 / 100) = 5 times

(500 / 150) = 3.33 times

(300 / 220) = 1.36 times

Interest coverage in year X1 is 5 times. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem unreasonable.Interest coverage in year X1 is 5 times. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem unreasonable.Interest coverage in year X1 is 5 times. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem unreasonable.Interest coverage in year X1 is 5 times. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem unreasonable.

In year X2 interest coverage falls to 3.33 times. This has occurred due to the interest charge increasing in the period while PBIT has remained constant.In year X2 interest coverage falls to 3.33 times. This has occurred due to the interest charge increasing in the period while PBIT has remained constant.In year X2 interest coverage falls to 3.33 times. This has occurred due to the interest charge increasing in the period while PBIT has remained constant.In year X2 interest coverage falls to 3.33 times. This has occurred due to the interest charge increasing in the period while PBIT has remained constant.

In year X3 interest coverage has decreased again to 1.36 times. This is caused by the PBIT achieved decreasing to 300 combined with the increase in the interest charge to 220. The increase in interest is caused by the increase in the long term debt of the company as shown by the gearing ratios calculated above.




Dividend Cover

X1 X2 X3

PAT 280 260 30


Dividend Cover (PAT / Dividends) (280 / 100) = 2.8 times

(260 / 110) = 2.36 times

(30 / 30) = 1 time

Dividend coverage in year X1 is 2.8 times. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem unreasonable.Dividend coverage in year X1 is 2.8 times. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem unreasonable.Dividend coverage in year X1 is 2.8 times. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem unreasonable.Dividend coverage in year X1 is 2.8 times. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem unreasonable.

In year X2 dividend coverage falls to 2.36 times. This would not concern investors as although coverage has gone down slightly, the dividend paid this year is greater than last.In year X2 dividend coverage falls to 2.36 times. This would not concern investors as although coverage has gone down slightly, the dividend paid this year is greater than last.In year X2 dividend coverage falls to 2.36 times. This would not concern investors as although coverage has gone down slightly, the dividend paid this year is greater than last.In year X2 dividend coverage falls to 2.36 times. This would not concern investors as although coverage has gone down slightly, the dividend paid this year is greater than last.

In year X3 dividend coverage has decreased to 1 time. This is caused by the decrease in profit achieved by the company restricting the level of dividend payable. This will be of concern to investors and their concern is reflected in the fall in the share price from $4 in year X2 to $2.20 in year X3.





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Dividend Yield

X1 X2 X3

Number of Shares (300 / 1) 300 300 300


Dividends Per Share (100 / 300) = 33c (110 / 300) = 36c (30 / 300) = 10c

Dividend Yield (Dividends Per Share / Share Price)

(33 / 330) = 10% (36 / 400) = 9% (10 / 220) = 4.5%

The Dividend Yield is 10% in year X1. Whilst we do not have comparatives, this seems a reasonable return.The Dividend Yield is 10% in year X1. Whilst we do not have comparatives, this seems a reasonable return.The Dividend Yield is 10% in year X1. Whilst we do not have comparatives, this seems a reasonable return.The Dividend Yield is 10% in year X1. Whilst we do not have comparatives, this seems a reasonable return.

In year X2 the Dividend Yield falls to 9%. This will not be overly concerning to investors as the increase in share price over the year will have more than made up for the slightly lower yield.In year X2 the Dividend Yield falls to 9%. This will not be overly concerning to investors as the increase in share price over the year will have more than made up for the slightly lower yield.In year X2 the Dividend Yield falls to 9%. This will not be overly concerning to investors as the increase in share price over the year will have more than made up for the slightly lower yield.In year X2 the Dividend Yield falls to 9%. This will not be overly concerning to investors as the increase in share price over the year will have more than made up for the slightly lower yield.

In year X3 the Dividend Yield has fallen to 4.5% which is 50% lower than the previous year. This, combined with the fall in share price and reduced profitability will be a major concern to investors.In year X3 the Dividend Yield has fallen to 4.5% which is 50% lower than the previous year. This, combined with the fall in share price and reduced profitability will be a major concern to investors.In year X3 the Dividend Yield has fallen to 4.5% which is 50% lower than the previous year. This, combined with the fall in share price and reduced profitability will be a major concern to investors.In year X3 the Dividend Yield has fallen to 4.5% which is 50% lower than the previous year. This, combined with the fall in share price and reduced profitability will be a major concern to investors.

P/E Ratio

X1 X2 X3

Share Price $3.30 $4 $2.20


No. Ordinary Shares 300 300 300

EPS (280 / 300) = 93c (260 / 300) = 86c (30 / 300) = 10c

P/E Ratio (Share Price / EPS) (330 / 93) = 3.54 (400 / 86) = 4.65 (220 / 10) = 22

The P/E Ratio in year X1 is 3.54. We do not have industry comparatives or prior year information with which to compare this.The P/E Ratio in year X1 is 3.54. We do not have industry comparatives or prior year information with which to compare this.The P/E Ratio in year X1 is 3.54. We do not have industry comparatives or prior year information with which to compare this.The P/E Ratio in year X1 is 3.54. We do not have industry comparatives or prior year information with which to compare this.

In year X2 the P/E Ratio increases to 4.65. This indicates that the market expectations for this share have risen since X1 and that investors are now willing to pay 4.65 times what the business earns in a year to own the share.




In year X4 the P/E ratio has increased dramatically to 22. This is unusual as the earnings have decreased to 12% of the previous year. The share price has fallen to reflect this, but not by as much as would be expected. This may indicate that the market feels that the results in year X3 were perhaps a one-off and that next years results will improve.





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Lecture 31 - Decision Trees


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Illustration 1

A student is deciding how to get to class and has 2 choices:

1.Walk to class which is free.

2.Take the bus costing $5.

There is a 25% chance that it will rain and if it does the student will have to pay $10 to get their clothes dry cleaned.

Draw a decision tree to assess whether the student should walk or take the bus.

Solution

W1 - Expected Value of Public Transport

Event Probability Outcome EV

Rain 0.25 0 0

No Rain 0.75 0 0

Total EV 0

W2 - Expected Value of Walking


Rain 0.25 -10 -2.5

No Rain 0.75 0 0

Total EV -2.5

W3 - Total Cost of each option

Choice Initial Cost EV 1 Total Cost

Public Transport 5 0 5

Walking 0 2.5 2.5

Walking has the lowest total cost so is the best optionWalking has the lowest total cost so is the best optionWalking has the lowest total cost so is the best optionWalking has the lowest total cost so is the best option


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Illustration 2

Say that the student in the above illustration could take an umbrella to avoid getting wet when walking but there is a 10% chance that the student will lose the umbrella costing $20 at college.

Solution

W1 - Expected Value of Raining


Rain 0.25 -10 -2.5

No Rain 0.75 0 0

Total EV -2.5

W2 - Expected Value of losing umbrella


Losing 0.1 -20 -2

Not Losing 0.9 0 0

Total EV -2

W3 - Total Cost of each option

Choice Initial Cost EV Rain EV Lost Umbrella

Total Cost

Public Transport

5 0 0 5

Walking - No umbrella

0 2.5 0 2.5

Walking - With umbrella

0 0 2 2

Walking with the umbrella has the lowest total cost so is the best optionWalking with the umbrella has the lowest total cost so is the best optionWalking with the umbrella has the lowest total cost so is the best optionWalking with the umbrella has the lowest total cost so is the best optionWalking with the umbrella has the lowest total cost so is the best option


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Illustration 3

We have 3 choices, we can invest in stocks, bonds or put the money on deposit. The returns of each are sumarised below:

Market Direction

Return on Stocks

Return on Bonds

Return on Deposit

Up (50% chance) $1,500 $900 $500

Even(30% chance) $300 $600 $500

Down(20% chance) -$800 $200 $500

(i) Calculate the expected value for investing in each of stocks, bonds and deposit.

(ii)Select the best investment for each of the 3 possibilities i.e that the market goes up, goes down and is even and calculate the expected value of these ‘best’ choices.

(iii)Based on the above answers, what is the price of perfect information in this instance?

Solution

(i)

Market Direction

Return on StocksReturn on Stocks Return on BondsReturn on Bonds Return on DepositReturn on Deposit

Up (50% chance)

$1,500 x 0.5 750 $900 x 0.5 450 $500 x 0.5 250

Even(30% chance)

$300 x 0.3 90 $600 x 0.3 180 $500 x 0.3 150

Down(20% chance)

-$800 x 0.2 -160 $200 x 0.2 40 $500 x 0.2 100

EVEV $680 EV $670 EV $500


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(ii)

Market Direction

Investment Working Value

Up (50% chance)

Stocks 1500 x 0.5 750

Even(30% chance)

Bonds 600 x 0.3 180

Down(20% chance)

Deposit 500 x 0.2 100

Expected ValueExpected ValueExpected Value $1,030

(iii)

$

Expected Value of Investing in Stocks 680

Expectation to Maximise Profit 1030

Difference (Price of perfect information) 350


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Test Your Knowledge

If you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. What is a decision tree?

2. What is the decision?

3. What is the event?

4. How is each of the items outlined in Q2 & Q3 represented on the decision tree?

5. How is the value of perfect information calculated?


New area of the syllabus so no questions (yet!)

Now do it!


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Test Your Knowledge

If you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. What is a decision tree?

A problem solving technique.

2. What is the decision?

A choice that the manager must make that is therefore controlled by the manager.

3. What is the event?

The event is what will occur - it can’t be controlled but the probability of it happening can be calculated and used to make the decision.

4. How is each of the items outlined in Q2 & Q3 represented on the decision tree?

The decision is a rectangle.The event is a circle.

5. How is the value of perfect information calculated?

By comparing the expected value of the outcome with the expected value if you knew what was going to happen.


New area of the syllabus so no questions (yet!)


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Lecture 33 - Strategy & People II


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Illustration 1

Judy Sodhi is in her first teaching year at the National College, a private college offering short courses in accounting, auditing and management. In her first year Judy has primarily taught the Certificate in Managerial Finance. This is a three-day short course which ends in an externally set examination, marked and invigilated by staff employed by the Institute of Managerial Finance (IMF). The IMF also defines the syllabus, the length of the course and accredits colleges to run the course. There are no pre-conditions for candidates who wish to attend the course. Last year Judy ran the course 20 times with an average of nine students on each running of the course. At the end of each course every student has to complete a post-course evaluation questionnaire. Judy does not see these questionnaires and has received no feedback about her performance.

As the college is a virtual organisation using serviced training rooms, Judy rarely sees her manager Blake Jones. However, he contacted her recently to suggest that they should conduct her first appraisal and a date and time was agreed. Blake explained that ‘it would be just a general chat looking at how the year had gone. We need to do one to satisfy the college and the IMF’. The time of the appraisal was set for 3.00 pm, finishing at 5.00 pm.The appraisal did start with a general discussion. Blake outlined the plans of the organisation and his own promotion hopes. Judy was surprised to see that Blake was not following any standard list of questions or noting down any of the answers she made. She told him that one of her main problems was the numeracy level of some of the candidates. She recognised that the course had no pre-conditions, ‘but it does require some basic mathematical skills that some of our candidates just do not have’.

After listening to Judy for a while Blake produced a statistical summary of the feedback questionnaires from the courses she had run in the last year. He said that the organisation expected its lecturers to attain an acceptable result in all 10 questions given in the post-course questionnaire. An acceptable result ‘is that 90% of all candidates said that they were ‘satisfied or very satisfied’ with key aspects of the course’. Judy had achieved this on seven of the questions but specifically failed on the following performance measures;

– Percentage of candidates who felt that the course was relevant to their current job – only 65% of your candidates felt that the course was relevant to their current job.

– Percentage of candidates who passed the examination – only 88·88% of your candidates passed the examination.

– Percentage of candidates who felt that the course pace was satisfactory – only 75% of your candidates felt that the pace of the course was satisfactory.

After expressing her surprise that she had not been given this information before, she immediately returned to the problem of numeracy skills. ‘As I told you’ she said ‘some of these students lack the mathematical skills to pass. That’s not my fault, it is yours – you should not have let them on the course in the first place. You are just filling the places to make money’.

After a heated discussion, Blake then turned to the ‘last thing on my agenda’. He explained that it was only college policy to give pay increases to lecturers who had achieved 90% in all 10 questions, so there would be no increase for Judy next year. However, he also needed to discuss her workload for next year. He produced a spreadsheet and had just begun to discuss course planning and locations in great detail


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when his mobile phone rang. ‘I am sorry, Judy, I have to collect the children from school – I must go. I will write down your planned course assignments and e-mail them to you. I think that was a very useful discussion. Overall we are very happy with you. See you at the end-of-year party, and of course at next year’s appraisal.’ He left at 4.30 pm.

Explain the concept and purpose of competency frameworks for organisations, assessing their potential use at the National College and the Institute of Managerial Finance.

Solution

Competencies define what is expected from an individual in an organisation, both in terms of content and levels of performance. They should provide a map of the behaviours that will be valued, recognised and, in some organisations, rewarded. Employees have a set of objectives to work towards and are clear about how they are expected to perform their jobs. This would have been very useful at National College because the inappropriateness of some of the performance measures would have become clearer at a much earlier stage.

Originally, many competency frameworks concentrated on behavioural elements, for example, developing softer skills such as problem-solving. However, competency frameworks are increasingly becoming more ambitious and including technical competencies that in many ways are more specific and easier to assess than behaviours. Many examination syllabuses are cross-referenced to national competency frameworks and the Institute of Managerial Finance might consider this for their examinations.

Competencies are normally expressed at a number of levels; reflecting increasing demands in those competences. For example, in the Skills Framework for the Information Age (SFIA), which has four levels (3–7), level 3 is apply, level 4 is enable, level 5 advise and level 6 initiate or influence.

The competency framework usually defines competencies for each role within the organisation. There are typically ten or less competencies for each role. The detail for each competence has to be carefully balanced. If it is too general then employees are unsure of what is required and managers will have a problem in assessing staff against the defined competency.

On the other hand, if the definition of each competence is too detailed, it can be excessively time-consuming to develop, administer and maintain. In reality, defining the appropriate level of detail is one of the key challenges of defining an effective competency framework. Performance against current competencies and the development of desired competencies becomes one of the focuses of the appraisal. Adopting an appropriate competency framework should lead to a fairer appraisal system at the National College. It should also improve the fairness of the recruitment process.

Competency frameworks may be developed internally, usually using HR consultants. KPMG developed theirs in partnership with Saville & Holdsworth Ltd (ACCA Case Study). Alternatively, the organisation can use a framework published by an external organisation – usually a trade association or a government body.

The best solution is often a compromise between the two, using externally proven frameworks but tuning them so that they are relevant to the organisation. This has the


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added promise of providing a link between organisational and personal objectives. SFIA is published in two variants; SFIA, which is intended as a basis for tailoring to an organisation’s needs, and SFIAplus which should be treated as a standard and should not be customised.

Competency frameworks were originally focused on performance management and development. However, contemporary advocates now see competency frameworks as a significant contributor to organisational performance through focusing and reviewing an individual’s capability and potential. The competency framework might also be an important element in change management.

The CIPD Change Agenda Focus on the Learner concluded that ‘competencies have been a feature of progressive human resources development for more than a decade. What is new is their central importance as a means of providing a framework for the learner to take responsibility for their own learning’. Gold (referencing Holbeche, 1999) suggests that advocates of competencies perceive them as a mechanism for aligning organisational objectives with ‘the various HR activities of recruitment, selection, appraisal, training and reward’.


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Lecture 34 - Financial Strategy


164



No illustrations


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Lecture 35 - IT Risks & Controls


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Illustration 1

H is a training company that provides executive training in management subjects. H provides short courses that range from a single day to five days. H has five offices and each office has between ten and twenty full-time trainers.

H’s courses are very expensive. Delegates are senior managers and company directors. All courses are paid for by employers who are keen to equip their staff with new skills or to update existing knowledge. Many courses are taught in H’s offices to small groups of delegates, each of whom has come from a different company. These courses are advertised on H’s website and some, like “finance for non-financial managers”, are taught frequently throughout the year. H will also adapt an existing course or even write a new course from scratch and offer it in-house for a client company. Trainers often have to travel away from home and stay in hotels in order to present in-house courses at clients’ offices.

Each course delegate receives a printed copy of the course materials and an electronic copy on a memory stick. Feedback indicates that delegates like to refer to the paper copy during the course and then take the electronic copy for ease of storage and future reference.

Courses are presented using laptops and projectors. Slides are written on an industry-standard presentation software package. H has provided each trainer with a laptop and all of the company’s training rooms are equipped with projectors. Client companies also have projectors that are available for presentations.

Each course has a very specific syllabus and the course materials are written to a very high standard. A master copy of the material used on each course, including client-specific “in-house courses” is stored on a PC at H’s head office and updated copies are backed up to a server at another office. Courses are reviewed regularly and updated when required. The company- specific courses are held so that they can be adapted if necessary for other companies or to become a general offering.

‘Image’ is very important and H’s trainers all take great pride in their personal appearance. They all take care to ensure that they are well dressed. That pride also extends to being seen to have the latest technology. Many of H’s trainers have bought themselves tablet computers that they can use instead of their laptops. There are different operating systems for these machines, but all can run the software required to edit and present course materials and all of the trainers have purchased models that can work with standard projectors. The trainers feel that these tablets look more impressive and that they are lighter to pack when they have to work away from home on in-house courses. The tablets have also been used to go online and access H’s systems.

H’s Head of IT is concerned that there could be problems associated with the trainers using their own tablet computers in this way.


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Required

Discuss the risks associated with H’s staff using their own equipment (for example tablets) instead of the laptops provided by H.

Solution

There are several risks facing H in allowing staff to use their own equipment such as:

Data Corruption

The tablet computers used by the staff are used to go online and access H’s systems. The risk here is that if the staff use these tablet computers at home and pick up computer viruses from home use they may well pass the virus on to H’s own systems.

This is quite a high risk and requires that staff be very careful in their home usage of the tablet which may not always be the case either through lack of knowledge of the risks or lack of care taken.

Theft/breach of copyright

H is a training company who offer many different courses to a wide range of clients. There is a risk that by allowing staff to load these courses onto their own tablet computers they may be able to set up in competition should they subsequently leave the company.

This again is a high risk and leaves the company open to loss of market share if ex-employees offer the same or similar products at a lower price.

Data Protection

There is stringent legislation surrounding data-protection and there is a risk that if client data is loaded onto a personal tablet it then becomes used in a way that breaches the rules around data protection.

This presents a reputation risk for the business and could be damaging in the loss of clients were it to occur.

Loss of Data

Allowing staff to use personal tablets increases the risk of staff losing data by working independently on courses on their tablet and having it lost or staolen without backing it up.


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Company owned laptops etc. should be backed up on a regular basis, but this may not be the case for a personal computer which increases this risk.

Using the wrong course

Courses are reviewed regularly and backed-up centrally which leads to the risk of staff using personal tablets using older versions of the course because they haven’t had the most recent version uploaded onto their tablet.

This could lead to a course being presented on out of date information and even loss of a client who receives the incorrect information.


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Lecture 36 - Integrated Reporting


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No illustrations


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Documents

ACCA P3 - Business Analysis - Mapit Accountancy