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ACCA PasscardsPaper P3Business Analysis
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Professional Paper P3Business Analysis
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First edition 2007, Eighth edition June 2014ISBN 9781 4727 1131 1
e ISBN 9781 4727 1187 8British Library Cataloguing-in-Publication Data
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2014
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Page iii
ContentsPreface
Welcome to BPP Learning Medias ACCA Passcards for Professional Paper 3 Business Analysis. They focus on your exam and save you time. They incorporate diagrams to kick start your memory. They follow the overall structure of BPP Learning Medias Study Texts, but BPP Learning Medias ACCA
Passcards are not just a condensed book. Each card has been separately designed for clear presentation.Topics are self contained and can be grasped visually.
ACCA Passcards are still just the right size for pockets, briefcases and bags.Run through the Passcards as often as you can during your final revision period. The day before the exam, tryto go through the Passcards again! You will then be well on your way to passing your exams.
Good luck!
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Preface Contents
Page1 Business strategy 12 Environmental issues 73 Competitors and customers 174 Strategic capability 275 Stakeholders, ethics and culture 416 Strategic choices 537 Organising for success 738 Managing strategic change 899 Business process change 9510 Improving processes 10511 E-business 111
Page12 E-marketing 12913 Project management 14514 Finance 16115 Human resource management 17316 Strategic development 179
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1: Business strategy
Topic List
What is strategy?Levels of strategy in an organisationElements of strategic managementThe importance of contextThe strategy lenses
This chapter gives you an overview of the fundamentalsof strategy and strategy formulation, and how they relateto business analysis.
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Elements ofstrategic management
What isstrategy?
The strategylenses
The importanceof context
Levels of strategyin an organisation
STRATEGY: a course of action over the long term, including identifying the competences and resourcesrequired, to achieve a specific objective and fulfil stakeholder expectations.
Four elements of mission Purpose and planning Values Strategy Policies and standards
GOALS: General aimOBJECTIVES: SMART and PRIME
Areas for decision makingLong term directionScope of activitiesCompetitive advantageAdapting activities to fit businessenvironmentExploiting resources/competencesExpectations of key stakeholders
Strategic decisionsComplexSubject to uncertaintyImpact operational decisionsAffect whole organisationLead to change
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Elements ofstrategic management
What isstrategy?
The strategylenses
The importanceof context
Levels of strategyin an organisation
1: Business strategyPage 3
Corporate Overall purpose and scope, and how value will be added. Prioritisation and managementof stakeholder expectations. Allocation of corporate resources.
Business How to compete successfully in particular markets. Combines with corporate strategy ina small organisation. In larger organisations, strategies for strategic business units mustbe co-ordinated with corporate strategy, and with each other.
Operational How the component parts of the organisation deliver the higher-level objectives. Largelycreated and delivered by business functions such as marketing, production, finance,human resources management, and information systems.
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3
2
Three main levels of strategy in an organisation
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Position Choice Action is not simply a linear model.Need to recognise the interdependencies between position (analysis),choice and action (implementation).
Elements ofstrategic management
What isstrategy?
The strategylenses
The importanceof context
Levels of strategyin an organisation
Johnson, Scholes and Whittingtons model of strategy
Environment opportunities threats complexityCapability resources and competences strengths weaknessesStakeholder expectations purpose of strategy power/interest governance ethics
Strategic position
Made at corporate andbusiness levels
How to achievecompetitive advantage
Scope Direction of development Method of development
Strategic choices
Structuring processes relationships
Enabling management of resources
Change change management
Strategy into action
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Elements ofstrategic management
What isstrategy?
The strategylenses
The importanceof context
Levels of strategyin an organisation
1: Business strategyPage 5
The organisational setting in which strategy is developed. Possible contexts include:Small business Limited product range, markets and resources (especially financial), but significant
pressure from competitorsMultinational Diverse products, processes and markets, with significant resources and multiple
operationsThe public sector Constraints on funding, commitment to service provision and the need to
demonstrate value Not for profit organisation Diverse sources of funds, strong underlying values and purposeIntangible products Product information, after-sales service, brand values, staff performance (for both
manufacturing and service companies)
The context of strategy
Exam focusContext is very important in the P3 exam. Question scenarios will provide context for the question requirements.You must always consider the context of the question and make your answer directly relevant to it.
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Elements ofstrategic management
What isstrategy?
The strategylenses
The importanceof context
Levels of strategyin an organisation
Johnson, Scholes & Whittington suggest that strategy, and the development of strategic thinking, can beexamined through three lenses.
Strategy as design a rational, top-down process rational managers, clear objectives.Strategy is exclusively managements responsibility, and the organisationsrole is to implement managements plans.
Strategy as experience an adaptation of what has worked in the past based on experience,assumptions, and decisions to satisfice rather than optimise. Strategiesdevelop in incremental and adaptive ways, and emerge from lower levels ofthe organisation.
Strategy as ideas strategy based on innovation, diversity of ideas, informal interaction andexperimentation. Managers create the context and conditions for new ideasto emerge, but must prevent strategic drift. Organisational culture mustsupport innovation.
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2: Environmental issues
Topic List
The organisation in its environmentThe macro environmentThe competitive advantage of nationsThe environment in the future Competitive forces
Understanding the changing environment is one of thekey elements in both defining and developing strategy.One possible definition of corporate strategy is seeking agood fit with the environment. To achieve that fit, anorganisation must have a thorough knowledge of itsenvironment.
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Competitiveforces
The organisationin its environment
The environmentin the future
The competitiveadvantage of nations
The macroenvironment
All organisations are open systems they have a variety of interchanges with the environment (inputs andoutputs).The environment can be divided into three concentric layers:Environmental element Basis of analysisMacro-environment PESTEL
Key drivers of changeScenarios
Industry or sector Five forces (Porter)Cycles of competition
Competitors and markets Strategic groupsMarket segmentsCritical success factors
Macro-environment
Industry or sector
Competitors and markets
The organisation
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The macroenvironment
Competitiveforces
The organisationin its environment
The environmentin the future
The competitiveadvantage of nations
2: Environmental issuesPage 9
The PESTEL framework is based upon six segments: political, economic, socio-cultural, technological, environmentalprotection and legal.
Political/legal factorsGovernments oversee framework in which businessoperates eg physical, social and market infrastructure.Many aspects of business activity are subject to legalregulation: Contracts Employment Health and safety TaxOther aspects are regulated by supervisory bodies. TheEU is a significant influence.
Economic factorsThese operate in both a national and internationalcontext. Relevant factors include:
Inflation rates Growth/fall of GDP Employment rates Savings levels Interest rates Exchange rates Tax levels International trade The business cycle Capital markets
Fiscal policy (taxes, borrowing, spending) Monetary policy (interest rates, exchange rates) Size and scope of the public sector
Government policy
Political change and politicalrisks affects the planningactivities of many businesses
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The macroenvironment
Competitiveforces
The organisationin its environment
The environmentin the future
The competitiveadvantage of nations
Social factors Technological factors
Technological developments affect all aspects ofbusiness (especially IT developments)
Many strategies are based on exploiting technological change(eg Internet and e-commerce). Others are defences againstsuch change (eg emphasising service or quality when acompetitor introduces a major technical development).
Business must be particularly aware of cultural change.
New products and services become available New methods of production and service provision New ways of selling (e-commerce); Improved handling of information in sales and finance New organisation structures to exploit technology New media for communication with customers and within
the business (eg Internet and email); facilitates businessbecoming global.
Demography is the study of human population andpopulation trends. (eg birth rate, average age, ethnicity,death rate, family structure, social structure and wealth).Demographic changes have clear implications for patternsof demand. They also affect availability of labour. Can alsoaffect recruitment policies.
Culture in society provides a framework for understandingbeliefs and values, and creates patterns of human activity.It influences tastes and lifestyles.Affects: Marketing - may need to adapt products/services for a
particular market. HR - cultural differences in recruitment.
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2: Environmental issuesPage 11
Environmental protectionPressure coming from many quarters: Green pressure groups Legislation Employees Environmental risk screening Corporate Social Responsibility
Possible green issues for businesses to consider: Consumer demand for environmentally friendly
products Greater regulation by governments and
international bodies Businesses may be charged for the external cost
of their activities
Scarcity of non-renewable resources Sustainability of operations. Opportunities to develop new environmentally
friendly products and technologies
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Competitiveforces
The organisationin its environment
The environmentin the future
The competitiveadvantage of nations
The macroenvironment
Four aspects of globalisation are key drivers of change in the macro environment
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2
3
4
Market globalisation
Cost globalisation
Government policy
Global competition
Converging tastes; improving communications.
Economies of scale are a major source of cost advantage; purchaserssearch globally for lowest-cost suppliers.
Increasingly sympathetic to free trade.
High levels of international trade encourage global competition. Theexistence of global competitors and global customers in an industryencourages firms which currently only trade in one country to expand to beable to compete more effectively.
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Competitiveforces
The organisationin its environment
The environmentin the future
The competitiveadvantage of nations
The macroenvironment
2: Environmental issuesPage 13
Porter identifies four determinants of national competitive advantage on an industry basis. He refers to themas the diamond.
Demand conditionsBuyers in the home market set fundamentalparameters such as market segments, degreeof sophistication, rate of growth and rate ofinnovation. Early saturation of the homemarket will encourage a firm to export.
Factor conditionsEndowments of inputs to productionBasic: natural resources, climate, labour -unsustainable for competitive advantageAdvanced: infrastructure, technical education, high-tech industries - promote competitive advantage
Related and supporting industriesSuccess in related industries gives mutual support. Strong home suppliers make the industry more robust.
Rivalry creates supplier specialisations. Clusters of related industries derive strength from their links.
Firm strategy, structure and rivalryCultural factors, management style, time horizons and capital markets all help determine orientation and
capability. Domestic rivalry leads to competitive strength.
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The competitiveadvantage of nations
Competitiveforces
The organisationin its environment
The environmentin the future
The macroenvironment
ForecastingSound knowledge of the environment requiressome element of forecasting. The past is notnecessarily a good guide to the future, but insimple, static conditions time series analysis andregression analysis can be used.Economic forecasting uses leading indicators toassess future economic conditions.A scenario is a detailed and consistent view of howthe environment might develop in the future.Macro scenarios consider possible futures overall.Industry scenarios look in more detail at a singleindustry.
Scenario construction (Mercer)1
2
3
Identify drivers of change
Arrange drivers in a viableframework
Produce 7-9 mini-scenarios
Group mini-scenarios into 2-3comprehensive scenarios
Write up the scenarios
Identify issues arising, and what theymean to the business
4
5
6
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The environmentin the future
Competitiveforces
The organisationin its environment
The competitiveadvantage of nations
The macroenvironment
2: Environmental issuesPage 15
Scale economies Product differentiation Switching costs Access to distribution Patent rights Access to resources
Porter says that five forces together determine the long-term profit potential of an industry
Bargaining power of suppliers
Threat of new entrants
Rivalry among current competitors
Bargaining power of customers
Depends on: Number of suppliers Threats to suppliers'
industry Number of customers in
the industry Scope for substitution Switching costs Selling skills
Depends on: Volume bought Scope for substitution Switching costs Purchasing skills Importance of quality
Suppliers seek higher prices
Market growth Buyers ease of switching Spare capacity Exit barriers Uncertainty about competitors strategy
Customers seek lower prices
This is limited by barriers to entry
Threat from substitute productsA substitute is produced by a different industry
but satisfies the same needs
Depends on:
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Notes
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3: Competitors and customers
Topic List
Competition dynamicsThe marketing mixCustomers and segmentationUnderstanding the customer
A detailed knowledge of both competitors and customersis very important for strategy development. In particular,the cycle of competition and critical success factors arevery examinable.
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Understandingthe customer
Customers andsegmentation
The marketingmix
Competitiondynamics
EncirclementSimultaneous flank
attacks
Incumbent
Head-onIdentical
marketingmix
FlankNeglected segmentarea of technology
GuerillaAggressive, short
term moves
FlankingDefends
secondarymarkets
ContractionConcentrate on most
desirable markets
Incumbent
PositionChange nothing
Pre-emtiveAttack first
MobileBroaden and
diversity markets
Challenger
BypassUnrelated products,new areas, technical
advancesChallengerAttacks Defences
Cycle of competition
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3: Competitors and customersPage 19
Industry life cycle
Exam focus pointFor an organisations strategy to be successful, it needs to be appropriate to where its industry or productsare in their lifecycles.
Inception Growth Maturity/shakeout Decline
Product characteristics Basic, no standardsestablished
Improved design and quality,differentiated
Standardised product withlittle differentiation
Varied quality but fairlyundifferentiated
Competitors None to few Many entrants Competition increases,weaker players leave
Few remain. Competitionmay be on price
Buyers Early adopters, prosperous,curious must be induced
More customers attractedand aware
Mass market, brandswitching common
Enthusiasts, traditionalists,sophisticates
Profits Negative high first moveradvantage
Good, possibly starting todecline
Eroding under pressure ofcompetition Variable
Technology No standards established Technologies become morestandardised
Technology is understoodacross the industry
Technology is understoodacross the industry
Production processesSmall scale batchproduction.
Specialised distributors
Mass production.Distribution networksexpanded
Long production runs. Costefficiency critical
Overcapacity. Production isreduced
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Understandingthe customer
Customers andsegmentation
The marketingmix
Competitiondynamics
Product
Trade off between price and valueoffered to customer
Place Promotion
Price
Design Features Quality and reliability After sales service
Market channels Logistics Direct distribution or use of
intermediaries? Speed of delivery
Advertising (on line; off line) Sales promotion Direct selling Public relations
Luxury or necessity? Competitors prices Quality connotations Discounts Payment terms
People Service and service
provider are inseparablein service marketing
Front-line staff embodythe service
Customer satisfaction?
Processes Efficiency;
standardisation;automation
Queuing and waitingtimes
Capacity management Information gathering
and processing
Physical evidence Evidence of ownership
for services(intangibility)
Design and specificationof service environment
Marketing mix
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Customers andsegmentation
Understandingthe customer
The marketingmix
Competitiondynamics
3: Competitors and customersPage 21
Buyer behaviour models aim to show how purchase decisions are made.We can distinguish CONSUMER markets and INDUSTRIAL markets. Industrial buyers are more rationallymotivated than consumers in deciding what goods to buy.Government, reseller and export markets may also be considered.
The consumer market
Socio economic Psychological
Influences
Convenience (everyday) goods Shopping (higher value) goods Speciality (unique) goods
Products
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Understandingthe customer
Customers andsegmentation
The Marketing mix
Competitiondynamics
The industrial market
User Influencer Gatekeeper Buyer
Decision Making Unit
Quality and reliability Price Credit offered Problems solved Budgetary control
Influences
Raw materials Subcomponents Capital equipment Supplies
Products
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3: Competitors and customersPage 23
Market segmentationis the subdividing of a market intoincreasingly homogeneous subgroups ofcustomers, where any subgroup can beconceivably selected as a target marketto be met with a distinct marketing mix.It is relevant to a focus strategy.
Target marketOne or more segments selected forspecial attention by a company.
Policy options UNDIFFERENTIATED
CONCENTRATED
DIFFERENTIATED
Same product to whole market
One segment only
Several versions for many segments
A firm should only develop a uniquemarketing mix for a valid segment.
Better satisfaction of customer needs Revenue/profit growth Targeted communication Customer retention Product positioning
Reasons for segmentation
Measurable Potentially profitable Accessible, and can Susceptible to a distinct marketing mix
be accessed profitably Stable
Segments should be
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Understandingthe customer
Customers andsegmentation
The marketingmix
Competitiondynamics
The customer lifecycle Promotional expense is front-loaded; sales grow with time Consumer incomes rise with time; early purchases are likely to be basic may be more differentiated later
Use it to identify your mostprofitable/expensive customers
Compare cost of acquiring newcustomers vs retaining existing ones
Details of costs could be obtained froma relational database
Tools for analysis
To establish: Size of customer base Order sizes Product profitability Market share Growth and prospects Demand Price sensitivity Competition/substitutes
11 Marketing audit
Who are the keycustomers?
Customer history How important are they? Attitudes and behaviour Financial performance Profitability of their orders
22 Key customeranalysis
This varies from customer to customerbecause of customer-specific costs such asdiscounts, distribution costs, complexity oforders and credit given.
33 Customer profitability analysis
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3: Competitors and customersPage 25
Opportunities and threatsInformation about the environment may be summarised asopportunities and threats.OpportunitiesOpportunities often take the form of strategic gaps such as: Potential substitutes for existing products or
complements to them Different strategic customers via new distribution
methods such as the Internet Potential new market segmentsThreatsThe most immediate threats probably emerge from theimmediate industry: the five forces are a good guide. Thewider PESTEL environment must also be monitored, butthreats may be more difficult to recognise.
Strategic customer
Critical success factorsare those product features that are particularlyvalued by a group of customers and, therefore,where the organisation must outperformcompetitors.
is the purchaser of the product offered. Thismay not be the end user. The end usersrequirements are important, but those of anyintermediary purchaser are of primary strategicimportance.
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Understandingthe customer
Customers andsegmentation
MarketingCompetitiondynamics
Strategic groups CSFs Market segmentation Marketing mix
Understanding thecustomer
Inception Growth Maturity Decline
Customers and markets
External forces
New entrants Substitute products Bargaining power of customers Bargaining power of consumers Rivalry amongst current competition
Industry analysis
Political Economic Social Technological Environmental Legal
Macro-environment
National competitiveness
Demand conditionsFactor conditionsRelated industries
Firm strategy,structure, rivalry
Opportunitiesor
Threats
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4: Strategic capability
Topic ListThe organisations resourcesCost efficiencyKnowledgeThe value chainThe product portfolioBenchmarkingManaging strategic capabilitySWOT and TOWS
A detailed knowledge of the frameworks and models inthis chapter is very important in beginning to understandhow strategic choices are made.
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Cost efficiency
The valuechain
KnowledgeThe organisationsresources
BenchmarkingThe productportfolio
Strategic capability: the adequacy and suitability of an organisations resources and competences toachieve its strategy.
9 Ms Model (review of organisations resources) Machinery Makeup Management Markets Materials Methods Management information Money Men and womenPosition-based strategy aims to achieve competitive advantage by positioning a market offering to respond tothe opportunities and threats present in the environment.Resource-based strategy is based on the possession of distinctive resources, which may be physicalresources or competences. Competences are the activities and processes through which an organisationdeploys its resources effectively.Threshold competences and resources meet customers minimum requirements and are needed for survival.Unique resources and core competences underpin competitive advantage and are difficult for competitors toimitate or obtain.
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Cost efficiency
The valuechain
KnowledgeThe organisationsresources
BenchmarkingThe productportfolio
4: Strategic capabilityPage 29
Cost Efficiency is fundamental to strategic capabilityfor both public and private sector organisations. It isregarded as a threshold competence (vital for meresurvival) and is achieved in four main ways:
If competitive advantage is to be based on corecompetences and strategic capabilities, thecapabilities must have four key qualities:
Exploitation of scale economies reducing costsper unitControl of the cost of incoming supplies transport costs; supplier relationshipsCareful design of products and processes minimising direct and indirect costsExploitation of experience effects learningcurve effects; outsourcing
Offer value to buyers contribute to customerneedsRare can create competitive advantage byitselfRobust (difficult to imitate) linking ofprocesses and activities in ways that cannotbe copiedNon substitutable substitute products andcompetences are a key threat
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3
4
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2
3
4
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Cost efficiency
The valuechain
KnowledgeThe organisationsresources
BenchmarkingThe productportfolio
The progression from data to knowledge
The aim of knowledge management is to capture, organise and make widely available all the knowledge thatthe organisation possesses (ie use knowledge as a resource to contribute to competitive advantage).
Data Information KnowledgeNature Facts Relationships between
processed factsPatterns discerned ininformation
Importance ofcontext
Total Some Context independent
Importance tobusiness
Mundane Probably useful formanagement
May be strategically useful
Relevant ITsystems
Office automationData warehouse
GroupwareExpert systemsReport writing softwareIntranet
Data miningIntranetExpert systems
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4: Strategic capabilityPage 31
Learning based strategy incorporates knowledge management and innovation.
Knowledge management InnovationRecords, organises, retrieves and
applies knowledge effectively. ITsystems will probably be used. Good
knowledge management avoidsconstant re-invention of the wheel.
Innovation is encouraged by topmanagement; organisationalpurposes are continually re-examined;it is accepted that innovative solutionscan emerge at any level.
A top-down, command and control approach will not promote learning based strategy. The company must beopen to the environment and welcome new ideas and fresh insights. However, management must guide the
learning process and take necessary decisions.
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Cost efficiency
The valuechain
KnowledgeThe organisationsresources
BenchmarkingThe productportfolio
Porter grouped the various activities of anorganisation into a value chain.
FIRM INFRASTRUCTUREHUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENTPROCUREMENT
INBOUNDLOGISTICS OPERATIONS
OUTBOUNDLOGISTICS
SUPP
ORT
ACTIV
ITIES
PRIMARY ACTIVITIESMARGIN
MARGIN
MARKETING& SALES SERVICE
The margin is the excess the customer is prepared topay over the cost to the firm of obtaining resourceinputs and providing value activities. It represents thevalue created by the value activities themselves andby the management of the linkages between them.Linkages connect the activities in the value chain. Theactivities affect one another and therefore must be co-ordinated.Using the value chain. A firm can secure competitiveadvantage in several ways. Invent new or better ways to do activities Combine activities in new or better ways Manage the linkages in its own value chain Manage the linkages in the value network
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4: Strategic capabilityPage 33
Organisationsvalue chain
Suppliervalue chains
Distributor/retailervalue chains
Customervalue chains
A firms value chain is connected to the value network. The value created for a product's end user is oftenthe output of a complex system that includesseveral organisations value chains. The linksbetween these value chains representopportunities to create more value.The links also represent opportunities for individualorganisations to capture more of the value createdby the overall system by managing them to theiradvantage. This can be done in a direct way byvertical integration or the use of bargining powerover suppliers and customers. It can also beachieved more subtly by providing coordinationand by fostering relationships that promoteinnovation.
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Cost efficiency
The valuechain
KnowledgeThe organisationsresources
BenchmarkingThe productportfolio
The companys offerings to the market are fundamentalto its success. They must be kept under review so thatthere is a suitable mix. The product life cycle is animportant concept but it must be applied with care. Wecan distinguish 3 aspects of product.
Product class (or generic product) a broad category
Brand The specific product
Product form type within the category
Product life cycle
+
_
Inception Growth Maturity Decline Senility
Sales
Profits
Inception: development; marketing and production costs high;sales volume low; profits lowGrowth: sales volumes accelerate; unit costs fall; profits rise;competitors enter the marketMaturity: longest period; profits good; reminder promotionDecline: many causes; sales fall; over capacity in industry; someplayers leave marketSenility: profit negligible; product may be retained in niche
1
3
2
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4: Strategic capabilityPage 35
The development of new products is an important aspect of a firms strategy. New products can overcomeentry barriers and help give a company a balanced portfolio. Product innovation can also be a major sourceof competitive advantage.
New to the world New product line Additions to product line Repositioning Improvements/revisions Cost reductions
How are they new?
Leader strategy: high cost ofR&D, potential high reward, highrisk
Follower strategy: lower cost, lessR&D expertise needed, lower risk,reduced reward
How is it approached?
The management accountantcan help by analysing thecost components of the newproduct. This may lead to theremoval of superfluousfeatures.
New product development should be controlled by subjecting projects to aseries of gates, or review meetings, to decide whether they have made therequired progress, and to determine what must be achieved to pass the next gate.
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Cost efficiency
The valuechain
KnowledgeThe organisationsresources
BenchmarkingThe productportfolio
Roles of the R&D department
Intrapreneurship
Environmental analysis: technologicalopportunities and threats.
Technological position audit. Planning and controlling R&D. Developing new products. Developing new processes. Encouraging a culture of innovation
and learning.
New product research including developing, testing and prototyping.Screening product ideas against strategic objectives, technicalfeasibility and market requirements.Value engineering of existing products.Extending product life cycles.Ensuring (or preventing) backward compatibility with existingproducts.Processes themselves may be crucial, as in service industries.Productivity enhancements.Quality enhancements.
The R&D effort should support theorganisations strategy. Forexample, product development andmarket development are likely torequire different R&D emphases.
Entrepreneurial activity below the strategic apex. Innovation is encouraged by: Culture of risk-taking and tolerance of mistakes. Flexible organisation structure. Willingness to devote resources to new ideas. Reward policies that support new ideas.
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Cost efficiency
The valuechain
KnowledgeThe organisationsresources
BenchmarkingThe productportfolio
4: Strategic capabilityPage 37
Benchmarking involves establishing targets andcomparators against which to compare performance.Process
Ensure senior management commitment
Determine areas to benchmark and set objectivesEstablish performance measures
Select organisations to benchmark against
Measure own and others performance
Compare performance
Design and implement improvements
Monitor improvements
12
34
5
6
7
Why are these products or services provided at all? Why are they provided in that particular way? What are the examples of best practice elsewhere? How should activities be reshaped in the light of
these comparisons?
The questions to ask (Johnson, Scholes and Whittington)
8
3 levels of benchmarking Resources: quantity and quality Competences in separate activities Competences in linked activities
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Cost efficiency
The valuechain
KnowledgeThe organisationsresources
BenchmarkingThe productportfolio
Benchmarking can produce improvements in the value system but this is not guaranteed. It tends to improve the efficiency with which systems work rather than the effectiveness of their outputs. Benchmarking will only be useful if the systems being compared are the ones which are critical for business
success. (It sometimes concentrates on doing things right rather than doing the right things.) Comparison with similar systems ignores the emergence of substitutes. It is a catchingup exercise rather than a development of anything new. It does not indicate how competitors may be overtaken. It has significant costs, not least in management time. It can be a threat to commercial security.
Problems with benchmarking
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SWOT andTOWS
Managingstrategic capability
4: Strategic capabilityPage 39
Informal processesExisting strategic capability can be difficult to understand and, therefore, to manage, especially when it derives fromcore competences based on informal processes. Managers must take care not to disrupt such competences byattempting to manage or formalise them.
Opportunities to stretch and improve strategic capability Use existing competences in new activities Eliminate or outsource activities that do not support
CSFs Extend best practice Improve and add activities to better support CSFs Remedy weaknesses Utilise external capacity by acquisition and co-
operation (alliances; joint ventures)
HRMMuch strategic capability depends on peoples abilities, skillsand knowledge. Such capability can be enchanced by HRMpractice. Recruit for specific aptitudes such as leadership and
innovation Train and develop for specific rather than generic skills Develop individual strategic awareness
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SO strategy employ strengths to seize opportunitiesST strategy employ strengths to counter or avoid
threats.WO strategy address weakness in order to exploit
opportunityWT strategy defensive, avoid threats and impact of
weakness
SWOT andTOWS
Managingstrategic capability
The results can be combined in guiding strategy formation
StrengthsInternal
External
Weaknesses
Opportunities ThreatsMatch
SWOT analysis
INTERNALStrengthsWeaknesses
EXTERNALOpportunitiesThreats
and how they can be related.
(also known as corporate appraisal) is a review of:
Convert Remedy
Weihrich spoke of TOWS analysis to emphasisethreats and opportunities. SO strategies can beprofitable in the short term, generating the cashneeded to undertake WO strategies in the longerterm. ST and WT strategies are likely to be resourceneutral and are needed in the medium term to achieveoverall balance.
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5: Stakeholders, ethics and culture
Topic List
Ethics and the organisationSocial responsibilityCorporate governanceThe role of cultureIntegrated reporting
Business ethics is an increasingly important area, andone that is highly examinable both for its topicality and itssuitability for inclusion in scenario questions. Ethicalideas have a strategic impact upon organisations, andwith them come notions of corporate social responsibilityand principles of good corporate governance. Theinfluence of culture upon an organisation and its peoplemust not be underestimated.Finally, the rise of integrated reporting is considered.
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Ethics and theorganisation
Integratedreporting
The role ofculture
Corporategovernance
Socialresponsibility
Ethics are ideas about right and wrong that set standards for conduct. Ethics are important to business becausesociety considers such things important. There are also rules of professional conduct to consider. Ideas of right andwrong have become more fluid and less absolute. As a result there is a greater scrutiny of organisations behavioursince it is likely to be less subject to definitive internal rules.
Dealing with corrupt or unpleasant regimes Honesty in advertising Employees cost or asset? Corrupt payments to officials extortion, bribery or
gift? The local culture must be considered.
Scope of corporate ethics Ethical dilemmasConflicting views of the organisations responsibilitiescreate ethical dilemmas for managers at all levels.
Corporate ethics may be considered in three contexts:
The organisations interaction with nationaland international societyThe effects of the organisations routineoperations.The behaviour of individual members of staff
Organisations often publish corporate ethical codes todisseminate their policies on ethics.
1
2
3
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Ethics and theorganisation
Integratedreporting
The role ofculture
Corporategovernance
Socialresponsibility
5: Stakeholders, ethics and culturePage 43
?Should businesses actively practise social responsibility?
The business as fixer ofsocial problems
Big business has the resourcesto fight inequalities
ExamplesCharitable donations
Pollution controlCommunity activities
BUT
Long termv
Short term
Companies already discharge their responsibilitiesby contributing towards tax revenues.
The social audit recognisesthe expectations on a firm topromote social responsibility.In addition, there are greenpressures.
Pressure groups Employees Legislation
Environmental screening Sustainability of resources Ecological concerns
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Ethics and theorganisation
Integratedreporting
The role ofculture
Corporategovernance
Socialresponsibility
Stakeholders have a legitimateinterest in how the organisationbehaves. The extent to whichstakeholders should be able toinfluence behaviour is subject todebate, as is the matter of just whoshould qualify as a stakeholder. Somegroups will be accepted asstakeholders and their views will helpto determine the acceptability of astrategy.
Stakeholders interests are liable to conflict. Mendelowsstakeholder mapping helps the organisation to establish itspriorities and manage different stakeholder expectations.
A: Minimal effort B: Keep informed; little
direct influence butmay influence morepowerful stakeholders
C: Treat with care; oftenpassive but capableof moving to segmentD; keep satisfied
D: Key players strategy must beacceptable to them,at least
Level of interestHighLow
Low
High
Power
A B
C DStakeholders can be: Internal Connected External
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Ethics and theorganisation
Integratedreporting
The role ofculture
Corporategovernance
Socialresponsibility
5: Stakeholders, ethics and culturePage 45
The conduct of an organisations senior officers constitutes its corporate governance. The influence of thoseofficers over the behaviour of the organisation and the potential for both PR and financial disaster make this amatter of strategic importance.
External measures to improve corporate governance
1 Accounting standards attempt to prevent financial manipulation2 Codes of professional conduct regulate many senior managers3 Commissions on standards of behaviour (in the UK) have established best practiceFree flow of informationto stakeholders tends to inhibitwrong doing by senior managers.However, commercial confidentialitymust be respected.
Non-executive directorsmay remain objective and ensureproper governance in such areas asethics, audit and senior managerremuneration. However, there are nowaccusations of partiality within a close-knit body of non-executives in the UK.
Structural measures
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Ethics and theorganisation
Integratedreporting
The role ofculture
Corporategovernance
Socialresponsibility
Good corporate governance Reduces risk Improves performance Improves external perceptions Ensures an organisations strategy is directed
towards the benefit of legitimate stakeholders
Good corporate governanceCodes of best practice identify the way largecompanies should be run. Among their provisions arethese:
Directors remuneration should be subject toformal and clear procedures and be largelycontrolled by non-executive directors.
Non-executive directors audit committee shouldoversee both internal and external audit.
The governance frameworkEstablishes who the organisation exists to serve andhow its purposes and priorities should be decided.Separation of ownership and control brings the riskof adverse selection and moral hazard. Directors should use independent judgement;
the roles of Chairman and CEO should beseparate; no individual or group shoulddominate; there should be a balance of executiveand non-executive directors.
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Ethics and theorganisation
Integratedreporting
The role ofculture
Corporategovernance
Socialresponsibility
5: Stakeholders, ethics and culturePage 47
TheParadigm
Controlsystems
Organisa-tional
structures
Ritualsand
RoutinesPower
structures
SymbolsStories
Organisational culture consists of the beliefs, attitudes, practices and customs that affect people during theirinteraction with an organisation. It can have an important influence on strategy, both in the way that informationis interpreted and also by determining the acceptability of ideas and behaviour.
The cultural webJ, S and W suggest that theparadigm is reinforced by
physical aspects of culture.
The paradigmThe basic assumptions andbeliefs that an organisationsdecision-makers hold in commonand take for granted. It isessentially conservative since itis based on collective experience.It is closely linked to the strategyas experience lens.
The cultural web provides a way ofunderstanding behaviours within anorganisation and making sure all theorganisational elements are alignedwith one another, and with anorganisations strategy.If an organisation is not delivering theresults management wants, isorganisational culture contributing tothe under-performance?The cultural web can be very useful inchange management.
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Ethics and theorganisation
Integratedreporting
The role ofculture
Corporategovernance
Socialresponsibility
Integrated reporting is concerned with conveying a wider message on organisational performance. It isfundamentally concerned with reporting the value created by the organisation's resources.
Rise of integrated reportingTraditional corporate reporting is said to only tell part of the story. Stakeholders are increasingly interested inunderstanding how management use the organisation's resources to create value.
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5: Stakeholders, ethics and culturePage 49
Value creation The International Integrated Reporting Council introduced the Integrated Reporting Framework. The framework defines
resources as 'capitals'. Capitals are used to assess value creation. The framework classifies capitals as being:
ManufacturedCapitalIntellectual
Capital
HumanCapital
FinancialCapital
NaturalCapital
SocialCapital
IntegratedReporting Capitals
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Ethics and theorganisation
Integratedreporting
The role ofculture
Corporategovernance
Socialresponsibility
Interaction of capitalsAn increase in one capital may result in a decrease in another.
ExamplePaying for a staff training programme may increase humancapital (eg improve staff skills), but reduce financial capital asthe costs of the training programme will lead to a reduction inthe company's financial reserves (eg money).
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5: Stakeholders, ethics and culturePage 51
Integrated reporting does not involve attaching monetary values to every part of an organisation's operations. Value creation can be measured by the use of qualitative and quantitative performance measures.
ExampleCustomer satisfaction can be measured by comparingthe number of customers retained year on year.
Implications of introducingintegrated reporting
IT costs Consultancy costs Staff costs Disclosure
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Notes
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6: Strategic choices
Topic List
DiversificationThe corporate parent The corporate portfolioGeneric strategiesSustaining competitive advantageDirection and method of growthStrategy and market position Success criteria
Various strategic choices can present themselves to anorganisation. An organisation will select its preferredchoice as a result of environmental and internal analysisthat shows which choice provides the best strategic fitfor the organisation. There is no right or wrong answer:different frameworks and models will apply in differentbusiness settings.
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Genericstrategies
The corporateportfolio
The corporateparent
Diversification Sustaining competitiveadvantage
Diversity of products and markets may be advantageous to the organisation for three reasons:Economies of scope in the form of synergy
Corporate management skills are extended
Cross-subsidy can enhance market power
1
3
2
However, there are three questionable reasons that may be given to justify a policy of diversification:Response to environmental change may be a cover for protecting the interests of top managementand may lead to ill-considered acquisitions.
Risk spreading is valid for owner managed businesses, but shareholders in large public companies candiversify their own portfolios.
Powerful shareholder expectations, especially demands for growth, can lead to inappropriatediversification.
1
3
2
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6: Strategic choicesPage 55
Conglomerate (unrelated) diversificationHorizontal integration
Vertical integration
Other strategies Withdrawal Demerger
The organisation becomes its own supplier (backwardintegration) or distributor (forward integration). Secures supplies Stronger relationship with end-users Profits from all parts of value system Creates barriers to entryHowever: More eggs in same end-market basket (Ansoff)
more vulnerable to a single market Does not offer significant economies of scale
Spreads risk; escape from present business May obtain synergy (eg acquiring new skills,
utilising distribution channels, pooling R+D)organisational learning.
Use surplus cash/exploit under-used resourcesHowever: Unfamiliarity with new segments increases risk More opportunities to go wrong Lack of common culture and purpose
Development into activities that are competitive with,or complementary to, present activities; eg, electricitycompanies selling gas. Offers economies of scale.
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Genericstrategies
The corporateportfolio
The corporateparent
Diversification
International business orientations(Perlmutter)Ethnocentrism is a home country orientation inwhich the same products are marketed in the sameway both at home and in foreign countries.
Polycentrism adapts products and marketingmethods to each local environment. Each nationalsubsidiary runs its own operations.
Geocentrism recognises both similarities anddifferences between markets and incorporatesthem into regional or global strategies.
Regiocentrism is similar to geocentrism butconsiders that there are differences betweenregions.
Global strategic management (Ohmae)5 reasons why companies globalise (5 Cs)Customer: global market convergenceCompany: search for economies of scaleCompetition: demands global operationsCurrency: manage exchange rate risk by operating globallyCountry: explicit absolute and comparative advantage
5 stages in global expansionExporting via agents to extend scale of operationsOverseas branches to replace agents with stronger presenceOverseas production exploits cheap labour and saves shippingcostsInsiderisation via full capability: polycentric orientationGlobal company has geocentric management orientation
Sustaining competitiveadvantage
12345
123
45
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6: Strategic choicesPage 57
1. Whether to market abroadat all?
2. Which markets to enter? 3. Mode of entry?
Before getting involved, the company must consider both strategic(Does it fit?) and tactical/operational (Can we do it?) issues.
Adv Higher sales and profits Life cycle extended Spread seasonality Spread riskDisadv Less control Costly Adaptations needed
Key decisions for international expansion
Overseasproduction
Market attractiveness Competitive advantage possessed Risks (political; business; currency) Legal/regulatory factors
Direct orindirect
exporting
Foreignsubsidiaries orjoint ventures
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Genericstrategies
The corporateportfolio
The corporateparent
Diversification Sustaining competitiveadvantage
Exporting Overseas productionAdvantages Concentrates production; small start possible;
mnimises overheadsLower distribution costs; overcomes trade barriers; possibly lowerproduction costs
Key issues Exchange rates, protectionism Political risk; partnership; managing overseas facilities; more riskyInvolvement Usually less involved, but an exporter might
depend on the overseas marketUsually more involved, but overseas subsidiaries might actindependently: varying levels of control and risk
Entry strategies
Exporting
Indirect Direct
Export managementfirmsBuying officesPiggy-backingExport houses
WholesalersDistributors
StockistsAgents
via companybranch offices
to final user
E-commence and Internet
Licensing,Franchising
Contractmanufacture
Jointventure,
Consortium,Strategicalliances
Wholly ownedoverseas production
AcquisitionOrganic growth
Overseasproduction
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Genericstrategies
The corporateportfolio
The corporateparent
Diversification Sustaining competitiveadvantage
6: Strategic choicesPage 59
The corporate parent imposes costs, so it must create at least enough value to pay these costs. It may destroyvalue:
Exercise of managers political ambitions Size and complexity can obscure corporate vision Process and hierarchy slow decisions, stunt enterprise.
Envisioning corporate intent, communicating thevision to stakeholders and SBU managers, andacting in accordance with it.
Intervention to improve performance. Provision of services, resources and expertise.
Three value-creating roles for the corporateparent
Portfolio managers create value by applyingfinancial discipline.They keep their own costs low.
Synergy managers pursue economies of scopethrough the shared use of competences andresources.
Parental developers add value by deploying theirown competences to improve their SBUs'performance.
Three kinds of parent
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Genericstrategies
The corporateportfolio
The corporateparent
Diversification
Portfolio analysis is applicable to products, market segments and SBUs. There are four basic strategies:
The BCG Matrix
BuildInvest for market share
growth
HoldMaintain current
position
HarvestManage for profit in the
short term
DivestRelease resources for
use elsewhere
HighLow
Marketgrowth
Relative market share
Stars build Cash cows hold or harvestQuestion marks build or harvestDogs divest or hold
StarCash cow
Question markDog
High Low
Sustaining competitiveadvantage
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Ashridge portfolio displayBenefit (fit between SBU opportunities and parental skills etc)
6: Strategic choicesPage 61
Feel
CSFs(fit between SBU
andparental skills etc)
HighHigh
Low
LowBallastbusinesses
Heartlandbusinesses
Alienbusinesses
Value trap businesses
Heartland businesses can benefit from the attention of the parent without risk of harm from unsuitable developments.Ballast businesses are well-understood by the parent, but need little assistance. They should bear as little central cost as possible.Value trap businesses provide good opportunities for parenting, but these opportunities do not relate to the SBU's CSFs.Alien businesses have no place in the portfolio. They need the attention of a skilled parent, but the actual parent does not have theskills and resources required to help them. This approach is based on the idea of the corporate parent as a parental developer.
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Genericstrategies
The corporateportfolio
The corporateparent
Diversification Sustaining competitiveadvantage
The public sector portfolio matrixThe principal way of judging success in the private sector is by reference to customers. In the public sector, activities musthave political support. This does not depend exclusively on the opinions of the consumers of the services provided.
A public sector star is something that the system is doingwell and should not change. They are essential to theviability of the system.Political hot boxes are services that the public want, orwhich are mandated, but for which there are not adequateresources or competences.Golden fleeces are services that are done well but forwhich there is low demand. They are potential targets forcost cutting.Back drawer issues are unappreciated and have lowpriority for funding. They are obvious candidates for cuts,but if managers perceive them as essential, they shouldattempt to increase support for them and move them intothe political hot box category.
Public sector star
Ability to serve effectively
Political hot box
Golden fleece Back drawer issue
High
Public orpolitical need(and thereforesupport forexpense)
High Low
Low
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Genericstrategies
The corporateportfolio
The corporateparent
Diversification Sustaining competitiveadvantage
6: Strategic choicesPage 63
Cost leadership
Focus
DifferentiationAims to be the lowest cost producer in theindustry as a whole
Economies of scale Use the latest production technology or
cheap labour Productivity improvement Minimisation of overheads Favourable access to inputs
Aspects of cost leadership
Aims to exploit a product perceived as unique within theindustry as a whole
Breakthrough products radical performanceadvantage
Improved products superior performance at acompetitive price
Competitive products unique combinations of features Brand image Special features Unique combination of value activities
Aspects of differentiation
Activity is restricted to a particular segment of the market. Either a cost leadership or differentiation strategy is thenpursued. Such concentrated effort can be more effective, but the segment may be attacked by a larger firm.
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Genericstrategies
The corporateportfolio
The corporateparent
Diversification
Generic strategies and the five competitive forcesCompetitiveforceNewentrants
Substitutes
Cost leadershipAdvantages Disadvantages
Differentiation Cost leadership Differentiation
Customers
Suppliers
Industryrivalry
Economies of scale raise barriersto entry
Brand loyalty and perceiveduniqueness are entry barriers
Firm is not as vulnerable as itsless cost-effective competitors tothe threat of substitutes
Customer loyalty is a weaponagainst substitutes
Customers cannot drive downprices further than the next mostefficient competitor
Flexibility to deal with costincreases
Firm remains profitable whenrivals go under through excessiveprice competition
Unique features reduce directcompetition
Technological change will requirecapital investment, or makeproduction cheaper forcompetitorsCompetitors learn via imitationCost concerns ignore productdesign or marketing issues
Higher margins can offsetvulnerability to supplier pricerises
Increase in input costs canreduce price advantages
Customers have no comparablealternativeBrand loyalty should lower pricesensitivity
Customers may no longer need thedifferentiating factorSooner or later, customers becomeprice sensitive
Imitation narrows differentiation
Sustaining competitiveadvantage
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6: Strategic choicesPage 65
High
LowLow Price High
Perc
eived
adde
d va
lue
3 Hybrid Low price plusdifferentiation. Cost basemust be low. Can buildmarket share or be used formarket entry.
4 Differentiation perceived addedvalue either increases market shareor supports price premium
5 Focused differentiation seeks a high price premium inreturn for a high degree ofdifferentiation.3, 4 and 5 are all variants ondifferentiation.
6, 7 and 8 are all destined forultimate failure.
2 Low price better valuethan competitors. Costleadership needed. Pricewar may ensue.
1 No frills needs a largeprice-conscious segment. Maybe used for market entry tobuild volume and gainexperience.
6
7
8
The strategy clock
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Genericstrategies
The corporateportfolio
The corporateparent
Diversification Sustaining competitiveadvantage
SUSTAINING A PRICE BASEDSTRATEGY
SUSTAINING DIFFERENTIATION LOCK-IN (Delta model)
Increase volumes or cross subsidisefrom another SBU
Secure preferred access to customersor suppliers, via licensing for example,to block potential imitators
Achieved when a product becomesthe industry standard (eg Microsoftoperating systems)
Constantly and aggressively drivedown all costs (meaning companycan sustain a price advantage)
Strong branding, proprietarytechnology or co-specialisation can allmake the cost of switching high for acustomer
First mover advantage: Standard ismore likely to be set early in productlifecycle than when it is mature.
Engage in a price war (ifcompany is cost leader or hasextensive financial resources)
Cost advantages might be used toinvest in innovation, brandmanagement or quality improvements
Standard-setter becomes perceivedas the one to follow, especially if thestandard is set early in the productlifecycle
Implement a no frills strategy, forthose who particularly appreciatelow prices
Fierce defence tactics will often beemployed
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6: Strategic choicesPage 67
Strategy and hypercompetition
Be unpredictable Pre-empt imitation Small moves disguise intent Send misleading signals Attacks on weakness may provoke attempts
to improve
Principles for strategy
Reposition on the strategy clock Counter-attack undermine first mover
advantage by leapfrogging; initiate productmarket moves
Attack barriers to entry by rapid technologicaladvance, cross subsidy or use of economiesof scale from another market, anddevelopment of new distribution methods
Small players concentrate on niches, buildtrade alliances and merge with others
Options
HypercompetitionA condition of constant competitive change createdby frequent aggressive competitive moves. No firmcan create lasting competitive advantage. Successdepends on effective short-term moves.
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Strategy andmarket position
Direction andmethod of growth
Successcriteria
Market penetration Maintain or increase market share Dominate growth markets Drive out competition from mature
markets Increase usage by existing customers
Product development Launch new products (using existing
knowledge of customers and theirneeds/wants)
May require new competences Forces competitors to follow suit Discourages newcomers May require investment in R&D or new
production facilitiesMarket development
New markets for current products New geographic areas - export New package sizes New distribution channels Differential pricing to suit new
segments
Diversification
Related Unrelated(conglomerate)Vertical Horizontal
Forward BackwardNew competences will be required
Ansoff described the four possible growth vectors in the four cells in the diagrambelow: the growth vector matrix.
Existing
Existing New
New
MARKET
PRODUCT
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6: Strategic choicesPage 69
Include consortia, joint ventures, licensing,franchising and sub-contracting. These methods canenhance access to resources of all kinds, achieveeconomies of scale, achieve synergy, and enhancecompetences but stop short of a merger or takeover.
Cooperative methods
Organic growth Mergers and acquisitionsThe development of internal resources Supports learning and is supported by it Consistent culture and management style Provides economies of scale Ease of controlHowever: Can be slow Not good for dealing with barriers to entry
Can overcome barriers to entry Can spread risk Can defend against predators Provide access to a variety of resources: products;
managers; suppliers; production facilities;technology and skills; distribution facilities; cash; taxlosses
However, many acquisitions fail to enhance shareholdervalue. Cost: the acquisition price is often too high Customers may be disturbed by changes Cultural problems, especially in management Top management egos can warp judgement Professional advisers drive the market
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Strategy andmarket position
Direction andmethod of growth
Successcriteria
Joint ventures FranchisesTwo or more organisations join forces, and each hasa share in the equity and management of thebusiness.
Allow a business to expand with less capitalexpenditure than would otherwise be necessary.Franchisees pay lump sum to enter the franchise,and also bear some of the running costs.
Share costs - capital outlay is shared Synergies - combining expertise in different
areas Overseas JVs provide local knowledge, quickly Participating enterprises benefit from all sources
of profitBut: Profits are shared Conflicts over interest between different parties Disagreements over profit share splits,
management and strategy Risk of one partner withdrawing
Reduces capital requirements Quicker expansion than opening new company-
owned facilities Specialisation - franchisee and franchiser both
concentrate on their own areas Reduces head office and management costsBut: Profits are shared Issues re control over franchisees, and potential
for conflict Risk to brand/reputation if franchisee provides
inferior goods/services
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Strategy andmarket position
Direction andmethod of growth
6: Strategic choicesPage 71
Successcriteria
PIMS research showed a strong link between market share and profitability, probably dervived from scaleeconomies
Aims Expand total market Protect current market share Expand market share (eg increased
promotion, aggrerssive pricing)
Aim Build market share using attack strategiesoutlined in Chapter 3 and by attackingsmaller rivals
Accept status quo, compete in suitable segments, controlcosts and grow with market. Beware of predators.
Specialise in a niche with adequate size and growthpotential. Multiple niching spreads risk.
Strategies may be based upon market position
Market leaders
Market followers
Market challengers
Market nichers
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Strategy andmarket position
Direction andmethod of growth
Successcriteria
Strategies are evaluated according to:Their suitability to the firms strategic situationThis might be analysed using life cycle analysis;business profile analysis or strategy screening.TOWS strategies are inherently suitable.
Their feasibility in terms of resources and competencesResource deployment analysis, and financialapproaches such as funds flow analysis and breakeven analysis would be appropriate tools to access feasibility.
Their acceptability to key stakeholder groupsDepends upon the view of each stakeholder! Financial considerations (return on investment, cash flow,cost benefit analysis) are generally important, but dont forget issues such as government legislation orcorporate social responsibility. Also, risks must be carefully assessed.
1
3
2
Internalfactors
TOWS Matrix
SOUse strengths tomaximise opportunities
STUse strengths tominimise threats
WOMinimise weaknessesby taking advantage ofopportunities
WT
Minimise weaknessesand avoid threats
External factors
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7: Organising for success
Topic List
Challenges and conceptsTypes of structureProcessesRelationshipsCollaborative organisational structuresStereotypical configurationsConfiguration and strategy
The modern business environment has seen theemergence of new structural ideas and designs, andtraditional assumptions about organisation structure arebeing replaced with more flexible formats. The need toexploit knowledge has made organisation structures,processes and relationships vital ingredients in strategicsuccess.
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Challengesand concepts
Collaborativeorganisational structures
RelationshipsProcessesTypes ofstructure
An organisations configuration consists of the structures, process and relationships through which itoperates.
Rapid environmental change and uncertainty require organisations to be flexibleNew global communication and information systems must be accommodatedThe strategic importance of knowledge means that there must be effective processes and relationships for linking those who have knowledge and those whoneed it.
Formal structure shows:Who is responsible for whatWho communicates with whomAt the upper levels, the skills that are valued, and the roleof knowledge and skill
Processes and relationships will have varying degrees offormality and informality. The formal and informal aspectsmust work together.Also, processes and relationships are highlyinterdependent and must work intimately and consistentlytogether.
1
2
3
3 major challenges
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Challengesand concepts
Collaborativeorganisational structures
RelationshipsProcessesTypes ofstructure
7: Organising for successPage 75
Johnson, Scholes and Whittington identify review seven basic structural types:
Functional According to the type of work logical but does not reflect value creating processes
Multidivisional Semi-autonomous divisions that are then differentiated eg by-product brings problems ofbalkanisation and potential value creation.
Holding company Divisions are separate legal entities
Matrix Co-ordination across functional lines allows flexibility, but may cause confusion (dual authority) Transnational National units operate independently, but share capabilities some have a specialisation that supports
the whole organisation Team-based Use of cross functional teams to operate a specific process area
Project Similar to team-based, but with a finite life, since projects by definition have a finite lifeNo single model of organisation is suitable for all purposes. Managers must choose a structure in the light of which challenges theyregard as most pressing.
1
2
3
4
5
6
7
Self-contained organisational structures: historically most organisations have tended to be 'self contained' as they are distinctfrom external groups (customers, competitors and suppliers).
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Challengesand concepts
Collaborativeorganisational structures
RelationshipsProcessesTypes ofstructure
Control processes determine how organisations function. They may be analysed according to whether they deal with INPUTS orOUTPUTS, and whether they involve DIRECT MANAGEMENT ACTION or more INDIRECT effects. For example, balancedscorecards are direct output-based processes.
Types of control processInputs Outputs
Direct Supervision can be used for strategic control and ina crisisPlanning processes budgetary control andstandardisation schemes such as ISO 9000: 2000 workbest
Performance targets useful in large organisations whencombined with autonomy, and in heavily regulated activitiessuch as privatised utilities.Balanced scorecard emphasises need for broad range ofKPIs. See below.
Indirect Cultural processes can be very effective in complexand dynamic environments. Depend on good training.Self-control when combined with motivation, can bevery effective in exploiting knowledge. Depend onappropriate supportive leadership.
Internal markets useful in complex and dynamic markets.However, may encourage dysfunctional competition, time-consuming bargaining and increased bureaucracy to monitoreffects. May also destroy collaborative culture.
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Traditional accounting measures are inadequate for assessing overall progress. Other matters must be considered, especially as financial reporting is heavily retrospective in focus. The balanced scorecard covers most
of the angles with its four perspectives. Note that individual measures are company specific.
How do we create value for shareholders?This is thetraditional reporting perspective, but must not beoverlooked. Market share and sales growth areincluded here. Modern measures like value-added andshareholder value analysis should be included.
Can we continue to improve and create value? Thisperspective is forward looking and concentrates onwhat the company must do to satisfy future needs.Performance measures include time-to-market for newproducts and percentage of revenue from them.
How do customers see us? This perspectiveconcentrates on customers concern with price,quality, performance and service. Example measureswould be percentage of on-time deliveries andcustomer rejection rates.
What business processes must we excel at toachieve financial and customer objectives? Controlmeasures will focus on core competences, skills,productivity and cost, for example.
Customer perspective
Innovation and learning perspective
Internal business perspective
Financial perspective
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Challengesand concepts
Collaborativeorganisational structures
RelationshipsProcessesTypes ofstructure
Organisational relationships are categorised as internal or external. Degree of centralisation is an important issue in internalrelationships.
Allows easy exercise of firm control and strong leadership Policy and procedure are easily standardised Internal disputes may be settled more easily, though
political activity may still thrive Concentration avoids the increased overheads that
duplication of facilities may produce
Advantages of centralisation
Reduces the workload at the strategic apex Utilises expertise and local knowledge Enhances job satisfaction for subordinates Promotes faster response to changing conditions and
enhances flexibility Grooms managers for promotion
Advantages of decentralisation
Goold and Campbell identify three types of strategic decision making and control.
Strategic planners have a small number of core businesses. Planning and control are centralised.Strategic controllers tend to be diversified. The strategic apex provides objectives and guidelines, but leaves planning initiativesto business unit managers.Financial controllers are more interested in profit targets than business unit strategy. Use financial performance for control.
1
2
3
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External relationships are increasingly co-operative rather than adversial.
Boundary-less organisation structures involve the organisation collaborating with outside parties to makeit more flexible during times of change.
Hollow organisations Modular organisations Network Virtual Shamrock organisation Alliances
Boundary-less structures include:
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Challengesand concepts
Collaborativeorganisational structures
RelationshipsProcessesTypes ofstructure
Hollow organisation structure
Similar to a Network organisation Outsourcing is central to the creation of a hollow organisation Non-core processes are outsourced (eg Payroll) to specialist providers Entity now focuses on core value adding activities Outsourcing makes the organisation a hollowed out enitity
Modular organisation structure
Production processes are outsourced to specialist providers The organisation will assemble the outsourced components in-house to
produce a final product. Allows for cost efficiencies
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Outsourcing has made the concept of the boundary-less organisation possible. Outsourcing involves thecontracting out of certain internal functions to a third party.
Offshoring is a form of outsourcing which involves an external party in a different country providing anorganisation with a particular process.
Advantages of offshoring
Cost savings Focus on core activities Improve capability Skills Flexibility
Disadvantages of offshoring
Quality issues Public perceptions Loss of control
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Challengesand concepts
Collaborativeorganisational structures
RelationshipsProcessesTypes ofstructure
Shared servicing is an alternative to outsourcing. A shared service centre brings together certain functionswithin an organisation.IT support functions are commonly combined to provide services to the entire organisation, not just onedepartment.
Advantages of shared service centres
Reduced headcount Reduction in overhead costs Facilitates knowledge sharing Standardised approaches
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Shamrock organisation (Handy)
The virtual organisationContingentworkforce
Often part time/temp no career track routine
work engaged asrequired
Consumerseg buyers ofDIY furniture
Geographically dispersed organisational components Information technology is central to the production process Flexible structure Collaborative culture
Other forms of boundary-less organisation structure
Alliances Network organisationsMinimum effective scale may require pooling ofresources. Complex organisations such asalliances, partnerships and consortia result.Co-operation may be based on any value activity.
Network structure may exist within an organisation in theform of a loose array of informal, fluid relationships; thisapproach can achieve innovative response to change.
Strategic outsourcing can lead to external networks andvirtual teams.This creates interdependence. Competitorsmay collaborate on non-core competence matters such asR&D and distribution.
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Challengesand concepts
Collaborativeorganisational structures
RelationshipsProcessesTypes ofstructure
Organisations have turned to user contribution systems as a means of extracting and collating customercontributions.
Buchanan and Huczynski highlight 6 motivations for individuals tointeract via user contribution systems:
By-product Practical solutions Social rewards
Reputation Self-expression Altruism
New technologies such as Web 2.0 have enabled the widespread use of user contribution systems.
User contribution systems
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Crowdsourcing involves obtaining information from a large group of people. Organisations can use thisinformation to help solve commercial problems.
Drawbacks of crowdsourcing
Lack of credibility Collaborators do not have to collaborate
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Configurationand strategy
Stereotypicalconfigurations
StrategicApex
MiddleLine
administer andimplement
Tech
nostr
uctu
re
SupportStaff
Operating CoreDirectly involved in operations:
seek autonomy
Seeks control, responsible forstrategy and boundary management
Ancillary services eglegal, PR
Standardise work,work processes,outputs, skills egquantity assurancestaff
Mintzbergs view
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Mintzberg mentions one other co-ordinating factor: mission. A missionary organisation is one welded together byideology or culture. It features simple systems and network relationships in team structures. It works well in asimple and static environment.
Co-ordinationmechanism
Key part Environment Possible characteristics
Simple
MachinebureaucracyProfessionalbureaucracyDivisionalform
Adhocracy
Direct supervision
Standardisedwork processesStandardisedskillsStandardisedoutputs
Mutual adjustment
Strategic apex
Techno-structure
Operating core
Middle line
Support staff
Simple/dynamic (evenhostile)
Simple/stable
Complex/stable
Varies, each divisionis shielded to adegreeComplex/dynamic
Small, young, centralised,personality-driven.Crisis of leadershipOld, large, rule bound,specialisedDecentralised, emphasis ontrainingOld, large, divisions arequasi autonomous,decentralised, bureaucraticHigh automated, organic
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Configurationand strategy
Stereotypicalconfigurations
Chandler believed that structure is determined bystrategy. Johnson, Scholes and Whittington suggestthat there are few practical combinations ofstructures, processes and relationships. The onesthat work produce reinforcing cycles of behaviourthat make them cohesive, robust and difficult tochange. They look for opportunities that suit theirstyle. Change is thus dangerous since it disrupts thereinforcing cycles, leading to worseningperformance until a new cycle is established.
Any structure will have problems of optimisation,since all features have advantages anddisadvantages. For example, empowerment canpromote innovation but may lead to loss of control.
Possible approaches to optimisation Divide the organisation and use a different
approach in each part Combine features in unusual ways Reorganise often
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8: Managing strategic change
Topic List
Situation analysis for changeStyles of change managementChange management rolesChange management leversPitfalls of change management
Strategies can be expected to change and evolve overtime because of environmental changes anddevelopments. Certain factors will drive change, andexpecting and controlling such factors is an importantpart of strategic management.
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Changemanagement levers
Situation analysis for change
Pitfalls of changemanagement
Changemanagement roles
Styles of changemanagement
The management of change starts with an understanding of three main considerations.
The wider context of the change, in large part cultural considerations
The type of change required its scope and nature1
3
2 Time available Capacity - Availability of resources, especially finance, IS/IT and
management effort Features to preserve Workforce readiness to change, or resistence to change Organisational diversity Power to effect change Capability to manage change Scope of change needed
largely depends on experience
Realignment TransformationIncremental Adaptation Evolution'Big bang' Reconstruction Revolution
Scope of change
Nature ofchange
Forces facilitating and blocking change use of force field analysis
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Changemanagement levers
Situation analysis for change
Pitfalls of changemanagement
Changemanagement roles
Styles of changemanagement
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StyleEducation and communicationCollaboration and participationInterventionDirection
Coercion/edict
Different approaches may be appropriate to different stakeholders. Normal management practice will also affectthe style used. It may be advantageous to use more than one style.
Characterised by Appropriate toPersuasion Incremental change, willing staffInvolving those affected Incremental change, supportive cultureChange agents