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ACCA Paper P3: BUSINESS ANALYSIS

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For the ladies only ACCA Paper P3
Why study from a computer screen? Business Analysis
Memorising: Tips and techniques
Writing or saying things over and over again ….
Study Text
Vocalising
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The use of mnemonics
The use of jingles
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Visualising
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Do I need to memorise all your mnemonics?
Disguise your use of mnemonics in the exam
Charts
Colour codes
Electronic links within the database
Our results speak for themselves …
Syllabus Study Guide

The structure of the syllabus A Strategic position
Learning hours B Strategic choices
Guide to exam structure C Strategic action
Guide to examination assessment D Business process change
Aim E Information technology
Main capabilities F Quality issues
Relational diagram of main capabilities G Project management
Rationale H Financial analysis
Detailed syllabus I People
Approach to examining the syllabus Only
Tutorial 1
is hyperlinked
Route maps for this Free
Contents (with screen references)
Sample
Tutorial 1: Strategic position: Environmental aspects
Tutorial 2: Strategic position: Internal resources and stakeholders
Tutorial 3: Strategic choices: The influence of corporate strategy on the organisation
Tutorial 4: Strategic choices: Alternative ways of achieving competitive strategy
Tutorial 5: Strategic choices: Alternative directions and methods of development
Tutorial 6: Strategic action
Tutorial 7: Business process change
Tutorial 8: Information technology
Tutorial 9: Quality issues
Tutorial 10: Project management
Tutorial 11: Financial analysis
Tutorial 12: People
Route map of F1 revision
“Where shall I begin, please your majesty?” he asked. “Begin at the beginning,” the king
said gravely, “and go on till you come to the end: then stop.”
Lewis Carroll
Through the Looking-Glass

Tutorial 1
Strategic position:
Environmental aspects
ACCA Paper P3
Business Analysis

In this tutorial
 Fundamental nature and vocabulary of strategy and strategic decisions.

 How strategy may be formulated at different levels (corporate, business level,
operational) of an organisation.
 Johnson, Scholes and Whittingham’s model for defining elements of management.
 How strategic management is affected by different organisational contexts.
 A comparison of three strategic lens for viewing and understanding strategy.
 The scope of business analysis and its relationship to strategy and strategic
management in the context of the relational diagram of this syllabus.
 The macro-environment of an organisation using PESTEL.
 Key drivers of change likely to affect the structure of a sector or market.
 Porter’s Diamond.
 Preparing scenarios that reflect different assumptions about the future
environment of an organisation.
 Significance of industry, sector and convergence.
 Sources of competition in an industry or sector using Porter’s five forces
framework.
 Contribution of the lifecycle model and the cycle of competition to understanding
competitor behaviour.
 The influence of strategic groups and market segmentation.
. Establishing critical success factors for products and services.
 The role of the value chain in creating and sustaining competitive advantage.
 Different approaches to benchmarking an organisation’s performance.

The need for, and purpose of, strategic and business analysis
1. The fundamental nature and vocabulary of strategy and strategic decisions
(a) What is strategy?
The work "strategy" originates from a Greek word meaning the art of planning and conducting a war,
something akin to "generalship". From there the word has been stretched to cover the business field
- the art of preparing and conducting a business plan.
There are two distinct stages to strategy, namely
- the planning or development stage, and

- the stage when the plan is carried out - the execution stage.
The former is no good without the latter, and vice versa.
Roughly speaking, strategic planning is for the generals and other 'top brass', whereas execution is
for 'foot soldiers' and more lowly employees
(b) Strategy versus tactics
The terms strategy and tactics are often confused: strategy is the overall plan, which may
involve complex patterns of individual tactics, while tactics are the actual means used to achieve the
strategy.
If, for example, the overall goal is to build the customer base, one strategy might be to take
customers from a competitor. The tactics involved might describe specific actions to be taken such
as a price strike, advertising and promotion campaign, distribution network build and so on, and the
specific techniques and methods involved in accomplishing such objectives.
The differences might be remembered as:
Strategy is what to do ...... Tactics is how to do

Strategy is end ...... Tactics is means
(c) Strategic development
Once a policy decision has determined the long-term objectives for the company as a whole, it
becomes the task of senior managers to decide the best way in which to achieve these over the
following few years.
Unless a policy decision has been made which severely limits the field of study for the strategists,
their task will be complex, for the time-span they will be considering may be long enough to allow the
complete reorientation of the entire organisation ('transformation strategy') and its resources.
They will need to consider the desirability of
- certain product-market ploys

- the need for introducing new product lines
- the location of production sites
- changes required in the organisational structure of the company
and many other complex and far-reaching factors.

The range of choice facing strategists is always wide and the elements of uncertainty associated with
data upon which they must rely is also large.
(d) Tactics (again)
Once the strategy is approved, each part of the plan becomes the responsibility of an executive (or
team of executives) who may then take a series of tactical decisions in order to implement or, within
the limits of his/her authority, modify the strategy.
Real-world example
'The Vietnam War was lost on the ground in Vietnam, not in Washington.'
Source: Unknown
End of Real-world example
2. How strategy is formulated at different levels (corporate, business level, operational) of an

organisation
The need for strategy to guide policy and set direction is self-evident, particularly where the situation is
complex, the choices many and the information scarce and ambiguous. But what of the strategy-
formulating process, which so obviously differs from company to company and situation to situation. It
is, perhaps, useful to distinguish different approaches to strategic thinking; indeed to suggest a stage-
theoretical view as firms grow and mature, and evolve in their strategic processes.
For study convenience let us first follow this evolution through three stages:
- the 'entrepreneurial' stage

- the 'departmentalisation' stage
- the 'business-orientated planning' stage
(a) The entrepreneurial stage
At the entrepreneurial stage of enterprise one person dominates strategic thinking. His or her image
is seen throughout the business which often bears his/her name. Usually he/she is the owner-
manager. At most a handful of people are involved in longer-term thinking.
Real-world example: Sakiya
Any account of Honda's successes must grasp at the outset the unusual character of its
founder, Soichiro Honda was an inventive genius with a large ego and mercurial
temperament, given to bouts of 'philandering' (to use his expression). In the formative
stages of his company, Honda is variously reported to have tossed a geisha out of a
second-storey window, climbed inside a septic tank to retrieve a visiting supplier's false
teeth (and subsequently placed the teeth in his own mouth), appeared inebriated and in
costume before a formal presentation to Honda's bankers requesting finance vital to the
firm's survival (the loan was denied), hit a worker on the head with a wrench, and stripped
naked before his engineers to assemble a motorcycle engine.
Honda spent most of his time at the factory and the research laboratory, teaching plant
employees and engineers about technology.
(Source: Sakiya, T,. 'Honda Motor: The Men, The Management, The Machines',
Kodansha International, 1982.)
Real-world example: Ries and Trout
'Entrepreneurs are down at the front. Their ideas and concepts tend to spring from
their own personal experiences. They have the power to make decisions since they
don't have to seek the approval of others.‘
Source: Ries, A., Trout, J., 'Bottom-up marketing', (Plume 1990)
Strategy is seldom explicit in the entrepreneurial firm. (In other words it is not recorded or
documented.) Entrepreneurs carry ideas in their head. They know the business environment and is in
direct touch with it. The entrepreneur visits customers, contracts with suppliers, negotiates with the
bankers and knows the competitors.
There is no need for involved management information systems or complicated calculations; the
manager is his/her own information system. Consequently the situation has to be seen in relatively
simple terms.
As long as the entrepreneur can cope with the complexity and handle the forces in his/her
competitive setting, this can be a very successful basis for strategy formulation. (After all look at
the success of Honda!) Typically strategy emerges from a pattern of behaviour, without deliberate
or intended strategy, based on the short-term. (Some writers refer to this process of planning as
representing '.) Because of the close involvement of the owner-manager the strategy usually
produces a rational outcome.
The underlying perception of the business is as a series of ad hoc deals, a succession of contracts
or ventures, rather than a dominant strategy to create a market.
Consequently such firms are often dependent on a handful of customers for whom they provide a
customised service, such as manufacture to order. There is seldom a research and development
function, a marketing function, management accountants or expenditure on product or market
development.
There is an element of intuition and hunch, a reliance on good fortune, which is less apparent in
larger firms who rely, at least overtly, on more analysis and qualitative planning.
These characteristics are, obviously, highly generalised in this brief discussion. They are well
substantiated in a wealth of serious research undertaken by Henry Mintzberg, and others.
Real-world example: Mintzberg
'Planning, plans, and planners are likely to meet considerable resistance in the
entrepreneurial form of organisation..... Serious planning may get in the leader's way,
impeding free movement ...... .'
Source: Mintzberg, H., 'The rise and fall of strategic planning', (Prentice-Hall, 1994)
Such firms may be under pressure to change as enterprises grow, become more complex in their
products and services, more diverse in their procurement and production processes, more
geographically spread in their markets and large in their organisational scope.

Real-world example: Mintzberg
'Of course, as the entrepreneurial organisation grows, settles down, and begins to take on
the machine form [a 'Mintzberg term that we will discuss later], the visionary strategy of the
leader may be pinned down through strategic programming, and so the influence of the
planners may have to increase accordingly.'
Source: Mintzberg, H., 'The rise and fall of strategic planning', (Prentice-Hall, 1994)
(b) Department strategy
As enterprises grow and increase in complexity, formalisation and professionalism tend to occur.
Many responsibilities are delegated in departments, usually 'functional' departments. Budgetary
planning and control methods are introduced to help cope with the complexity, and departmental
responsibilities are located in cost and responsibility centres. Managers are involved and held
accountable.
The main effect of such a management process is, however, that decision making (and thus planning)
is, to a degree, decentralised into possibly three hierarchies: (1) the senior level [directors], (2) the
departmental (or functional) level [executives], and (3) the operating management level [junior
managers/supervisors]. Strategy, it could be said, has become multilayered.
System and order have been imposed, very necessarily, on the entrepreneurial excesses. But the
focus of attention has shifted into the business from its environment, although the main problem is
that the time horizon of budgetary control methods, typically a year, may be inappropriate for
strategic decision making on new investments, markets, technologies and products. Because of the
nature of the planning process, strategy here tends to produce an incremental (as opposed to
'rational‘) outcome.
To meet this criticism some firms attempt to roll forward their annual plans for three or even five
years. Still seeking forecasts of volumes and levels of activity in the years ahead, still attempting to
predict revenues, costs, profits and cash flows. (This is the essence of the term, 'long-term planning'!)
Unfortunately, in rapidly changing technological, market and economic conditions, such long term
plans (or strategy?) become less and less reliable and hence less useful as a basis for strategic
decisions. Also because they are based on the accountancy model of business (with the use of
decision making techniques such as DCF, etc.), they lack a sense of customer expectation and
competitor potential. However, by the nature of what long-term planning represents, strategy is
intended (or deliberate)
It is at this stage, it has to be said, when one hears complaints of the company being 'driven by
planners, analysts and accountants'.
(c) Business-orientated planning
As firms grow they find themselves operating in numerous different businesses. A business can
be defined, according to Abell, in terms of three dimensions: customer groups, customer needs, and
technology.
Companies identify their separate businesses in order to manage them strategically. The
approach adopted is to look ahead, with a time horizon appropriate to the particular business (for
example, quite short in the fashion industry, quite long in forestry) to identify possible future scenarios,
for each separate business.
The market-orientated (or positioning) approach to planning forces decisions on whether the
business should be:
- developing its existing products and services to its existing customers;
- extending through market development to provide existing products to new customers;
- extending with new products to existing customers; or/and
- growing in a diversification mode with essentially new products in a new market place.
Thus emerges the strategic business unit (SBU), a term often used in relation to business strategy.
SBU means a unit within the overall corporate entity for which there is an external market for its
goods and services and which is distinct from that of another SBU. For the sake of clarity it is useful
to consider business strategy at the level of the distinct market.
Real-world example: Strategic business units
The concept of the Strategic Business Unit (SBU) was devised by General Electric (GE) of
America. In the 1960s GE found that despite substantial growth in sales, its profits were
not increasing proportionately. GE's top management came to realise that one of the major
causes of the inadequate profits was the complexity and number of its product-markets
and the lack of balance between them. Accordingly, therefore, in 1971, it restructured its
170 or so departments into just fifty Strategic Business Units. Other large companies were
later to imitate GE by applying the concept.
Real-world example: Strategic business units

Campbell Soup Company established eight SBUs: soups, beverages, pet foods, frozen
foods, fresh produce, main meals, grocery, and food service.
End of Real-world examples
The characteristics of this form of multilayered management structure, is that planning and
decision making may take place at four distinct levels:
(i) Corporate strategy (senior management involved in corporate management, setting corporate
objectives, and agreeing the investment balance between the different business units [portfolio
management]).
(ii) Business strategy (SBU and divisional management concerned with product-market
positioning, capital programmes, and so on).
(iii) Functional strategy (functional [departmental] management involved with functional strategies
and functional budgets, etc.)
(iv) Operating management (junior management concerned with day to day operations, meeting
sales targets, cost reduction goals, and so on).
Figure 1.1 (on the next screen) summarises the different levels of strategy.

 Business portfolio management

Figure 1.1: Different levels of strategy  Liaison with Stock Exchange/shareholders
 Corporate treasury management
 Competitive strategy Corporate  Maximising corporate core competence
 Market penetration strategy strategy  Coordinating work within different SBUs
 Product development strategy
(Corporate management  Managing the effectiveness of SBU
 Market development strategy management
 Achieving agreed targets  ‘Fronting’ the company – public relations, etc.
 Management of human and other
resources Business strategy
 Management of the unit’s (SBU management)
investments
 Liaison with the corporate
 Budgets
board
 Planning programmes
 Project planning
Departmental tactics and plans  Resource planning
(Executive management)
 Action plans
Operational (day-to-day) plans

(Junior managers)
3. The Johnson, Scholes and Whittington model for defining elements of strategic management
Most writers would agree that there is no unique formula for the development of strategy. However, in
accordance with the views of Johnson, Scholes and Whittington, and numerous other writers, it is still
possible to identify three key elements of almost all different forms of strategic management. As
Figure 1.2 (below) shows, the three elements are:
- strategic position analysis

- strategic choices
- strategy into action (in other words, the implementation of the strategy)
Strategic position analysis
Strategy into action

Strategic choices
(Strategy implementation)
Figure 1.2:The elements of strategic management

(a) Strategic position analysis
Strategic analysis is concerned with understanding the strategic position of the organisation, i.e.
- the current strategic position, and

- the predicted future strategic position
A strategic position audit takes account of both external environmental factors and internal resources.
The aim of strategic position analysis is to form a view of the key influences on the present and
future prosperity of the enterprise and therefore on the choice of strategy.
Real-world example: Drucker
'The basic business analysis starts with an examination of the business as it is now, the
business as it has been bequeathed to us by the decisions, actions and results of the past.
We need to see the hard skeleton, the basic stuff that is the economic structure. We
need to see the relationship, and inter- relationship of resources and results, of efforts
and achievements, of revenues and costs'.
(Source: Drucker, P., 'Managing for Results', Pan, 1973.)
Tutorial comment
1. "Before you know where you are going, first you must know who you are and
where you've come from." (A statement from the Jewish faith)
2. "All the business of war, and indeed all the business of life, is to endeavour to find out
what you don't know by what you do; that's what I called 'guessing what was on the
other side of the hill". (Lord Wellington)
End of tutorial comment
Definition: Position audit
'Part of the planning process which examines the current state of the entity in respect of:
(a) resources of tangible and intangible assets and finance;

(b) products, brands and markets;
(c) operating systems such as production and distribution;
(d) internal organisation;
(e) current results;
(f) returns to stockholders.'
(Source: 'Management Accounting, Official Terminology of the CIMA‘, CIMA)
End of Definition
(b) Strategic choices
The aspect of strategic choice can be conceived of as having three parts:
- generation of strategic options

- evaluation of the strategic options
- selection of an appropriate strategy.
(c) Strategy into action (implementation)
Implementation of strategy can be thought of as having several parts:
- resource planning
- organisational structure development
- systems development
- managing change
4. How strategic management is affected by different organisational contexts
We have already seen how strategy and strategic development processes often evolve as
organisations change. Figure 1.3 helps by summarising the organisational contexts which may be involved.
Strategic
Figure 1.3: The organisational contexts
processes
of strategic development
(Contingent on
types of
enterprise)
 Strategy emerges from learning.
 Centralised planning. Small (or  Strategy often emerges due to short-run
 Power culture. embryonic) pressures/events.
 ‘Small company’ organisation and enterprise  Strategy has a short-run focus.
finance.
 Informal systems.  Strategic aims are cash related.
 Entrepreneurial thrust of owners.
 Mix of centralised/decentralised
planning and decision making. Medium-
 Role/task culture. sized
 More formality within systems. enterprise
 Entrepreneurship reserved for
Board.
 Use of formal planning system.

 Centralised (corporate) Large to very  More focus on long-term aims.
strategy.  Use of sophisticated planning
large
 Decentralised (divisional) techniques.
business strategy.
enterprise
 Strategy is mainly ‘deliberate’ – but there
 Formal systems. may also be emergent strategy.
 Entrepreneurship decentralised  Strategic aims are earnings-based.
in business units.
 Entrepreneurship Multinational
decentralised enterprise
in territorial business planning
and/or execution units.
ACCOUNTING SYSTEMS
(Strategic management accounting systems (SMAS)
and Management accounting information systems
(MAIS) adapt to meet the need of the situation
(‘contingency theory’.))

The 'Relational diagram of main capabilities‘ (of the Syllabus) demonstrates how the various parts of the
syllabus for Paper P3, Business Analysis are interrelated. It suggests that there are three
organisational layers:
- the top layer

- the middle layer
- the bottom layer
(a) The top layer
The 'top layer' of the relational diagram reflects the vocabulary of Johnson, Scholes and Whittington.
The syllabus begins with an assessment of the strategic position of an organisation, before moving on
to consider the strategic choices available to it.
Finally, strategic action concerns the implementation of strategic choices through appropriate
organisational actions.
(b) The middle layer
The 'middle layer' is an expansion of the implementation of strategy. Understanding the strategic
position of an organisation, and considering the strategic choices open to it, are of little value
unless the preferred strategies can be turned into organisational action.
Johnson, Scholes and Whittington acknowledge that 'such action takes form in the day-to-day
procedures and relationships that exist in organisations'.
Furthermore, strategies may emerge from these day-to-day activities, and the inclusion of this
'middle layer' (and indeed the 'bottom layer') should give students of this subject more opportunity to
reflect on strategy as an emergent, rather than a designed activity.
The focus of the 'middle layer' is on process redesign and automation, the e-business application
of information technology, and the role of quality - both as a threshold value and a differentiator. It
is perceived that these three elements are also interconnected. For example, many process redesign
initiatives use information technology to achieve improvements in product or service quality. All
three elements require effective project management.
Finally, strategic position, choices and implementation are all subject to financial benchmarks.
Financial analysis explicitly recognises this, reminding exam candidates of the importance of focusing
on the key ratios and measures that may be used to assess the position of an organisation, the
viability of a selected strategy, and the monitoring and measuring of its success.
This builds on capabilities defined in Paper F7, Financial Reporting and Paper F9, Financial
Management.
(c) The bottom layer
The 'bottom layer' of the relational diagram recognises that successful strategic planning and
implementation requires the effective recruitment, training, motivation, and organisation of people.
Tutorial comment
The text in the last section, referring to 'The relational diagram of this syllabus' was
reproduced from the article "Examiner's approach to Paper P3" by the examiner, Steve
Skidmore (26 January, 2008).
5. Three different strategic lenses
Strategic lenses are a concept of strategic management. They are three angles or visions from which
strategy can be viewed and implemented on a corporate level. They are:
- strategy as design
- strategy as experience
- strategy as ideas
(a) Strategy as design
This is a logical analytical process which views strategic development as a process of logical
determinism. Through careful evaluation of the firm's industry, environment and available resources,
the optimum strategy and clear direction can be determined.
The strategic process thus follows an analysis - selection - implementation sequence.
Fundamental to this view is that the responsibility of strategy development is top-management

driven and that they are capable of choosing the optimal strategy for the business.
(b) Strategy as experience
Many proponents of the view of strategy as design, such as Mintzberg, would argue that the design
lens is often inaccurate as top executives are too distant from daily developments of the enterprise.
According to Mintzberg, strategic development should be adaptive, and divides into intended, realised
and emergent strategies.
In this model, strategic development is the continuous adaptation of past strategies based on
experience. This view of strategy is greatly influenced by taken-for-granted assumptions (culture) and
involves high levels of bargaining and negotiation.
Management pay close attention over time to what does work and what doesn't work. They
incorporate these "lessons learned" into their overall plan of action. The world is too complex to
allow strategies to be developed all at once. Hence a strategy must emerge from experience in
small steps, as an organisation adapts or "learns".
(c) Strategy as ideas
This lens spawned from the fact that innovation is taken for granted under the design view. The
imposition of new strategy on employees under the design view leads to conformity which can often
stifle innovation.
In industries with short business cycles and fast technological advances, innovation is an essential
ingredient for competitive advantage. The Ideas lens attempts to provide an approach to utilise the
innovation of the firm. It places a strong emphasis on the importance of variety and diversity for
innovation. It actively seeks out emergent strategy from within and around the organisation.
As opposed to creating strategy, senior management instead create the conditions to foster and
encourage innovative thinking and creative development.

Real-world example: Ohmae
'But they [Japanese companies] have an intuitive grasp of the basic elements of strategy.
They have an idiosyncratic mode of thinking in which company, customers, and
competition merge in dynamic interaction out of which a comprehensive set of
objectives and plans for action eventually crystallizes.'
(Source: Ohmae, K., 'The Mind of the Strategist', Penguin)
Real-world example: Peters
'What is a good strategic plan? There is none. But there is a good strategic planning
process. A good strategic planning process (1) gets everyone involved, (2) is not
constrained by overall corporate "assumptions" (e.g. about the general economics picture),
(3) is perpetually fresh, forcing the asking of new questions, (4) is not left to the planners,
and (5) requires lots of noodling time and vigorous debate.'
(Source: Peters, T., 'Thriving On Chaos', Pan)
Real-world example: Ford’s Taurus/Sable programme
In the successful Taurus/Sable programme, Ford purchased cars from around the
world. They assessed over 400 features, from major performance parameters to the
ease with which petrol caps could be removed. The objective was to become Best in
Class (BIC) on most of these features; with a creative mix of copying and marginal
improvement, Ford feels it reached BIC status on 80 percent of the 400.
(Source: Peters, T., 'Thriving On Chaos', Pan)
6. The scope of business analysis and its relationship to strategy and strategic management
Business analysis helps an organisation to improve how it conducts its strategy, functions and activities
in order to better support customers, provide more efficient use of resources, and reduce overall costs.
As the scope of business analysis is very wide, there has been a tendency for business analysts to
specialise in one of the three sets of activities which constitute the scope of business analysis:
- strategist
- architect
- systems analyst
(a) Strategist
Organisations need on strategic matters is on a more or less continuous basis in modern business
environments. Business analyst, in the strategic area, are well-versed in analysing the strategic
profile of the organisation and its environment, advising senior management on suitable policies,
and the effect of policy decisions.
(b) Architect
Organisations need to introduce change to solve business problems which have been identified by
the strategic analysis, just referred to. Business analysts contribute by analysing objectives,
processes and resources, and suggesting ways by which business process re-design (BPR), or
business process improvements (BPI) could be made. Particular skills of this type of analyst are
"soft skills", such as the knowledge of the business, requirements engineering, stakeholder
analysis, and some "hard skills", such as business process modeling. Although the role requires an
awareness of technology and its uses, it is not an IT-focused role.
Three elements are essential to this aspects of the business analysis effort: the redesign of core
business processes; the application of enabling technologies to support the new core processes; and
the management of organisational change. This aspects of business analysis is also called 'business
process improvement (BPI), or business process re-engineering (BPR).
(c) Systems analyst
There is a need to align IT Development with the systems actually running in the business. A
long-standing problem in business is how to get the best return from IT investments, which are
generally very expensive and of critical, often strategic, importance. IT departments, aware of the
problem, often create a business analyst role to better understand, and define the requirements for
their IT systems.
Environmental issues affecting the strategic position of an

organisation
(i) The uncontrollables
We shall now consider some of the most basic forces that affect the structure, conduct, and performance
of organisations' strategic planning systems. These forces make up the business environment. They
have a great impact on the company, while the reverse is seldom true. They are the 'uncontrollables',
to which organisations adapt through setting the 'controllable' factors, their strategies.
Real-world example:
Competing in a world of rapidly changing technologies can be likened to playing a video
game. The target constantly moves, and new opponents zoom in from various sectors.
Focusing solely on one target sometimes means losing the game to an unexpected foe
that has been overlooked in the fray. To play the game well, a new set of skills is required:
heightened reflexes plus the ability to anticipate challenges and to make fast, rational
challenges.
(Source: Foster, R., '‘Business Week”)
Real-world example: Baby-food producers

The baby-food producers in Europe, companies such as Gerber, and Cow & Gate, failed
to anticipate the full impact that the declining birth rates and changing positive attitude of
women to breast-feeding babies would have on their market. The European market for
baby-foods fell by about 5% in real terms over the five year period 1976-1980. Exports to
the developing countries had also grown very slowly. By failing to spot and act on these
trends the industry was plunged into disorder.

(ii) Are usually external factors
The business environment, then, is the set of elements that affect the organisation, but are not controlled
by it. Though clearly relevant to the organisation, they are regarded as falling outside its boundary (in
other words, factors which are external to the organisation). Obviously, there are some factors within the
organisation over which management have little control and some writers refer to these as forming part of
the internal environment.
(iii) The influence of the environment on strategy development
Environmental factors play an important role in the value creation opportunities of a strategy. They usually
exert four influences on the way a strategy is formulated as shown in Figure 1.4 (below):
The environment contains customers

Customers and other interest or ‘pressure groups’.
1
Competitors The environment includes competitors

2 who represent potential direct threat.
The environment is the source of

Organisational resources organisational resources because
3
human resources come from outside the
organisation, as do supplies and funds
generally.
Macro ‘Opportunities and
4 Threats’ The environment offers opportunities
and present threats.
Figure 1.4: Environmental influences on a strategy
The practical implications are that each organisation faces a particular environmental outlook that is
contingent upon its industry, products-markets, stage of life-cycle, size, use of technology and the
convulsion and complexity of its business environment.
Examples of how the extent of change and complexity of a business environment can affect the
strategic development process are shown in Figure 1.5 and instances of different types of businesses
operating in the different environmental vectors outlined in Figure 1.5 are shown in Figure 1.6.
(iv) Micro- and macro- environments and the business domain
An organisation's environment can be split into (a) micro-environment and (b) macro-environment
depending on the domain it stakes out for itself. This is shown in Figure 1.7.

Dynamic means
This environment change that may force
Simple environment is
changes slowly and has the organisation to also
where few environmental
little force change
factors change
EXTENT OF CHANGE IN THE ENVIRONMENT

STABLE ENVIRONMENT DYNAMIC ENVIRONMENT
• Emphasis on tactical/ • Central (single-level) strategy
operational aspects • Investment focused on risk-
• Planning is relatively simple assessment
assessmentandandrisk-
risk-
SIMPLE ENVIRONMENT
• Change is usually incremental management

management
• Historic perspective is important • Usually strategy is incremental
• Economy and efficiency is more butbut might be transformational
important than doing new things might be transformational
• Inside-outside (resource-based)
COMPLEXITY OF THE ENVIRONMENT
strategic focus
• Central (single-level) strategy
• Central (single-level) strategy • Strategic development is a

withwith decentralised (divisional) continuous need
decentralised
execution. Possible
(divisional)
following • Sophisticated planning
COMPLEX ENVIRONMENT
execution.
Mintzberg’s ‘Missionary’ techniques are used
Possible
structurefollowing Mintzberg’s • Transformational strategy may
‘Missionary’ structure be required
• Current intelligence and future
projections are important
• Creativity/innovation and new
product-market initiatives are
vital
• Outside-inside (market-based)
strategic focus
• Divisional (multi-level) business-
unit strategy formulation
A complex environment is
where many environmental
factors (segments) might
change
Figure 1.5: Extent of change and complexity of business environments

EXTENT OF CHANGE IN THE ENVIRONMENT

STABLE ENVIRONMENT DYNAMIC ENVIRONMENT
• Stable with minor fluctuations • A soft-drink marketer may
A local government school will operate in a dynamic
adopt a set of procedures for environment but one with few
educating children, only having to environmental uncertainties.
adjust its operations to respond
to changing regulations and
SIMPLE ENVIRONMENT
guidelines or to adjust its scale

to accommodate the changing
numbers in the school.
• Gradually changing in a
COMPLEXITY OF THE ENVIRONMENT
predictable way
With the predictable changes
in the values of women the Girl
Guide Movement gradually
shifted its programmes toward
developing the ‘new woman’
rather than the ‘future wife and
mother’.
• Stable but with a complex • Rapidly changing in an

COMPLEX ENVIRONMENT
environment unpredictable fashion

A railway company often The UK National Heath Service
operates in an environment (NHS) in recent years has
characterised by endured a succession of shocks
seasonal fluctuations within a and surprises – private medicare,
fairly stable mechanistic fast-changing medical
structure. The PESTEL factors technology, in-depth appraisal of
are numerous. its performance by the Audit
Commission, new government
policies and controls, rising costs
and ‘consumerism’.
Figure 1.6:
Examples of the extent of change and complexity of business environments
It is useless to tell a river to stop running; the best thing is to

learn how to swim in the direction it is flowing.
Anonymous

Macro-environment
Those components of the environment that

affect many businesses in the economy as a Domain
whole and may potentially affect a particular
organisation but whose relevance is not What an organisation
specific as a particular time. They are broad stakes out for itself with
forces (PESTEL) which we cover later. The respect to the range of
effect of macro factors is usually less products or services
immediate than direct ones. offered and markets
served. An organisation’s
domain determines those
MACRO-
parts of the business
ENVIRONMENT environment that are
‘micro’ or ‘macro’.
Example:
The UK ‘Sun’
MICRO- newspaper has a
ENVIRONMENT different business
domain than the
(London) ‘Times’
newspaper.
Micro-environment
That part of the business environment that is directly

relevant to an industry or market and is therefore relevant
for the organisation is achieving its goals.
It usually contains:
 customers
 competitors
 stakeholders
but depending on the organisation’s domain can include

other factors.
Figure 1.7: Divisions of the business environment
1. The macro-environment of an organisation using PESTEL
(a) PESTEL Analysis
PESTEL Analysis is a framework that strategy consultants use to scan the external macro-
environment in which an organisation operates.
PESTEL is an acronym for the factors shown in Figure 1.8 (on the next screen).

P Political factors
E Economic factors
S Social factors
T Technological factors
E Ecological (natural, ‘green) factors
L Legal factors
Figure 1.8: PESTEL factors
In Table 1.1 (on the next page) we find examples of each of the PESTEL factors. Remember,
macro-environmental factors can differ per continent, country or even region, so normally a
PESTEL Analysis should be performed on a geographical basis.
(b) Conducting a PESTEL Analysis
Completing a PESTEL Analysis is relatively simple, and can be done by:
- workshops
- using brain-storming techniques
- conditioned and directed research.
(c) Using a PESTEL Analysis
The usage of PESTEL analysis can vary depending on the industry, business, strategic
development approach or market planning method. In general terms, PESTEL Analysis aids the
following important stages of strategic development:
- 'current position' auditing

- future position projection
- formulation of strategic proposals
- evaluation of strategic proposals
2. Key drivers of change likely to affect the structure of a sector or market
We have seen that the business environment consists of those factors that can affect an organisation's
operations, but which its management have little or no power to influence or control. An organisation
can be thought of as an open system which is influenced by a complex political, economic, social,
technological, ecological and legal structure of variables which can change, sometimes suddenly and
without warning.
For these reasons, the environmental dimension will usually drive business change and as such
comprises a number of segments or sub-environments. The main drivers (or forces, or dynamics) of
environmental change are listed below:

Table 1.1: Examples of PESTEL factors
In this table are examples of each of the PESTEL factors. Remember, macro-environmental
factors can differ per continent, country or even region, so normally a PESTEL Analysis should be
performed on a geographical basis.
Political Economic Social Technological Ecological Legal

International Interest Labour/social New Environmental Contract
trade rates & mobility inventions regulations enforcement
regulations and monetary and and law
restrictions policies development protection
Tax policies Stages of the Lifestyle Government Energy use Customer
business cycle changes research protection
spending law
Government Economic Income Industry Social Employment
organisation/ growth distribution focus on attitude law
attitude technological (including
effort influence of
‘pressure
groups’)
Political Government Demographics, Life cycle Legislation/ Trading block
stability spending population and speed of regulation directives
growth rates, technological enforcing (such as
age obsolescence pollution European
distribution (effluent) directives)
controls
Destabilising Taxation Education Rate of Legislation/
factors (war, technology regulation
etc.) transfer controlling
traffic
movement
and its cost
Competition Inflation Fashion, hypes Energy costs
regulation rates
Safety Exchange Work/career (Changes in)
regulation rates and leisure information
attitudes technology
Entrepreneurial
spirit
Unemployment Living (Changes in)
policy conditions mobile
technology
Consumer Health (Changes in)
confidence consciousness Internet
& welfare,
feelings on
safety

(i) customer drivers (the 'market' environment)

(ii) competitive drivers;
(iii) social and cultural drivers;
(iv) national and international environmental drivers;
(v) economic drivers;
(vi) political drivers;
(vii) ecological drivers;
(viii) legal drivers;
(ix) technological drivers; and
(x) demographic drivers.
Although each of the environmental segments (or different drivers) have been listed separately, they tend
to overlap. However, breaking down the environment into segments is useful in order that an attempt can
be enabled to evaluate the relative importance of each to the organisation.
Micro-environmental (and to an lesser extent macro-environmental [PESTEL]) changes impact on strategy

in different ways, as shown in Figures 1.9 (below), 1.10 (below), 1.11, 1.12 and 1.13.
environmental change
strategic change
The environment changes

gradually and predictably Strategic change is
Environmental incremental (bit by
change bit). The hour hand on
a clock moves so
slowly that change
cannot be seen but
each 12 hours the
hand traverses
through a complete
Time 360˚
Figure 1.9: A supermarket chain opening branch by branch as it uses

self-growth to generate funds for its expansion.
There is a significant
(possibly single) change in
Environmental the environment
change
Depending on the extent of the

change a transformational
strategy may be required
Time
Figure 1.10: This was much the effect that the opening of the Channel
Tunnel had on cross-sea ferries (Kent [UK] to Europe).
However, the change was sign-posted!

The company has ‘drifted’

Environmental from its business
change environment
A transformational strategy
(developed possibly b y a new
board of directors) may be
required to realign the company
with its environment
Time
Figure 1.11: An example of ‘strategic drift’
Environmental The change in the

change environment is erratic,
random and thus
unpredictable. Strategy will
need to be
 short-term
 flexible
Time  versatile
 adaptable
although set within long-

term goals (the ‘tunnel
affect’).
The ‘tunnel effect’
Daylight at the end of

the tunnel is the ‘goal’
The width of the tunnel allows for short-term

manoeuvrability although tunnel walls will determine
overall direction towards the goal
Figure 1.12: The electronics industry generally, mobile telephony particularly
The environment becomes

complex and diverse with
increased short-run change
Environmental
change
May call for change to multi-
level strategic planning (e.g. the
setting up of a strategic-
business-unit structure)
Time
Figure 1.13: Environmental complexity caused by diversification

The objectives of a micro-environmental appraisal and PESTEL Analysis are to bring together all the
strands of data concerning the firm's present position, extrapolated position, strategic drift and gaps, to
profile its competitive, market and industry 'fit' positions and to provide important (if not vital) information
for strategists about the extent of change required and the direction the firm should be heading for. By
highlighting the firm's opportunities and threats and the profiles produced would provide its management
with ideas as to how best to formulate future strategy.
3. Porter's Diamond and the influence of national competitiveness on the strategic position
(a) Porter's 'The Competitive Advantage of Nations
Business is more global than it's ever been. With every passing year, competition between
different organisations in different countries is likely to become even more intense. This creates a
strong need for ever-increasing efficiency, innovation, and intelligent deployment of limited resources,
if organisations are to be competitive in this global market.
In his book, The Competitive Advantage of Nations, Michael Porter introduced his model for
analysing the areas of strength and weakness that can give a country, or industry within a country, a
competitive advantage or disadvantage. This model is known as "Porter's Diamond" and includes four
key elements:
- "factor" conditions
- demand conditions
- firm (or organisation) strategy, structure and rivalry
- related and supporting industries.
Factor
conditions
Related
and Demand
supporting conditions
industries
Firm
strategy,
structure
and rivalry
Figure 1.14: Porter’s 4-factor ‘Diamond model’
In addition, Porter argues that the four key elements all influence each other, and these dynamics
are shown in Figure 1.14 (above) . Porter also suggests that they are all effected by Chance and
by Government Policies, and the inclusion of these two additional variables into the model is shown
in Figure 1.15, although Figure 1.14 (above) is the one used by most text-books when discussing
the Diamond model.

Chance Factor
conditions
Related
and Demand
supporting conditions
industries
Firm
strategy,
structure Government
and rivalry policies
Figure 1.15: Porter’s 6-factor ‘Diamond model’
(b) Factor conditions
"Factor" is an economist's term for the things that contribute to the production of goods and
services. Traditionally these were people, raw materials, "land" and capital (although this idea has
shifted to include a measure for knowledge and technology).
"Factor conditions" relate to the availability or non-availability of these things in a particular country,
and this allows nations to:
- use factor strengths to differentiate

- use factor disadvantage to drive innovation.
This involves making best use of widely available production factors to differentiate one country
from competing countries. This might involve developing university research programs to build
skills in micro-electronics.
Real-world example: using factor strength to differentiate
India as a country has a large graduate workforce whose pay expectations are lower
than those of graduates in Western countries. This has allowed India to become a
leader in offshore call centre and business process supply.
End of real-world example
When factor conditions are in short supply ('selective factor disadvantage' [SFD]) countries need
to innovate to overcome this, and this innovation can build competitive advantage. Abundance of
factors may actually undermine competitive advantage and generate waste. Scarcity often breeds an
innovative mindset. Since resource depletion seems to be a general trend, it pays to be the first
mover in figuring out how to generate more output with fewer resource factors.

Real-world examples: Using disadvantage to drive innovation
Switzerland… experienced labour shortage… abandoned labour-intensive watches…

concentrated on innovative and/or high-end watches… Rolex, Swatch.
Holland… cold, grey climate… innovation in glass-growing… innovation in energy

conservation (taking advantage of abundant natural gas)… exports over $1bn (refrigerated)
ready-to-bloom in shops, fresh-cut flowers.
Japan… high-priced land… high cost of factory space… just-in-time (JIT) inventory.
Sweden… short building season… high construction costs… pre-fabricated housing.
End of real-world examples
(c) Demand conditions
This term refers to the level of demand for a product or service from the organisation's home
country. If people in an organisation's own country are demanding a lot of a product or service, that
can give it a strong advantage over global competitors.
The more demanding the customers are in an economy, the greater the pressure facing companies
to constantly improve their competitiveness via innovative products, through high quality, etc.
The advantages gained from "demand conditions" can be exploited in three ways:
- exporting
- national advantage
- anticipating trends
(i) Exporting
When the organisation's own country creates a large demand for a particular type of product
or service, domestic companies get good at producing them. That country is then well
placed to respond to developing demands abroad.
Real-world example: Using advantage to build exports
Japan… high-priced land… small houses/rooms… need for small household durables…
miniaturisation became core competence of companies, such as SONY.
(ii) National advantage
When demand is high at home, there are likely to be more competitors in the organisation's
local industry. Competition forces innovation, making the country as a whole effective in that
industry.

Real-world examples: Using national advantage
England… interest of people in gardening… development of skills in seed production....

world-wide competitive advantage.
England… interest in football (built up over years in 'working-class' areas)… development

of football club management... Premium League branded products sold throughout the
world.
(iii) Anticipating trends
When consumers at home are discerning and keyed into trends in a particular product- or
service-type, this forces domestic competitors to stay current and change quickly and flexibly
as demand changes. This helps these companies succeed in international competition.
(d) Firms strategy, structure and rivalry
These are the factors that shape domestic competition. The typical size of companies, the way they
are managed, and the way they compete are factors that help companies succeed or fail globally.
Things affecting this include the following:
- Different companies suit different types of industry.
Real-world example: Matching industries to conditions
Italy… unusually high proportion of small family run firms… helps to keep Italy at the
forefront of the fashion industry... the ability to react quickly to trends is critical to success in
this industry... much harder to have the same level of flexibility in larger organisations.
- Industries will thrive best in a country if that country's investors find that the industry's way of
operating meets their needs.
- Those investors looking for long-term, stable returns, may be nervous of industries based on
clusters of highly innovative start-up organisations. Equally, investors wanting high returns
will not find them easily in well-established industries.
(e) Related and supporting industries
This element relates to the competitiveness of other industries in the country. The presence of
high-quality suppliers and other related industries leads to two main types of advantage:
Highly competitive suppliers typically offer a cost advantage. When these competing suppliers
operate in the same country, this translates to a cost advantage for all related industries.
The reasons for this relate to the following:
- A large industry presence in a country/area will increase the supply of specific factors (e.g.
specialised engineering support, skilled labour) since suppliers will tend to get higher returns
and less risk of losing work/employment.
- At the same time, upstream firms (i.e. those who supply intermediate inputs) will invest in the
country/area for the same reasons. They will look to save on transport costs, tariffs, inter-firm
communication costs, etc.
- Likewise, downstream firms (i.e. those who use the industry's product as an input) will invest in
the country/area. This results in savings of the types mentioned for upstream firms.
- Finally, attracted by the synergies of upstream and downstream firms, producers in related
industries (i.e. those who use similar inputs or who are purchased by the same set of
customers) will also invest in the country/area.
- Firms locating near to their rivals often gain the advantage of quick technological transfer
("technology spillover").
- The existence of such external scale effects often makes competitive advantage self-reinforcing.
Real-world examples: Cost advantages through related and supporting industries
Italy… high success of the shoe and leather industries… translated into other successes
related to leather manufacturing and processing.
Canada… late 1990s… Abitib and Stone Consolidated merged... despite language
difficulties (Quebec speaks French)… despite higher taxes (Quebec)… despite political
uncertainty (Quebec)… Why?... Montreal's status as "hub" of "Eastern Canada's forest
industry… proximity to majority of its 26 mills... critical mass of paper expertise (more than
any other city in North America)… proximity to university forest research centres,
engineers, supplier.
Also, Highly competitive suppliers tend to be innovative. Related industries benefit from this
innovation.
Real-world examples: Related industries benefiting from innovation
USA… Silicon Valley (San Jose, California)... chips, computers, software.

USA… Hollywood.
(f) Government policy
The role of government in the "Diamond" is to
- encourage companies to raise their performance, e.g. by enforcing strict product standards
- stimulate early demand for advanced products
- focus on specialised factor creation
- stimulate local rivalry by limiting direct co-operation and enforcing anti-trust regulations.

Real-world example: Government support
The Japanese facsimile industry (fax machines) illustrates the Diamond of national
advantage. Japanese firms achieved dominance in this industry for the following reasons:
- Japanese factor conditions: Japan has a relatively high number of electrical

engineers per capita.
- Japanese demand conditions: The Japanese market was very demanding
because of the written language.
- Large number of related and supporting industries with good technology, for
example, miniaturised components.
- Domestic rivalry in the Japanese fax machine industry pushed innovation and
resulted in significant and rapid cost reductions.
- Government support - NTT (the state owned telecom company) changed its
cumbersome approval requirements for each installation to a more general-type
approval.
(g) Using the 'Diamond model'
Most organisations have little opportunity to influence government's policy and the national economy
at the level of the elements of Porter's Diamond.
The model starts to be useful when an organisation's management wants to understand how the
Diamond factors affect the organisation. By thinking about questions like this, management can
understand whether the industry they're in (or thinking of diversifying into) has a long term future.
Consultants/accountants can aid the process in the following ways:
- Identify factor conditions
It is important to identify the factor conditions that apply to the industry and country the
organisation operates in. If the industry is successful internationally, what factors give your
country an advantage over other countries? Is the organisation taking full advantage of these
factors? If the industry is struggling, why? How do people, raw materials, capital, land,
education levels and technological expertise of the organisation's country/area compare
with those countries that compete with the organisation? What action could be taken?
- Appraise demand conditions
The characteristics of the demand conditions in the organisation's industry need to be identified.
Are domestic buyers discerning and demanding in the organisation's market or industry?
Are there aspects of demand that are specific to the organisation's country that wouldn't apply
anywhere else and would give the organisation an international competitive advantage? How
sophisticated are the industry's distribution methods? How do these compare with the
situation in the countries that most successfully compete with the organisation?
- Consider organisation structure
The national approach to organisation structure and the levels of competitive rivalry in the
organisation's country needs to be analysed. Is this the best structure?

- Examine the related and supporting industries
The related and supporting industries of the organisation's own industry needs examination.
How much does the industry rely on imports, or benefit from high quality or low cost (or
both) local supply? How much knowledge and expertise is there in local related industries that
could benefit the organisation?
4. Scenarios reflecting different assumptions about the future environment
(a) What is a scenario?
A scenario is an account or synopsis of a projected course of action, events or situations. In practice

it does not attempt to forecast what might happen, but What the consequences would be if
something did happen.
Tutorial comment
Of course there is a difference between these two predictions. Take yourself. First
you could attempt to forecast the likelihood of passing the exam. Another exercise,
similar, but different, would be to decide what the consequence would be if you failed
the exam.
Scenario development is used in policy planning, organisational development and, generally when
organisations wish to test strategies against uncertain future developments.
Scenarios are widely used by organisations (either explicitly, or more commonly implicitly) to help
understand different ways that future events could unfold, whose strategic implications can then be
investigated.
Scenario planning is a complex business process related to 'futures planning'.
Real-world example: Government support
A scenario model might be developed for a manufacturer using steel in its products to
explore the question:
'What would happen if green environmental pressure groups and social concerns forced
private cars off the road by the year 2020 and demand for steel in cars collapsed as a
result. What impact would this have on the company?’
(b) Technique of scenario building
Scenarios are concerned with peering into the future, not forecasting the future. The act of
forecasting takes the current situation and extrapolates it forward. Scenarios take possible future
situations (i.e. situations which could occur) with a different starting point - 'What would happen if?',
not 'What will happen?’

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Study Text MAIN PAGE Paper P3: Business Analysis

ACCA Paper P3 – Business Analysis – Study Text

Good luck with your studies.

Copyright: Tony Surridge Online Limited, 2010 http://www.tonysurridge.co.uk 1

ACCA Paper P3: BUSINESS ANALYSIS

Published by Tony Surridge Online Limited in 2010

Copyright © Tony Surridge Online Limited

Tony Surridge Online Limited

Copyright: Tony Surridge Online Limited, 2010 http://www.tonysurridge.co.uk 2

Syllabus Study Guide

Copyright: Tony Surridge Online Limited, 2010 http://www.tonysurridge.co.uk 3

Copyright: Tony Surridge Online Limited, 2010 http://www.tonysurridge.co.uk 4

 Fundamental nature and vocabulary of strategy and strategic decisions.

Copyright: Tony Surridge Online Limited, 2010 http://www.tonysurridge.co.uk 5

(a) What is strategy?

There are two distinct stages to strategy, namely

- the planning or development stage, and

The former is no good without the latter, and vice versa.

(b) Strategy versus tactics

The differences might be remembered as:

Strategy is what to do ...... Tactics is how to do

(c) Strategic development

They will need to consider the desirability of

- certain product-market ploys

and many other complex and far-reaching factors.

Copyright: Tony Surridge Online Limited, 2010 http://www.tonysurridge.co.uk 6

(d) Tactics (again)

End of Real-world example

2. How strategy is formulated at different levels (corporate, business level, operational) of an

- the 'entrepreneurial' stage

(a) The entrepreneurial stage

Real-world example: Sakiya

Real-world example: Ries and Trout

End of Real-world example

Real-world example: Mintzberg

End of Real-world example

Copyright: Tony Surridge Online Limited, 2010 http://www.tonysurridge.co.uk 8

Real-world example: Mintzberg

End of Real-world example

(b) Department strategy

(c) Business-orientated planning

- developing its existing products and services to its existing customers;

- extending through market development to provide existing products to new customers;

- extending with new products to existing customers; or/and

Real-world example: Strategic business units

Real-world example: Strategic business units

End of Real-world examples

Copyright: Tony Surridge Online Limited, 2010 http://www.tonysurridge.co.uk 10

 Business portfolio management

Operational (day-to-day) plans

- strategic position analysis

Strategic position analysis

Strategy into action

Figure 1.2:The elements of strategic management

Copyright: Tony Surridge Online Limited, 2010 http://www.tonysurridge.co.uk 11

- the current strategic position, and

Real-world example: Drucker

End of Real-world example

End of tutorial comment

Definition: Position audit

(a) resources of tangible and intangible assets and finance;

(b) Strategic choices

The aspect of strategic choice can be conceived of as having three parts: