Ex PCIMAE3

Notes
CIMA Paper E3
Enterprise Strategy
For exams in 2014
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CIMA E3 Enterprise Strategy
Contents
About ExPress Notes
1. 2. 3. 4. 5. 6. External factors affecting organizations strategy Strategy formulation and development Strategy implementation Change management Information technology Project management
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Chapter 1
External factors affecting organizations strategy
START The Big Picture
Before trying to develop its strategy an organization needs to have a clear understanding of its environment. It must be sure what the expectations of its customers and stakeholders are. To know that organizations first need to define who those customers and stakeholders are. There is a number of ways in which this might be done.
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This chapter discussed some of those ways and some of the considerations before the actual strategy development process starts.
KEY KNOWLEDGE Responsible business practices
Responsible business practice is the recognition of, and response to the interconnectedness and interdependence of businesses within the world. Responsible business practice advocates that the true costs and obligations (both financial and non-financial) of businesses and their organisational activity are accounted for - and require a process of accountability, transparency and comparability through: Reflection on actual business impacts, risks and opportunities Responsible business practices through integrated and inclusive management processes Reporting on these practices in the public domain via a multi-stakeholder approach to management, measurement and monitoring Resilience through transparency, trust, adaptability and innovation
Elements of responsible business practice: Environmental - the environmental impact, direct or indirect, of an organisations operations, products or services including those of its suppliers (a topical issues with significant irregularities found in Asian subcontractors of major multinationals eg. GAP, Nike etc.). Community/Social - the impact of an organisations projects, products, services or investments on the community at a local or global level. Workplace Practices - including respectful treatment of employees in matters related to recruitment and selection, diversity and equal opportunity, work/life balance, professional development and progression, managing redundancies and full entitlement to employment rights. Marketplace & Business Conduct responsible behaviour in developing, purchasing, selling and marketing products and services. Ethical Governance - from board level and throughout an organisation: transparency; risk management; due diligence; effective codes of conduct and ethics.
Responsible business practice overarches the following areas:
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Corporate Social Responsibility (CSR) CSR applies to all aspects of corporate responsibility; community, social, environmental, workplace, governance. CSR practitioners talk about corporate opportunity - highlighting the opportunity/risk dimension of responsible business practice. ESG (Environmental, Social, Governance-related) A term commonly used in the investment industry referring to environmental, social and governance considerations to incorporate in investment decision-making processes: responsible investment. Triple Bottom Line Reporting (TBL) A framework for measuring corporate performance against not only economic, but also social and environmental parameters. Sustainability Organisations practices ... that meet the needs of the present without compromising ... the environmental, social and human needs of our descendants. www.wbcsd.org Global Citizenship Implies organisations commitment to and awareness of good CSR practices across its operations at all levels, from local to global. Enlightened Self-Interest Organisations recognition that it is in its own long-term business interest to engage in CSR strategies and sustainable business practices.
KEY KNOWLEDGE Stakeholder management
Stakeholders and their impact on corporate objectives Executives must further take into account the concerns of other stakeholders in the business. Stakeholders range from employees to customers, suppliers, competitors, public interest groups and the authorities.
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Shareholders: As owners of the business, they rank supreme, as reflected in US/UK models of corporate governance; Lenders: Important if the business relies heavily on providers of loan capital (banks, bondholders); Directors: The executive directors or senior management of the business is central since they have hands-on power and can serve their own interests (giving rise to agency risk); Employees: Often referred to as a companys most valuable asset; they must be motivated and adequately compensated; Customers: No customers, no business! How influential they are or how carefully management needs to listen to their concerns depends on the type of business activity and the competitive environment; Suppliers: Good and reliable suppliers can be critical to corporate success. Government: They have two major interests: (a) they receive revenue via taxes and (b) benefit indirectly when firms create employment. Environmental and other regulatory concerns are also within the scope of the governments interest; Public: The general public, its opinions and ability to exert pressure through lobby groups are all relevant factor for businesses that pollute, are involved in nuclear power, or carry out other activities that may be controversial (e.g. abortion clinics).
Conflicting stakeholder interests Conflicting interests can exist between various stakeholder groups. Management must examine the degrees of stakeholder influence and actively manage the relationship with relevant stakeholders. Stakeholders are individuals, groups or organisations that can impact or be impacted by, an organisation. Mendelows Matrix The matrix allocates stakeholders into quadrants according to their level of power and how likely they are to exercise that power (i.e. their interest).
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Stakeholder Interest Low High Keep satisfied Stakeholder Power Minimum effort Low Low High Keep informed Key players High
KEY KNOWLEDGE Customer analysis and bahaviour
Consumer behaviour is the study of when, why, how, and where people do or do not buy a product. It attempts to understand the buyer decision making process, both individually and in groups. Customer behaviour study is based on consumer buying behaviour, with the customer playing the three distinct roles of user, payer and buyer. Before the strategy is formulated and developed it is important to understand the customers of the organization and the patterns in which they make decisions about consuming organizations products or services. There is a vast amount of theory behind this area involving psychology and quantitative methods. In principle, according to G.R. Foxall: consumer behavior occurs at the intersection of a consumer-behavior setting and an individuals learning history of consumption and is a function of utilitarian (mediated by the product) and informational (mediated by other persons) consequences. A Black Box is model is also often used under which the researches ignore the process inside the customer that leads to a decision, but rather focus on the relationship between stimuli (marketing) and the ultimate decisions taken.
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KEY KNOWLEDGE Supply chain management

Supply chain management (SCM) is the management of a network of interconnected businesses involved in the ultimate provision of product and service packages required by end customers (Harland, 1996). Supply chain management spans all movement and storage of raw materials, work-in-process inventory, and finished goods from point of origin to point of consumption (supply chain). Supply chain management must address the following problems: Distribution Network: number, location and network of suppliers, production facilities, distribution centers, warehouses and customers. Distribution Strategy: questions of operating control (centralized, decentralized or shared); delivery scheme (e.g., direct shipment); mode of transportation, (e.g., motor carrier, parcel); and transportation control (e.g. owner-operated, contract carrier). Trade-Offs in Logistical Activities: The above activities must be well coordinated in order to achieve the lowest total logistics cost. Information: Integration of processes through the supply chain to share valuable information, including demand signals, forecasts, inventory, transportation, potential collaboration, etc. Inventory Management: Quantity and location of inventory, including raw materials, work-in-progress (WIP) and finished goods. Cash-Flow: Arranging the payment terms and methodologies for exchanging funds across entities within the supply chain.
Supply chain execution means managing and coordinating the movement of materials, information and funds across the supply chain. The flow is bi-directional.
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Chapter 2
Strategy formulation and development

Once the environmental issues are recognized, the organizations focus will be on determining the destination it will pursue. It is about determining where we want to be as an organization, why the organization exists and how it wants to contribute to the outside world in general and to its shareholders in detail. The only successful business is the one which solves somebodys problem and thus the shareholders and stakeholders expect the managers of companies to show that there is a customers issue, that the company aims to solve and that they know how to solve it.
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KEY KNOWLEDGE Key definitions

Strategy: Various definitions are present but a straightforward view is Strategy is a plan of action designed to achieve a particular goal Strategic planning: An organisations process for ascertaining the strategy it should adopt, taking into account what they want to do, how they are going to do it and what resources they will need. Strategic planning covers where the organisation is planning on going, impacts on the whole organisation and involves the long term view. Note the distinction in what is meant by long term (for example the long term is different when comparing the airline industry with the fashion industry.)
KEY KNOWLEDGE Strategy formulation process

Determining the strategic direction of a firm can only be sensibly performed in the context first understanding of the following sequence:
The formulation of corporate vision/objectives and their translation into strategy is basically a top-down process, though the analysis and data that goes into strategy formulation is often (and critically) produced bottom-up; in other words, there is much useful experience and information across the organization that can be mobilized in the strategic planning process.
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KEY KNOWLEDGE Organisations mission and vision

This is a written declaration by management that sets forth the purpose of the organization, i.e. its raison detre, defining the main activity of the business and outlining its core values, i.e. the manner in which business is conducted. It provides "the framework or context within which the company's strategies are formulated (Hill, Ch., Jones, G. Strategic Management). The vision and the mission statements are often confused with one another, and some organizations even use them interchangeably. In simplest terms, the mission is the organization's reason for existence, and vision is what it wants to be. Sample mission statements: McDonalds Google Starbucks Avaya Avon To provide the fast food customer food prepared in the same high-quality manner world-wide that is tasty, reasonably-priced & delivered consistently in a low-key dcor and friendly atmosphere. We organize the worlds information and make it universally accessible and useful We inspire and nurture the human spirit one person, one cup, and one neighborhood at a time Provide the world's best communications solutions that enable businesses to excel The Global Beauty Leader We will build a unique portfolio of Beauty and related brands, striving to surpass our competitors in quality, innovation and value, and elevating our image to become the Beauty company most women turn to worldwide. The Women's Choice for Buying We will become the destination store for women, offering the convenience of multiple brands and channels, and providing a personal high touch shopping experience that helps create lifelong customer relationships. The Premier Direct Seller We will expand our presence in direct selling and lead the reinvention of the channel, offering an entrepreneurial opportunity that delivers superior earnings, recognition, service and support, making it easy and rewarding to be affiliated with Avon and elevating the image of our industry. The Best Place to Work We will be known for our leadership edge, through our passion for high standards, our respect for diversity and our commitment to create exceptional opportunities for professional growth so that associates can fulfill their highest potential. The Largest Women's Foundation We will be a committed global champion for the health and well-being of
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Bristol-Myers Squibb Citigroup
Harley-Davidson
Microsoft
women through philanthropic efforts that eliminate breast cancer from the face of the earth, and that empower women to achieve economic independence. The Most Admired Company We will deliver superior returns to our shareholders by tirelessly pursuing new growth opportunities while continually improving our profitability, a socially responsible, ethical company that is watched and emulated as a model of success. To discover, develop and deliver innovative medicines that help patients prevail over serious diseases. Our goal for Citigroup is to be the most respected global financial services company. Like any other public company, we're obligated to deliver profits and growth to our shareholders. Of equal importance is to deliver those profits and generate growth responsibly. We fulfill dreams through the experience of motorcycling, by providing to motorcyclists and to the general public an expanding line of motorcycles and branded products and services in selected market segments. At Microsoft, we work to help people and businesses throughout the world realize their full potential.
As you will see from the above table there is no one template for a mission (though you can find mission generators on the web). Some of them put emphasis on the value provided to clients, others on technical details of operations.
KEY KNOWLEDGE Strategic planning

Corporate Objectives The clear and explicit articulation of corporate objectives begins at the most senior corporate strategy and policy-making level, where these objectives are established. This is essentially a top-down process. Objectives specify quantitative measures of the performance to be achieved in striving towards accomplishment of the companys mission, and the time frame (short -term or longterm) in which they are to be achieved. Executive management must ensure that strategic objectives are consistent with the desires of shareholders, who are legal owners of the business. The mantra normally quoted in this connection is that it is the duty of managers to maximize shareholder value.
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Quantifying corporate objectives Corporate objectives must be quantified in order to be actionable. Consideration must be given to how well these objectives are consistent with the creation of shareholder value. Question: Consider the following measures. Are they consistent with each other? Do they need to be limited to financial objectives alone? Sales revenue / growth Market share / growth Profit maximization / growth Earnings per share (EPS) / growth Return on investment (ROI) and Return on Capital Employed (ROCE) Return on Equity (ROE) Return on Assets Price-Earnings ratio (P/E) Dividend per share (DPS) Economic Value Added Discounted Free Cash Flows
Strategic Planning Whereas corporate objectives define what the goals of the organization are, the strategy addresses the issue of how to get to those goals. Strategic planning is the process by which the organization develops its strategic options, formulates specific action plans and identifies the resources required to implement the strategy. Strategy is made at different levels of the organization:
Corporate Business Functional
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Corporate strategy: covers the big view of the organisation. It begins with the question What business or businesses should we be in? Business strategy: the strategy of a single business organisation or the strategies of strategic business units (SBUs) Functional (or operational) strategy: the functional strategies involving items such as marketing, IT and HRM that support the business strategy. It is important that the strategies support each other. For example, if the Business Strategy of a SBU revolves around providing high quality consultancy advice on certain areas, a functional strategy for HRM of minimising labour costs would cause problems. Strategic Planning Process Johnson & Scholes describe the strategic planning process as consisting of three stages: 1. 2. 3. Analysis Choice; and Implementation
Interactions exist between all three stages:
Analysis
Choice
Implementation
Johnson & Scholes propose that strategic options are evaluated using: (a) Suitable. Would it help? Is it relevant (to the objectives of the firm)? Does it fit in with the strategic position of the organisation. e.g. does it take advantage of an opportunity or reduce a threat (within SWOT analysis)
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(b) (c)
Feasible. Would it work? Use of techniques such as cash flow analysis and working capital reviews. Do the resources exist to realize the project? Acceptable. Is it acceptable to the relevant stakeholders? Techniques to use include Net Present Value, Return on Capital Employed, sensitivity analysis and ratio analysis.
Strategic Planning process Tools and techniques Crucial to the strategic planning process is the ability to diagnose ones company from a number of angles. These include, among many other tools of analysis: PESTEL: Analyzing Political, Economic, Social, Technological, Environmental and Legal factors affecting the firm; Political Economic Social Technological Environmental Legal global, national and local changes and trends. Taxation policies. Relationships between certain countries. global, regional and local issues. Exchange rates. Link to topical issues such as global recession, current interest rates for funding. changes in behaviour and expectations in society. Demographics, lifestyle. changes including hardware, software, e-issues, materials and services. Global communications. what are the environmental considerations such as recycling, pollution, attitude of the media, customers, etc. changes and predicted changes to regional (e.g. EU) and national legislation. Regulatory bodies. Changes to employment law.
SWOT: Analyzing (internal) strengths and weaknesses, as well as (external) opportunities and threats facing the firm; Porters generic strategies In his classic Competitive Strategy: Techniques for Analysing Industries and Competitors, Michael Porter described a category scheme consisting of three general types of strategies that are commonly used by businesses to achieve and maintain competitive advantage. They are: (a) (b) (c) cost leadership, differentiation, and market segmentation (or focus).
Market segmentation is narrow in scope while both cost leadership and differentiation are relatively broad in market scope.
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Cost leadership strategy involves the firm winning market share by appealing to costconscious or price-sensitive customers. This is achieved by having the lowest prices in the target market segment, or at least the lowest price to value ratio (price compared to what customers receive). To succeed at offering the lowest price while still achieving profitability and a high return on investment, the firm must be able to operate at a lower cost than its rivals. Differentiation strategy is about making the products different in some way in order to compete successfully. Examples of the successful use of a differentiation strategy are Nike athletic shoes, Apple Computer, or Mercedes-Benz cars. A differentiation strategy is appropriate where the target customer segment is not pricesensitive, the market is competitive or saturated, customers have very specific needs which are possibly under-served, and the firm has unique resources and capabilities which enable it to satisfy these needs in ways that are difficult to copy. Focus is not a separate strategy per se, but describes the scope over which the company should compete based on cost leadership or differentiation. The firm can choose to compete in the mass market (take an example of Toyota) with a broad scope, or in a defined, focused market segment with a narrow scope (eg. Pagani if you do not know who they are it means they do it well you are probably not in their niche). In either case, the basis of competition will still be either cost leadership or differentiation. Ansoffs product / market matrix The Ansoff Growth matrix is a tool that helps businesses decide their product and market growth strategy. Ansoffs product/market growth matrix suggests that a business attempts to grow depend on whether it markets new or existing products in new or existing markets. Existing products New products Product development Diversification
Existing markets
Market penetration Market development
New markets
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The output from the Ansoff product/market matrix is a series of suggested growth strategies that set the direction for the business strategy. These are described below: Market penetration Market penetration is the name given to a growth strategy where the business focuses on selling existing products into existing markets. Market penetration seeks to achieve four main objectives: Maintain or increase the market share of current products this can be achieved by a combination of competitive pricing strategies, advertising, sales promotion and perhaps more resources dedicated to personal selling Secure dominance of growth markets Restructure a mature market by driving out competitors; this would require a much more aggressive promotional campaign, supported by a pricing strategy designed to make the market unattractive for competitors Increase usage by existing customers for example by introducing loyalty schemes.
A market penetration marketing strategy is very much about business as usual. The business is focusing on markets and products it knows well. Market development Market development is the name given to a growth strategy where the business seeks to sell its existing products into new markets. There are many possible ways of approaching this strategy, including: New geographical markets; for example exporting the product to a new country New product dimensions or packaging: for example New distribution channels Different pricing policies to attract different customers or create new market segments
Product development Product development is the name given to a growth strategy where a business aims to introduce new products into existing markets. This strategy may require the development of new competencies and requires the business to develop modified products which can appeal to existing markets.
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Diversification Diversification is the name given to the growth strategy where a business markets new products in new markets. This is an inherently more risky strategy because the business is moving into markets in which it has little or no experience. Methods of expansion. Internal Development. Organic growth using an organisations own resources. Mergers & Acquisition. Often treated as being the same thing, these are in fact different. A true merger is a joining of equals where organisations of approximately the same size and strength come together (e.g. when Glaxo Wellcome and SmithKline Beecham merged to form GlaxoSmithKline). An acquisition (or takeover) is usually the purchase of a smaller target company by a larger one. The acquisition may be friendly (the company being acquired is in favour of the takeover) or hostile (the company does not want to be taken over). Strategic Alliance. A formal relationship between parties which aims to achieve certain strategic objectives whilst enabling them both to remain independent. A good example of this is the airline industry where many airlines form alliances (eg. StarAlliance) while still remaining independent. Franchise. The Franchisor gives the right to the Franchisee to use its brand in exchange for a capital sum and /or a royalty payment. Examples of a franchise include certain McDonalds restaurants around the world.
KEY KNOWLEDGE Scenario planning

Scenario planning, also called scenario thinking or scenario analysis, is a strategic planning method that some organizations use to make flexible long-term plans. Within the method a group of analysts would generate simulation games for policy makers. The games combine known facts about the future, such as demographics, geography, political, industrial information, and mineral reserves, with plausible alternative social, technical, economic, environmental, educational, political and aesthetic trends which are key driving forces. The method also allows the inclusion of factors that are difficult to formalize, such as novel insights about the future, deep shifts in values, unprecedented regulations or inventions.
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Although the method enables to analyse situations without any boundaries, its subjective and heuristic nature leads to its criticism. The key concerns are with the lack of formality in the method leading to questions such as: did we consider the right scenarios? Or can we base our decisions on the scenarios we developed?
KEY KNOWLEDGE Game theory

In strategic planning, the impact of decisions made by external entities and stakeholders such as competitors, suppliers, regulators and customers can be very important. However, assessing these external factors in a comprehensive manner can be very difficult. Game theory is the branch of mathematics that allows the formal consideration of the interactions of players (in this case various entities) in situations of parallel and conflicting goals. Any decisions made by an organization are not made in isolation. There is always a dynamic environment that will respond to such decisions and in some cases will anticipate them. Competitors will match product pricing or will introduce better products at lower prices. Suppliers might increase raw material costs, customers can switch brand, or regulators can pass new restrictive regulations. In order to validate any strategic plan, it is necessary to consider both the effect on the other players of the actions taken in the plan, and also effect on the company of actions taken by other players. The feasible future possibilities quickly become very difficult to enumerate and assess, and so a formal game theory process is valuable.
KEY KNOWLEDGE Strategy vs. organisations structure

Organizational structure affects organizational action in two ways. First, it provides the foundation on which standard operating procedures and routines rest. Second, it determines which individuals get to participate in which decision-making processes, and thus to what extent their views shape the organizations actions The set organizational structure may not coincide with facts, evolving in operational action. Such divergence decreases performance, when growing. Organizational structures should be adaptive to process requirements
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Every organization has a unique structure. An organizational structure is the reflection of the companys past history, reporting relationships and internal politics. In order for the strategy to be deployed successfully the organisations structure must be aligned with the strategic choices made.
KEY KNOWLEDGE Managing the portfolio of products

The product portfolio is the collection of products that make up the companys product offer. The best product portfolio is one that fits the company's strengths and helps exploit the most attractive opportunities. The company must: (1) (2) Analyse its current portfolio and decide which products should receive more or less resources and attention, and Develop growth strategies for adding new products to the portfolio, whilst at the same time deciding when products should no longer be retained.
The most common approach to product portfolio management was developed by Boston Consulting Group and is known as BCG matrix:
A balanced portfolio would have: 1. 2. 3. Stars to ensure the future. Question marks to convert to Stars. Cash Cows to provide funding to develop the Stars and Question Marks.
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KEY KNOWLEDGE Porters value chain

The value chain was introduced by Porter and represents an approach to looking at the development of competitive advantage within an organisation. All organisations consist of activities which link together to develop the value of a business. Together these activities represent the value chain. The value chain represents a series of activities that both create and build value. Combined they represent the total value delivered by an organisation. The margin in the diagram is the added value (the difference between the total value of the activities and the cost of performing them). Primary activities: related with production. Support activities: provide the background for the effectiveness of the organisation (e.g. HRM)
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Chapter 3
Strategy implementation

Once a strategy is chosen, the next big challenge is to actually put the words into practice and then monitor whether the assumed effects materialize. Each business unit must be given clear measures based on which its operations will be assessed. These measures must be developed to promote the following of the strategic choice. Otherwise goal congruence will not be achieved. If things do not work the way they were planned it might be because the strategy was wrong or because it was wrongly implemented. In both cases feedback must be provided and the organization should be flexible enough to accommodate it.
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KEY KNOWLEDGE Critical success factors and Key performance indicators

Critical success factors (CSF) Within any organisation there are certain factors that will be critical to the success of that organisation. If the organisation fails to achieve the objectives associated with these particular factors the organisation will fail. Example: CSFs will vary from industry to industry. An example of a CSF for an online food delivery company would be prompt and accurate home delivery. Core competencies Critical success factors are closely linked to a firms core competencies; these are processes and activities undertaken by an organisation which are seen as being central to its success. Core competencies are capabilities which the firm develops in addressing its CSFs, and by doing so, it can achieve competitive advantage. True core competencies provide customer benefits and are difficult for competitors to imitate, i.e. among other things, it can pose a barrier to entry to potential competitors. A core competency can take many forms such as technical know-how or the quality of customer relationships. Example: Amazon.com has a number of core competencies such as a reliable and efficient online ordering and delivery system. Key Performance Indicators Once the CSFs in a business have been identified, management will define key performance indicators (KPIs) as a way to track and monitor the performance of the CSFs. KPIs can be financial or non-financial in nature. Examples: Critical success factor Quality of product Customer satisfaction Innovation Cost reduction Productivity gains Measured by: Rate of defects Customer surveys No. of new products developed Monetary reductions achieved Output per employee (wage-adjusted)
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The measurements are meaningful when judged relative to competitors.
KEY KNOWLEDGE The balanced scorecard

The balanced scorecard is a strategic planning and management system that is used in business and industry, government, and not-for-profit organizations worldwide to align business activities to the vision and strategy of the organization, improve internal and external communications, and monitor organization performance against strategic goals. It was developed originally by R. Kaplan and D. Norton as a performance measurement framework that added non-financial performance measures to traditional financial metrics to give managers and executives a more 'balanced' view of organizational performance. The characteristic of the balanced scorecard is the presentation of a mixture of financial and non-financial measures each compared to a 'target' value within a single concise report. The report is not meant to be a replacement for traditional reports but a summary that captures the information most relevant to those reading it. Design of a balanced scorecard is about the identification of a small number of financial and non-financial measures and attaching targets to them, so that when they are reviewed it is possible to determine whether current performance meets expectations. The measures would be sought and grouped within four perspectives: Financial: encourages the identification of a few relevant high-level financial measures - "How do we look to shareholders?" Customer: encourages the identification of measures that answer the question "How do customers see us?" Internal business processes: encourages the identification of measures that answer the question "What must we excel at?" Learning and growth: encourages the identification of measures that answer the question "Can we continue to improve and create value?".
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KEY KNOWLEDGE Business unit performance

Benchmarking Benchmarking is the process of identifying best practice in relation to products and processes by which those products are created and delivered. The search for best practice can take place both inside a particular industry, or in other industries (are there lessons to be learned from other industries?). The objective of benchmarking is to understand and evaluate the current position of a business or organisation in relation to best practice and to identify areas and means of performance improvement. Benchmarking involves looking outward (outside a particular business, organisation, industry, region or country) to examine how others achieve their performance levels and to understand the processes they use. When lessons learnt from a benchmarking exercise are applied appropriately, they facilitate improved performance. Application of benchmarking involves four key steps: (1) (2) (3) (4) Understand in detail existing business processes Analyse the business processes of others Compare own business performance with that of others analysed Implement the steps necessary to close the performance gap
Benchmarking should not be considered a one-off exercise. To be effective, it must become an ongoing, integral part of an ongoing improvement process with the goal of keeping abreast of ever-improving best practice. Transfer pricing Transfer price refers to the amount used in accounting for transfer of goods or services from one responsibility centre to another or from one company to another which belongs to the same group. Transfer pricing is a mechanism for distributing revenue between different divisions which jointly develop, manufacture and market products and services. Transfer pricing systems are designed to accomplish the following objectives:
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to provide each division with relevant information required to make optimal decisions for the organisation as a whole; to promote goal congruence that is, actions by divisional managers to optimise divisional performance should automatically optimise the firm's performance; and to facilitate measuring divisional performances.
The fundamental principle is that the transfer price should be similar to the price that would be charged if the product were sold to outside customers or purchased from outside vendors. Market-based transfer pricing system provides optimal results when the market for the intermediate product is perfectly competitive and the selling division can sell its output either to insiders or outsiders and as long as the buying division can obtain all its requirements from either outsiders or insiders.
KEY KNOWLEDGE Lean systems

Lean systems gives people at all levels of the organization the skills and a shared way of thinking to systematically drive out waste through designing and improving work of activities, connections, and flows. There are 4 Bedrock Rules of lean organizations: (1) (2) (3) (4) Structure every activity Clearly connect every customer-supplier (within the organization) Specify every flow path Improve through experimentation at the lowest level possible towards the ideal state
Lean manufacturing is a variation on the theme of efficiency based on optimizing flow; it is a present-day instance of the recurring theme in human history toward increasing efficiency, decreasing waste, and using empirical methods to decide what matters, rather than uncritically accepting pre-existing ideas.
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KEY KNOWLEDGE Types of organizational structures

There are different types of organizational structures and a company should choose the one that best suits the need of the strategy they pursue. Traditional Structures These are based on functional divisions and departments. These are the kind of structures that follow the organizations rules and procedures. They are characterized by having precise authority lines for all levels in the management. Typical examples include: Line Structure this is the kind of structure that has a very specific line of command. The approvals and orders in this kind of structure come from top to bottom in a line.
Sales Director
Regional Manager 1
Regional Manager 2
Regional Manager 3
Sales force
Sales force
Sales force
Line and Staff Structure line structure is not effective for larger companies. This is where the line and staff organizational structure comes into play. Line and staff combines the line structure where information and approvals come from top to bottom, with staff departments for support and specialization. Line and staff organizational structures are more centralized. Managers of line and staff have authority over their subordinates, but staff managers have no authority over line managers and their subordinates. The decision making process becomes slower in this type of organizational structure because of the layers and guidelines that are typical to it.
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Sales Director Expert Training Manager Regional Manager 1 Sales force
Regional Manager 2 Sales force
Regional Manager 3 Sales force
Functional structure this kind of organizational structure classifies people according to the function they perform in their professional life or according to the functions performed by them in the organization. The organization chart for a functional based organization consists of Vice President, Sales department, Customer Service Department, Engineering or production department, Accounting department and Administrative department. This is not an alternative to the above examples but rather a type within which both can exist.
Divisional Structures This is the kind of structure that is based on the different divisions in the organization. These structures can be further divided into: Product structure a product structure is based on organizing employees and work on the basis of the different types of products. If the company produces three different types of products, they will have three different divisions for these products.
CEO
Vice President Cars division
Vice President Church equipment
Vice President Alcohol and Cigarettes
Market Structure market structure is used to group employees on the basis of specific market the company sells in. A company could have 3 different markets they use and according to this structure, each would be a separate division in the structure.
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CEO
Vice President Children entertainment
Vice President Elderly people services
Geographic structure large organizations have offices at different place, for example there could be a north zone, south zone, west and east zone. The organizational structure would then follow a zonal region structure.
Matrix Structures This is a structure, which is a combination of function, and product structures. This combines both the best of both worlds to make an efficient organizational structure. This structure is the most complex organizational structure. It is important to find an organizational structure that works best for the organization, as the wrong set up could hamper proper functioning in the organization.
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Chapter 4
Change management

Change management is an important aspect of management that tries to ensure that a business responds to the environment in which it operates. There are four key features of change management: Change is the result of dissatisfaction with present strategies It is essential to develop a vision for a better alternative Management have to develop strategies to implement change There will be resistance to change
Many factors drive change in a business. Despite the potential positive outcomes, change is nearly always resisted. A degree of resistance is normal since change is: Disruptive, and Stressful
As a result of change resistance and poorly managed change projects, many of them ultimately fail to achieve their objectives. Amongst the reasons commonly associated with failed change programmes are: Employees do not understand the purpose or even the need for change
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Lack of planning and preparation Poor communication Employees lack the necessary skills and/ or there is insufficient training and development offered Lack of necessary resources Inadequate/inappropriate rewards
KEY KNOWLEDGE Lewins change models

1. Unfreezing, Moving, Refreezing Unfreezing Shows the need for change and gets people ready for change. Moving The actual change occurs here. Refreezing Stabilising the situation to the new approach.
Change can only happen once people have been unfrozen and existing ideas and misconceptions have melted. 2. Force field analysis Driving forces (pushing for change) Restraining forces (resisting change)
Current state
Desired state
The length of the arrow represents the time duration of the force and the thickness of the arrow represents the strength of the force.
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There are driving forces pushing for change and forces resisting change. To encourage change, change agents should strengthen driving forces and reduce restraining forces.
KEY KNOWLEDGE The Change Kaleidoscope (Balogun and Hope Hailey)

This helps management design approaches to change within a company. It contains 3 rings: An outer ring which relates to the wider strategic change. A middle ring which looks at the more specific change features. An inner ring which provides a range of choices for management to use.
Organisational Change Context
Power
Time
Readiness
Design Choice - change path - change start - change target - change roles
Scope
Capacity
Preservation
Capability
Diversity
The kaleidoscope does not create prescriptive choices for management to use. Instead, just like a real kaleidoscope changes the image so the change design mechanisms will change.
KEY KNOWLEDGE Business Process Reengineering (BPR)

BPR is a method aimed at improving the efficiency and effectiveness of business processes within an organisation.
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The process strategy matrix (Harmon) is based on: The importance of the process The complexity of the process
Process type
Complex
Complex process that are not part of core competencies.
Complex processes of high strategic value.
Outsource
Simple processes of low value.
Focus on people based process improvements

Simple processes of high strategic value.
Simple
Automate in ERP application or outsource

Low
Automate for efficiency
High Strategic importance of process
Business processing Outsourcing (BPO) is a form of outsourcing that involves contracting 3rd parties to undertake specific functions. Typically, back office functions such as accounting activities are outsourced.
KEY KNOWLEDGE Methods of successful change implementation

The key stages in a successful change project are likely to be to: Identify the changes required (a role here for SWOT and PEST analysis) Determine the major issues Identify and assess the key stakeholders Win the support of key individuals Identify the obstacles Determine the degree of risk and the cost of change Understand why change will be resisted and how it can be managed
People are the key factor in overcoming resistance to change. The successful implementation of new working methods and practices or integrating new businesses into a group is dependent upon the willing and effective co-operation of employees and
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management. Many change initiatives and programmes fail because they are derailed by the people factor! A key part of successful change is, therefore, building and communicating the reasons & the vision for change. Employee communication is critical for the success of the change. It will not ensure the success will come but without it a failure is nearly certain. Employees need to be clear about what a change involves and how they are involved in it: What are the proposed changes? What is the timescale? Why should we do it? What will the major effects be?
The way in which the change can be communicated / negotiated / discussed with employees might be any or some of those: Cross-functional teams Stronger internal communication Negotiation Action planning Appointing change agents or champions of change And a certain amount of compulsion manipulation and coercion
The change must also be clearly supported by the top. Employees need to feel that the changes has been accepted / invented by the top and thus it is unavoidable. Their voice will be heard and their input is welcome but the previous state cannot be reinstated. Thus the top managers should: Act decisively demonstrate momentum Consider how they will be affected Involve them in the change Consult and inform frequently Be firm but flexible Monitor the change
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Chapter 5
Information technology

Over the past 30 years the technology changed the way businesses operate and a run. It is now impossible or absolutely reckless to disregard the impact of IT on the strategy and strategic choices made by any company (literally any, including a local newsagent). This chapter looks at IT in the context of supporting strategic plans and linking with various models referred to previously such as Porters 5 Forces, Value Chain Analysis, etc.
KEY KNOWLEDGE Information for competitive advantage

The theoretical framework for the way information technology can change the competitive environment of an organization were laid down by M. Porter and V. Millar as early as 1985. Surprisingly little has changed since then and their remarks linking the changes resulting
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from the IT revolution to Porters 5 forces model, the value chain or his generic strategies remain up to date. Information technology is changing the way companies operate. It is affecting the processes in which companies create their products and render services. In many cases the information reshapes the product or service itself, combines products with services and create value for their buyers. Within the value chain every activity has both physical and information processing content. It is about the physical tasks to be performed while the information processing element is about capturing, manipulating and storing data necessary to perform the activity. Recently the information technology has been advancing faster than the technologies for physical processing. The ability to capture, manipulate and process information became incomparable to previous years or decades. Also the cost of doing it has consistently fallen. Some companies make extensive use of the information processing capability to increase the competitive advantage. Take the example of Wal-Mart an American supermarket chain. Very early in their history they developed sophisticated systems for monitoring customers buying habits in various supermarkets to optimize their purchasing and stock levels. This enabled them to offer low pricing and pursue the cost leadership strategy. Another example might be a purely information-processing company Google. They pride themselves to be operating one of the largest data processing and storing centre. This enabled them to offer new services to monitor internet users habits and collect information about them, which transforms into being able to provide an internet advertising paid service targeted precisely at clients needs. Obviously technology enables new linkages within companies and between companies and their suppliers and customers. These linkages (in terms of effecting transactions or speed of communications) can also be transformed into competitive advantage. In summary there are two overarching ways in which information technology can creates competitive advantage: Lowering cost in every single element of the value chain Enhancing differentiation through changes in products themselves or changes to ways in which companies effect transactions.
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KEY KNOWLEDGE E-business

What is e-business? E-commerce is the buying and selling of goods and services over the internet. E-business is broader than e-commerce as it also includes IT issues that support key business processes as well as enabling businesses to work more closely with suppliers and to better satisfy customer needs. It inherently involves fast moving and innovative processes. B2B (Business to business): transactions between business (e.g. a manufacturer to a wholesaler). Could be used to link a VCA of the purchaser to a VCA of a supplier. B2C (Business to Consumer): an individual purchasing from a retailer.
Stages of eBusiness 1. 2. Web presence in effect being simply a brochure on the internet. The aim is to reach a wider audience and broaden the brand image. Basic e-commerce - undertaking entry level e-commerce to enable the business to conduct transactions on line. Facilities such as PayPal have made this possible for even the smallest of businesses. Building and maintaining relationships integrating core areas of the business to enable closer and quicker relationships with suppliers and customers. Includes CRM facilities. Creating the future fully integrated systems with minimal human interaction. Systems update automatically.
3.
4.
McFarlans Grid This is used to assess business and IT alignment and to select projects which need developing.
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Strategic impact of future systems Low Low Support - Uses IT primarily for support activities such as payroll processing. High Turnaround not overly dependent on IT at the moment but may look to use IT to improve position in the future.
Strategic impact of current systems
High
Factory IT is used heavily for day to day business but not viewed as a competitive advantage.
Strategic critical for success both now and in the future.
Push / Pull Supply Chain A supply chain is the system of resources, processes and people that move a product or service from the initial supplier to the end customer. The supply chain transfers the raw materials into a finished product that will be delivered to the end customer. A push based supply chain is where the products are pushed through the process to the end customer (i.e. from production to retail). Manufacturing levels are often based on historical levels. The majority of businesses comprise a hybrid of some form between push and pull supply chains. Ford is an example of a business at the push end of the scale whilst technology companies such as Dell are at the other end where demand pull is dominant.
E-marketing using the 6 Is. 1. 2. 3. 4. 5. 6. Interactivity traditional marketing is mainly push whereas e-marketing is predominately pull (i.e. the customer looks for the information) Intelligence a wide variety of low cost marketing information can be collected. Individualisation personalization is easier compared to the traditional mass marketing methods. Integration possible to integrate e-communication into the wider e-buying process. Industry structure can be radically impacted as a result. Independence of location e communication creates global possibilities from remote locations.
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Customer Relationship Management (CRM) consists of systems and processes that organisations use to organise and develop both current and prospective customers. Typical objectives of a CRM system are to improve customer service, build loyalty and ultimately improve the performance of the organisation. CRM involves such activities as front office (e.g. direct contact with customers), back office (e.g. invoicing procedures) and B2B relationships (e.g. interaction with suppliers).
E-business Pricing E-business pricing can follow similar pricing techniques to traditional areas of business. Points to be aware of include:
KEY KNOWLEDGE Price Quality relationship

A priori one would expect a positive correlation between price and quality.
High
Skimming
Premium
Price
Low Economy Penetration
Low
High
Quality
The four principal pricing strategies are shown in the above quadrants. The more interesting ones involve High-Low and Low-High combinations.
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Economy (pricing) This is a no frills low price. Skimming Enter the market at a high price to catch customers willing and able to pay the price. Penetration pricing Go in at a very low price to win market share. Premium pricing Maintain a high price due to the nature of the product. Cost plus A markup is added to the (production) cost. Target pricing This method backs into the price by calculating the required profit and the possible production costs first. Promotional Pricing These are in support of campaigns to raise customer awareness of a product. Perceived value pricing Plays on perception of value and what the market is willing to pay. Value Pricing Increasing the value content of the product so as to defend market share (in times of difficult economic conditions or competition). Product range pricing Sell a core product cheaply and price high related products. Captive Product Pricing Similar to product range but product is more closely tied to the initial product. Competitive pricing Using competitors as a benchmark.
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Price differentiation Pricing the same product at different levels in different markets. Psychological Pricing Plays on the emotion of the consumer. Product Line Pricing The overall price reflects the benefits provided by the constituent parts. Optional Product Pricing The pricing of additional products and services once the customer has made the initial purchase. Product Bundle Pricing Combining products into one pack and pricing it overall. Geographical Pricing Similar to price differentiation.
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Chapter 6
Project management

Project management is the process of planning and organising resources to achieve a specific goal or objective. A project is a separate task having a defined beginning and ending. Given the temporary nature of the majority of projects there are specific skills that are necessary for managing projects. Typical challenges for project management are: Scope (what exactly is required from the project) Time Budget
The major stages of project management revolve around the following: Initiation Planning or development Production or execution Monitoring and controlling Closing
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KEY KNOWLEDGE Stages of project management
KEY KNOWLEDGE Work Breakdown Structure

A work breakdown structure (WBS) is a tool used in project management to breakdown and organise the total work of the project into individual discrete components. An extract for a WBS when a company decides to enter a new market with an existing product is:
Enter a new market Team 1 Marketing Ideas Team 2 Logistics Local distributors Team 3 Legal Local requirements
Marketing plan
Transport mechanism
Accounting consolidation
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KEY KNOWLEDGE Network diagrams (Critical Path Analysis)

Critical Path Analysis (CPA) formally identifies tasks which must be completed on time for the whole project to be completed on time. It is a project management tool that identifies: Individual activities that make up a project. The order in which the activities have to be undertaken. Activities which can only happen once other activities have been completed. Activities which can be undertaken simultaneously.
KEY KNOWLEDGE Project Initiation Document

A Project Initiation Document (PID) is a term representing the initial plan of approach for a project. The PID brings together all the key information that is needed to commence and run the project. All the project stakeholders should be aware of it and it should be signed off by the project sponsors. It defines all the major aspects of a project and forms the basis for its management and the assessment of its overall success. Typical contents of a PID include: Project objectives Scope Project team members Business Case Constraints
(end of ExPress notes)
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Notes

START About ExPress Notes

How to get the most from these ExPress notes

At the start of the learning phase

Your stage in study for each paper Practice phase

These ExPress notes

CIMA online past exams

The night before the real exam

At the door of the exam room before you go in.

Our ExPress notes fit into our portfolio of materials as follows:

START About The ExP Group

External factors affecting organizations strategy

START The Big Picture

KEY KNOWLEDGE Responsible business practices

Responsible business practice overarches the following areas:

KEY KNOWLEDGE Stakeholder management

KEY KNOWLEDGE Customer analysis and bahaviour

KEY KNOWLEDGE Supply chain management

Strategy formulation and development

START The Big Picture

KEY KNOWLEDGE Key definitions

KEY KNOWLEDGE Strategy formulation process

KEY KNOWLEDGE Organisations mission and vision

Bristol-Myers Squibb Citigroup

KEY KNOWLEDGE Strategic planning

Corporate Business Functional

Interactions exist between all three stages:

Market penetration Market development

KEY KNOWLEDGE Scenario planning

KEY KNOWLEDGE Game theory

KEY KNOWLEDGE Strategy vs. organisations structure

KEY KNOWLEDGE Managing the portfolio of products

KEY KNOWLEDGE Porters value chain

START The Big Picture

KEY KNOWLEDGE Critical success factors and Key performance indicators

The measurements are meaningful when judged relative to competitors.

KEY KNOWLEDGE The balanced scorecard

KEY KNOWLEDGE Business unit performance

KEY KNOWLEDGE Lean systems

KEY KNOWLEDGE Types of organizational structures

Sales Director Expert Training Manager Regional Manager 1 Sales force

Regional Manager 2 Sales force

Regional Manager 3 Sales force

Vice President Cars division

Vice President Church equipment

Vice President Alcohol and Cigarettes

Vice President Children entertainment

Vice President Elderly people services

START The Big Picture

KEY KNOWLEDGE Lewins change models

KEY KNOWLEDGE The Change Kaleidoscope (Balogun and Hope Hailey)

KEY KNOWLEDGE Business Process Reengineering (BPR)

Complex process that are not part of core competencies.

Complex processes of high strategic value.

Focus on people based process improvements

Automate in ERP application or outsource

Automate for efficiency

High Strategic importance of process

KEY KNOWLEDGE Methods of successful change implementation

START The Big Picture

KEY KNOWLEDGE Information for competitive advantage

KEY KNOWLEDGE E-business

Strategic impact of current systems