GCA business management revision kit

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30 January, 2013

Business Management Exam Kit
This kit is designed to help ICAP Module E business management students to get the following:
 ICAP Syllabus Grid
 Complete Revision Notes from PBP
 Past Papers Analysis
 Topic wise past papers with answers and examiner comments
 All up to date past papers given with solutions attempt wise

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Final Examination

Business Management

Module E
P AP ER E 16 : Bu s i ne s s M a n a g e m e n t

(100 marks)

Introduction
The ob ject ive of t his p aper is t hat the ind ivid ual s hould b e ab le to:
•
•
•
•
•
•
•
•
•
•

Identify the principles and concepts in the theories and practices of strategic business
management;
Asses the impact of environmental forces such as global microeconomic forces, international trade
and financial system on organizational strategies and plans;
Understand the importance of linking information systems development and management to
business goals and needs;
Understand the interplay of marketing with other vital functional areas in business management and
to understand the accountant»s role in servicing the needs of marketing and other functions of
business;
Recognize the role of global marketing and international business;
Assess the importance of human resources development to organisations and identify methods of
managing people effectively;
Evaluate ways in which change can be managed successfully;
Appreciation of social and ethical implication of strategic policies in business;
Understand the aims of corporate codes of conduct and their role in improved corporate

governance; and
Understand the manager»s role and responsibilities in relation to the working environment.

Case studies / scenario based questions will be set in the examination.

Indicative Grid
Syllabus Content Area

Weightage

1. Strategic management and planning
2. Corporate social responsibility and business ethics

30

3. Human resource management
4. Management of the working environment

30

5. Marketing Management
6. International Business

20
20

Total
Note:

100

The weightages given above are for guidance purposes only and some deviations in setting
of papers could be expected.

The Institute of Chartered Accountants of Pakistan


Final Examination

Business Management

Contents:
1. Strategic management and planning:
a.
b.
c.

The purpose of strategic management and business planning and their inter relationship
The methods which organisations use to plan for the future including the role of information
technology
Pos ition ap prais al and analys is :
i.
ii.
iii.

Identifying the organization»s strengths and weaknesses, opportunities and threats
Identification and quantification of the planning gap
Closing the planning gap through the identification and evaluation of alternative courses
of action: improved efficiency; improved product(s);or service(s); introducing new
product; entering new markets; merging with or acquiring other organisations
iv. Use of alternative strategies

v. Quality and a strategic variable; its implementation and management
vi. Performance against operational and strategic targets; flexibility» economy, efficiency and
effectiveness
vii. Performance against that of competitors; benchmarking; use of inter-firm comparisons;
the limitations of external data
viii. Performance of costs, profit and investment centres using financial and non-financial
measures
ix. Problems of measuring divisional and subsidiary company performance
x. International and multinational trading; transfer pricing of goods and services and their
impact on trading results
xi. Impact of changing price level on current performance and the future projections
xii. Customer outlets, including customer profitability analysis
d.

The eff ect of ex ternal environm ent on st rateg y and p lans and ap prais ing t he env ironment :
i.
ii.
iii.
iv.

v.

Scanning the environment of the organisation and the context in which it is set for
changes, developments and opportunities
Forecasting trends and developments in relevant areas through the use of relevant
quantitative and qualitative analysis
Future basing (i.e Anticipating long-term prospects for the business and its likelihood of
survival) and other scenario-building techniques
Impact on the organisation of changing national and international influences:
demography; technology (progressional alternative / acceptability); economic resources;

social attitudes and aspirations; legislation and regulation; political forces; government
and other agencies, including pressure groups
Competitive advantage:
◗
◗
◗

its meaning in different markets and industries of nations and the implications of this
for organisational success
the different approaches used by organisations and management in different
countries and the lessons which can be applied to Pakistan
the effect on organisations of working in an international environment, the key
aspects of that environment and methods of entry into it

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Final Examination

Business Management

vi.

Use of renewable and non-renewable resources including the ethical implications of
such use; the effect of the environment on corporate performance
vii. External sources of information, including databases, both private and public, and their
usefulness to the organisation
viii. Impact of innovation, substitution and obsolescence on business process (including
marketing and production)
ix. Impact of international market integration on the transfer of goods, services and labour

x. Comparative organizational performance: market share production capacity
e.

Methods of gaining support and commitment for strategies

f.

Es tab lishing the corporat e object ives:
i.
ii.
iii
iv
v.

Organizational missions, aims, goals and objectives
Long-term (strategic) and short-term (operational) objectives: quantitative and
qualitative evaluation
Application of decision theory
Problems of achieving balanced growth and development
Internal and external factors effecting decisions; implication of «short-termism»

g.

Formulating and evaluating plans with an awareness of the various techniques available to
managers

h.

Understanding and managing the risk of a proposed business plan for the plan itself and for
all the aspects of business which it will influence

i.

Reviewing strategy for the effect it will have on the organisation and the local and global
community

2. Corporate social responsibility and business ethics
a.

Understanding of obligation towards society by business organisations and the individuals
associated with it, in carrying out the business and professional activities

b.

Understanding ethical and social implications of business strategic policies and decisions
and their impact on the stockholders; consideration thereof in the formulation and
implementation of strategic planning and management decisions

c.

Disclosure and confidentiality

d.

Profit motives versus other corporate objectives

e.

Goal congruence and corporate performance measurement

f.

The role of professional bodies in regulating the activities of members

The Institute of Chartered Accountants of Pakistan


Final Examination

Business Management

3. Human resource management
a.
b.
c.
d.
e.
f.
g.
h.
i.

The purpose and forms of personnel specifications in the recruitment of personnel
Methods of identifying competencies and other attributes required
Specifying personnel requirements
Evaluating and determining the benefits and costs of new or additional personnel
Identifying and determining suitable methods of recruitment
Selection methods and their use
Methods of motivating and supporting personnel
Staff appraisals and the assessment of competence

Warning and dismissing personnel: legal and organizational policies and procedures; the role
of internal and external specialists in the process
j.
The role of employee group in promoting the welfare of personnel
k. National legislation which affects recruitment, selection, employment and dismissal of
personnel
l.
The management of organizational and personal changes
m. Concep ts and princip les of hum an resource dev elopm ent
i.
ii.
iii.
iv.
n.

The role which individual and team development can play in growth and development
The different concepts and models of competence
Methods of encouraging and supporting individuals and teams to grow and develop
The effect of internal and external factors on development

Human relations management

4. Management of the working environment
a.
b.
c.
d.

Interpretation, applying and monitoring best practices for managing the working environment
National Legislation which affects the working environment

The role and purpose of health , safety and security requirements, procedures and guidelines
Roles and responsibilities of management for managing and improving the working
environment

5. Marketing Management
An introduction to marketing principles, the purpose of marketing philosophy and concepts in
providing for customer needs. Areas include:
a. S trat egy in t he m arket place
i.
ii.
iii.
iv.
v.

Assessing threats and opportunities to the marketing plan; determining the need for
change in the planning area
Development of marketing strategies to meet organisation objectives
Assessing the nature and size of the market using internal records, market intelligence,
market research
The process of creating, reviewing, selecting and marketing the right product in the right
place, to the right customer at the right time, while achieving the right price; relevance of
the product life cycle
The product portfolio; formulation, management, the relevance of
branded merchandise

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Final Examination

Business Management

vi. Consumer power within the marketing environment
vii. Strategic management of markets through mergers, acquisitions and divestments
viii. Problems associated with the acquisition of the foreign subsidiaries especially in respect
of performance appraisals
b.

Analyzing the impact of globalization on marketing to assess competitive advantage

c.

Techniques for analyzing the market, choosing the target market and the appropriate
marketing mix, distribution channels, promotions, and developing a marketing plan

6. International Business
a.

The environment of global marketing, global opportunities and threats; difficulties in
International business and alternative approaches to managing the process

b.

The development of multinational organisations and transnational corporations and their role
in the world economy

c.

Int ernational f inancial m anagem ent d ecisions
i.

ii.
iii.

Alternative methods of financing imports and exports
The workings of international money and capital markets and the opportunities that they
offer to companies as a source of finance and as a repository for the investment of funds
The management of financial resources within a group of companies including:
•
•
•
•
•

iv.

payments between companies
cash management
transfer pricing
judging the performance of companies within a group
the financial control of a group of companies

The appraisal of international capital investments, applying the appropriate techniques,
and the consideration of the major issues in the decision-making process, including:
•
•
•
•
•
•
•

strategic objectives
the principle of foreign home country versus host country returns
the form of foreign investments, including the use of branches versus subsidiaries
the different methods of financing foreign investments
the effect of taxation on foreign investment decisions
repatriation of sales amounts, earnings and charges to foreign operating companies
political risk analysis

The Institute of Chartered Accountants of Pakistan


Final Examination

Business Management

Recommended Reading

PAPER E 16: Business Management
Book Name & Author

About the Book

1.

Strategic Management Concepts and
Cases by Fred R. David.

The book ensures concept building for the
topics on strategic management.

2.

Principles of Marketing by Kotler Armstrong.

The book gives an in-depth knowledge of the
principles of marketing and a good explanation
of basic marketing concepts.

3.

Human Resource Management by H. John
Bernardin.

The book is relevant for various syllabus topics
under the mentioned grid.

4.

Management and Organizational Behaviour
by Laurie J. Mullins.

A comprehensive and detailed explanation of
managerial practices is given in this book. The
book is a good guide for concepts in the field
of organizational behavior.

5.

Business Studies by Dave Hall Rob Jones

and Carlo Raffo.

6.

}

AS Level and A Level Business Studies by
Peter Stimpson.

The books comprehensively cover the following
topics: Business Strategy and environment,
marketing and human resources.

Supplementary Study Material
1.

Business Management Study Text and Revision Series by AT Foulks Lynch Pakistan.

2.

Business Management Study Text and Revision Series by Professional Business Publications
(PBP).

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Global Chart ered Accountants - GCA

Revision
Notes

(An effort by Mr.Asif)

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Chapter 1 : Objectives of Organisation
Introduction to Strategy
Strategy:
― Course of actions, including specification of resources required, to achieve a specific objective‖
Influences on /Determinants of Strategy:
 External
o Society
o Organized groups
 Nature of business
o Market situation and conditions
o Products of company
o Technology used
 Organization‘s Culture
o Organizational system and structure
o Leadership style
o Organization‘s history
o Organization‘s founder
 Stakeholders‘ powers (mapping) and Internal coalition
 Economic objectives
 Social responsibility
Environmental conditions affecting Strategic Planning:
1. Resources (mineral)
2. Disaster

3. Logistics
4. Government
Environmental M anagement Accounting is a solution: examples are
1. Eco – Balance
2. Cleaner Technology
3. Lifecycle assessment
4. Performance appraisal
5. Budgetary planning and control
6. Corporate liabilities (a factor in PERT)
Characteristics of Strategic Decision:
Scope:
Overall long-term direction.
Matching:
Matches activities to environment & resources capability.
Affect:
Affected by values, beliefs and powers of people in organization. & Affect operational decisions.
Implications for change.
Complex in nature.
Allocation or reallocation of resources.
Strategic Financial Management:
It is identification of strategies able to maximize NPV and to allocate scarce resources, and implementing and
monitoring of such strategy.
Financial management decision: (Also see end of chapter 9)
 Investing decisions (merger, divestment etc.)
 Financing decisions (Capital structure and Working Capital Management)
 Dividend decisions (Cash or Bonus share)

Financial objectives:
Non financial objectives:
 Primary; to maximize wealth of shareholders

 Service provision.
 Others are
 Fulfillment of responsibility to suppliers & customers.
o Decrease in debt.
 Welfare of Society
o Profit retention.
 Welfare of M anagement
o Sales growth.
 Welfare of Employees
Government organizations:
External Financing Limit.
To create Value for Money, funds must be applied Economically, Efficiently and Effectively.
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Chapter 2 & 4 : Strategy Formulation and Choice
Strategy formulation/choice
1.
2.

How to gain competitive advantage?(question of survival)
i. Porter‘s Generic Strategies (5 forces)
Which Direction to go
i. Growth direction
a. Organic growth
 Ansoff‘s Product-Market Matrix
b. Joint development
ii. Defensive/Non growth strategies

a. Capital Restructure Scheme
b. Downsizing
c. Divestment

Porter’s Generic Competitive Strategies (to achieve competitive advantage):
Competitive position is the market share, costs, prices, quality and accumulated experiences of an organization/product
relative to competition.
Competitive strategy is taking offensive or defensive action to create a defendable position in an industry, and to cope
with competitive forces yielding superior ROI.
Competitive advantage is anything which gives one organization an edge over competitors.
There are following Competitive Strategies for companies to achieve Competitive Advantage.
Broad Target
Niche Focus

Lower Cost
Cost Leadership
Cost Focus

Differentiation
Differentiation
Differentiation Focus
(for luxury goods)

Differentiation is ―creating value through uniqueness‖. It could be at following levels of product i.e.
1.Actual Product
a). Features.
b). Quality level.
c). Design.
d).Brand name
e). Packaging.

2. Augmented Product
i. Delivery and credit
ii. Warranty
iii. Installation
iv. After sale service
Cost Leadership is ―having lowest cost of producing‖. It could be achieved by:
 Mass Production (economies of scale)
 Latest Technologies
 Favorable access to raw materials
 Automation
 Minimizing overhead by exploiting bargaining power
 Constantly improving efficiency and economy e.g. through value chain analysis
Focus involves a restriction of activities to only part of the market (a segment) through
Providing goods/services at lower cost (Cost focus)
Providing a differentiated product/service (Differentiation focus)

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Advantages/Comparison of Competitive Strategies:
Competitive Force
Rivalry
New Entrants
Substitutes
Customers
Suppliers

Cost Leadership strategy

Profitable even in price competition.
Low price is entry barrier.
Firm is less vulnerable than competitors.
Customers won‘t switch.
High bargaining power because of market
share.

Differentiation strategy
Reduces direct competition.
Customer loyalty is entry barrier.
Brand loyalty is weapon.
Low price sensitivity.
Supplier may raise prices but higher
margin offsets it.

Ansoff’s Product-Market Matrix:
Present Market
New Market

Present Product
Market Penetration
Market Development

New Product
Product Development
Diversification

Market Penetration: (low risk; no capital investment)
To increase usage by existing customers or
To increase market share through Competitive pricing, Advertising, Sales promotion taking share of

competitors
Market Development: (low risk; less investment)
New geographical area
New segment
New packing size
Product Development: (riskier; requires investment)
Company can exploit followings
 Existing marketing arrangements (e.g. Promotion, Distribution)
 Knowledge of customers and habits
Cost of entry will go up for competitors.
Diversification (high risk; requires investments and new competence)
Related diversification is when product is new but still within broad confines of industry. e.g.
 Vertical integration (control over supply chain)
 Forward integration (control/ownership over distributors or retailers)
 Backward integration (control/ownership over suppliers)
 Horizontal integration (control/ownership over competitors)
Unrelated diversification is where development is beyond industry and product is entirely new having
no relation with existing technology, market or products.
Franchising

Unrelated

Diversification

Forward
Vertical

Related
Growth

Backward
Horizontal

Organic Growth

Joint Development Strategi es









Take Over/ Acquisition
Mergers
Joint Ventures
Strategic Alliance
Licenses
Agency Agreement
Franchising

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Chapter # 3 : Planning and Control
Planning

Planning:
― Planning involves making choices between alternatives and is primarily a decision making activity‖
2 approaches to planning:
Top-down approach means strategic management starts from top management and flows down the structure.
Bottom-up approach means information is accumulated at lower level and presented to top management along with
summary and options available.
Planning cycle
1.
2.
3.
4.
5.

Identify objectives
Identify available strategies
Evaluate each strategy
Choose strategy (course of action)
Implement long-term plan in the form of annual budgets

Risk factors in planning:
Types of risks:
 Physical
 Economical
 Political
 Financial
 Business
 Product lifecycle
Accounting for Risk:
Required rate of return, adjusted by
 Return %age

 Payback period
 Finance (strict rules of financing i.e. out of profits)
Quantification risk:
 Rule of Thumb (best estimate of value within worst to best possible range)
 Probability Theory (likelihood of occurrence of a forecast result)
 Standard Deviation (calculate Standard Deviation of Expected Value, the higher it is the higher risk is)
Budgetary Control
Control:
―Control is comparing actual results with planned performance and taking appropriate actions‖
Control Cycle
1. Actual results are recorded and analyzed for each responsibility center.
2. Feedback is reported to management.
3. Management compares actual results with plans or targets.
4. Do one of three things
i. Decide to do nothing
ii. Take control actions
iii. Alter the plan or target
Feedback:
― The process of reporting back control information to management and the control information itself‖
 It may be Single Loop or Double Loop.
 It may be Positive or Negative.
Feed forward Control:

Control actions taken in advance.

Actual results are compared with Budgeted (i.e. adjusted by past results)
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Well organized system of control should have:
 Hierarchy of budget center.
 Clearly defined responsibilities.
 Responsibilities for Cost, Revenue, and Capital Employed.
Budget Center:
―Each section of the organization for which budget is prepared‖
Objectives of budgeted planning and control:
1. Motivates employees
2. Establish system of control
3. Responsibility accounting
4. Achievement of goals
5. Communication
6. Coordination
7. Compel planning
Responsibility Accounting:
Each manager has a clearly defined area of responsibility and authority to make decisions within that area. No
uncertainty as to who is responsible for what (sometimes dual responsibility exists).
There are 3 different areas of responsibility.
Type of responsibility center
Manager has control over…

Cost Center
 Controllable cost

Profit Center

Controllable cost

Sales Price


Sales volume

Principal
measures

Variance analysis

Profit

performance

Investment Center
 Controllable cost
 Sales prices
 Sales volume
 Investment in fixed and
current assets
Return on investment and
residual income

Responsibility Center is a unit of organization headed by a manager who has a direct responsibility for its performance.
Controllable Cost is an item of expenditure which can be directly influences by a given manager within a given time
span.
Controllability of fixed cost:
 Committed fixed cost (e.g. PPE-------non-controllable in short term)
 Discretionary fixed cost ( e.g. R.&D. or Advertisement ---------- controllable in short term)

Role of IT in Strategic Management
IT as changing industry:

With Porter‘s 5 forces model.
IT/IS as competitive advantage:
With Porter‘s generic strategies for competitive advantage. &
With Peppard’s 9 ways
5 forces
1.
2.
3.
4.
5.
6.

Ensure competitive pricing
Establish entry barrier (cost of entry)
Using information as a product
Limiting access to distribution channel
Affecting cost of switching
Building close relationship with supplier and
customer.

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Generic strategies
7. Differentiating Product/Service
8. Increasing Cost efficiency
9. Decreasing Supply Cost.


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Chapter 4 & 5 : Strategic Management : Traditional & other models
Traditional and other models of S trategic Management
Strategic Management:
―Strategic M anagement is the analysis, choice, implementation and control of agreed strategies‖
Strategy is a course of action including the specification of resources required to meet a specific objective.
Tactics is the deployment of resources to execute an agreed strategy.
Policy is a general statement providing guidelines for management of decision-making.
Levels of strategy: (by Hofer and Schendel)
1. Corporate Strategy determines the overall purpose and scope of the organization. It is concerned with what types of
business the organization is in.
Defining aspects of corporate strategy:
Scope of activities (whole organization)
Faces environment (opportunities and threats)
Resources (how to obtain and allocate them)
Values (of people in power in organization affect it)
Time scale (long term)
Complexity (uncertainty of future)
2. Business Strategy is how an organization approaches a particular product market area (applied at SBU level).
3. Functional/Operational strategies deal with specialized area of activity within an SBU e.g. Production, Marketing,
HRM, Finance.
Traditional approach to make strategy: (through Planning in a systematic way)
o

o
o
o

Strategic analysis

Analyzing Vision, M ission and Objectives (Strategic Direction)


Corporate appraisal (where we are)
o Analyzing external environment
i. SLEPT analysis
ii. Porter‘s 5 forces model
iii. Scenarios
o Analyzing internal environment (Situation analysis/Position audit)
i. Resources Audit
ii. BCG and GEBS matrices
iii. Value chain
iv. System structure
o SWOT Analysis
o Gap analysis
Strategy formulation/Choice (how we can go)
Strategy implementation
Strategy evaluation and Control

Favor of rational model: (Ansoff and Drucker support it)
1. Corporate level first
2. Strategies are best generated from Top -Down
3. Provide a common thread
4. Enables decision making in conditions where
i. Partial ignorance (Ansoff)
ii. Risk is inevitable (Drucker)
5. Basis for strategic control
6. Improves stakeholders‘ perception
Problems with rational model: (M intzberg criticizes it)
1. Organizations are incapable of having objectives because
i. Objectives may conflict with each other.
ii. Objectives will change from time to time

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2.
3.
4.
5.
6.
7.
8.

iii. Objectives are unlikely to be directly related to economic benefits of shareholders.
Senior management should not be only strategy - setter.
In reality formulation is not a simple step by step process.
Strategies that firms follow are not the same as ones they set in plans.
Over reliance on formalization.
Predetermination
Failure in practice (suitable for only stable environment)
Hinders innovation and radical change.

Other models of(making strategy) Strategic Management
Mintzberg’s emergent strategy model: (Considers random shocks)
 It is unlikely that a firm‘s environment is totally predictable.
 Emergent strategy is a non-conscious strategy arising from patterns of behavior.
 Strategic M anagement is to control and shape/craft these emergent strategies as they arise.

Intended
Strategies

Deliberat e
Strategies
Realized
Strategies

Unrealized
Strategies
Patterns of
behavior

Unexpect ed
Contingencies

Emergent
Strategies

Activities affecting Crafting Strategy:
 Manage stability
o Implement, not just plan
o Obsession to change is dysfunctional; know when to change
 Manage patterns
o Detect patterns and help them shape; grow positives and eliminate negatives.
 Know the business operations
 Detect discontinuing and significance of environmental changes.
 Crafting strategy---- requires natural synthesis of past, present and future. (reconcile change and continuity)
Mintzberg’s 8 styles of strategic management:
1. Planned strategies (imposed by central leadership, large no. of controls, precise intentions)
2. Imposed strategies (imposed by environment e.g. influential customers)
3. Ideological strategies (collective vision of organization‘s members, shared values)

4. Umbrella strategies (ends are defined, means are emergent, target based)
5. Disconnected strategies (members mind their own business, strategies are deliberate for sub-units but
emergent for organization)
6. Consensus strategies ( groups shares common patterns)
7. Entrepreneurial strategies (visioned from strong leadership)
8. Process strategies
Mintzberg’s 5 ways to describe strategy:
1. Plan
- consciously intended course of action
2. Ploy
- a competitive game (e.g discouraging competitors to enter)
3. Pattern
- ideas of emergent strategies
4. Position
- ―environmentally fit‖ & relationship with other organisations
5. Perspectives
- approach towards world
Strategy and managerial intent: (Johnson and Scholes) not emergent
The Command view:
 Strategy develops through the direction of an individual or group, but not necessarily through formal
planning.
 Control of strategy direction is possessed by autocratic or charismatic leader.

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Paradigm and Politics:
 Paradigm (basic assumption and beliefs common in organization‘s decision makers) is inhabitant and

conservative than culture.
 Politics is process of bargaining and negotiation of strategy among powerful stakeholders.
 Process by which Paradigm and Politics influence process of strategy development.
o Issue awareness (by internal results, customer response or environmental change)
o Issue formulation (analysis of issue to get its root)
o Solution development
Summary:
 Memory search (from past experience)
a) Managers do not take best
 Passive search (time will tell)
decisions but satisfactory
o Solution selection
ones.
 Eliminate unacceptable plans (politics)
b) Managers do not pursue the
 Endorsement to junior management
whole rational model but take
small-scale decisions.
Incrementalism:
Bounded Rationality Theory: (Herbert Simon)
 Mangers are limited by time, information and skills.
 They satisfice rather than maximize.
Incrementalism: (Lindblom)
 It involves small-scale extension of past practices.
 Organizations change incrementally, during which time, strategies form gradually.
Disadvantages of Incrementalism:
1. Not suitable where radical new approaches are needed.
2. Some changes are dramatic not incremental.
3. Ignores influence of corporate culture.
4. Applicable to stable environment only.

Logical Incrementalism: (mid way)
Managers have a vague notion as to where the organization should go, but strategies should be tested in small steps
because of uncertainty about future.
Knowledge as a source
tacit knowledge
Learning based strategy:
Knowledge creation
explicit knowledge




Strategy development is a learning process.
Learning organization will generate a flow of fresh ideas and insights, This will promote renewal and prevent
stagnation.
Learning organization is one which is skilled at creating, acquiring, and transferring knowledge, and at modifying
its behavior to reflect new knowledge and insights.

Double loop learning is where purpose is also reviewed. (derived from control theory)
Future will change incrementally
Future Orientation: (Hamel and Prahalad)
Future will be radically different

Future is not just something that happens to organization.

Organizations can create the future.
They offered a ‗diagnostic‘ to indicate how future oriented an organization is.
Diagnostic:
Diagnostic statement
Senior management, view about future

Senior management, spending most time on
Are managers……
Are employees…..
The company is better at
Within the industry, the company
Competitive advantage is pursued by

Protect the past
Reactive
Re-engineering current practices
Engineers of present
Anxious
Operational efficiency
Follows the rules
Catching up with competitors

Agenda for change is set by

Competitors

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Create the future
Distinctive
Regenerating core strategies
Architect of future
Hopeful
Building new businesses
Makes the rules
Creating new sources

competitive advantage
Vision of future

of


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How to cope with future:
Simply more far-sightedness
Imaging products and services that do not exist.
Spend less time in positioning in competitive environment
Future orientation is embodied in the corporate culture.
Environmental Fit: (Hofer and Schendel)




Strategy is a mediating force between organization and environment.
Fit or Suitability means ‗ Organizations are successful when they intentionally achieve internal harmony and
external adaptation.
Strategic logic requires that strategy must:
o Be consistent with objectives
o Match organization‘s capabilities with environment.
Survival and growth are process of adoptation :
Why : because environment gives physical resources and financial resources
Hence : choice of strategy must follow a strategic logic.

Ecology Model:
Organisation‘s environment changes radically, it will only survivor if it adopts its environment and evolves i.e finding

niche areas which provide both demands for output and resources to be used as input to the system.
Pattern and Competencies: (Andrew)
 Corporate strategy is the pattern of management decisions in a company
o That determines and reveals its objectives, purposes or goals,
o That produces the principal policies and plans to achieve those goals,
o Defines the range of business, and
o Kind of human and economic organization it is or intends to be.
 Strategy is exploitation of competencies.
o The distinctive competence is what it does well, uniquely or better than rivals. It comes through
Experience
Quality of co-ordination
Talents and potentials of individuals
Strategic Thinking: (Kenichi & Ohmae)
 Strategy is a creating process
 Success business strategies result not from rigorous analysis but from a particular state of mind.
 Aspects of strategic thinking
o Flexible thinking (what if ?questions)
o Keeping details in perspective (specially uncertain)
o Focus on key factors and distinctive competences)
 How strategic thinking operates
o Ask right question
o Find solution of problem, not remedy or symptom.
o Observe the problem
o Group problems together (e.g. by brainstorming) to see key factors.
Competition: (Ohmae & Porter)
Competitive strategy is the taking of offensive or defensive actions to create a defendable position within an
industry------ and a superior return on investment.
Successful strategy is the interplay of 3 Cs (strategic triangle)
1. Competitor
2. Customer

3. Company
3 assumptions of theory: (focus: survival in competitive environment)
1. Survival of business is impossible without a competitive strategy.
2. Actual strategy will be unique.
3. Marketplace is a battlefield.
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Competitive strategy:
― A strategy by which a firm can have significant ground on its competitors at an acceptable costs‖
Competitive Advantage:
Re-adjust current resources  i.e identify key success factors
Relative superiority
 i.e exploiting competitors weakness
Challenge assumptions
Degree of freedom
 i.e segmenting
How to create sustainable strategic position:
operational effectiveness
doing unique things
doing trade-off
combining good individual activities
making own choices i.e not blindly imitating competitors

Realised Strategies
Intended or planned strategies

Emergent strategies

- Senior management decisions
- Imposed from top
- Well planned
- Well thought-out
- Time consuming
- Deliberately planned

- not planned
- not fore throught
- not the result of management intentions
- caused by pattern of behavior

Implicit & Explicit S trategies
(Depends upon extent to which strategies are
deliberate or emergent)
Implicit  Only in head of chief executive
Explicit  Properly documented
Flaws:
-

Purely deliberate strategy p revents
learning from experience.
A purely emergent strategy defies
control

Descriptive and Prescriptive Strategies
Descriptive : ―what is actually happening in the organisations i.e paradigm, politics, pattern of decisions, incremental approach
Prescriptive : ―to prescribe something‖ i.e rational model, strategic thinking, learning based environment, resource based
model

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Chapter # 6 : SWOT Analysis ad gap analysis
Corporate Appraisal
Corporate appraisal (where we are)
o

o

o
o

Analyzing external environment
iv. SLEPT analysis
v. Porter‘s 5 forces model
vi. Scenarios
Analyzing internal environment (Situation analysis/Position audit)
i. Resources audit
ii. BCG and GEBS matrices
iii. Value chain analysis
iv. System structure
SWOT Analysis
Gap analysis

Corporate appraisal is assessment of SWOT in relation to internal (SW) and external (OT) factors affecting
organization to establish long term plans.

OT Analysis---Analyzing external broad environment:
 Social factors
 Legal factors
 Economic factors
 Political factors
 Technical factors
What Social factors affect:
Changing values and lifestyle
Changing pattern of work and leisure
Demographic change
Why social factors are considered:
• Stakeholders are members of society --assessment of their values and beliefs
• Good (ethical) reputation
• Avoid restrictive legislation
• Change = opportunities
Legal factors:
o Health and safety legislation
o Employment laws
o Environmental legislation
o Information about performance.
Economic key forces affecting organizations:
 Economic Growth
 Interest Rates and Tax rates
 Availability of Credit
 Inflation Rates
 Govt. fiscal policies (taxation, govt. spending, borrowing and repayment) and monetary policies (control of
money demand and supply through rates)
 Foreign Exchange Rates
 Foreign Trade Balances
 Consumer income, debt and spending

 Govt. Subsidy
 Unemployment rate
International economic issues:
o Extent of protectionist measures
o Comparative rates of growth, inflation, wages and taxation
o The freedom of capital movement
o Exchange rates
o Economic agreements
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Exchange rate is the rate at which a national currency exchanges for other national currency.
Determinants are:
Demand and supply of currencies in foreign exchange market (Floating exchange rate)
Govt. (Fixed exchange rate)
Synthesis of above two (Managed exchange rate)
Types are:
Spot exchange rate (rate set for immediate delivery of a currency)
Forward exchange rate (rate set for future exchange of a currency)
Closing rate (Spot exchange rate at Balance Sheet date)

Political factors:
 Type of Govt.
 Stability of Govt.
 Govt. attitude i.e. privatization or nationalization
 Amount of bureaucracy
 Pricing, dividend, tax, employment issues
Political risk is the risk that political factors will affect an organization e.g. war, corruption, nationalization, political

instability.
Jeannet and Hennessry developed a checklist to assess political risk:
1. How stable is Political system.
2. How long will govt. remain in power.
3. How strong is govt.‘s commitment to specific rules of game.
4. If present govt. is succeeded, how specific rules of games would change.
5. What would be the effect of change in specific rules of game.
6. In light of these effects, what decisions and actions should be taken now?
Technological factors:
o Change in production techniques
o Invention and innovation

OT Analysis ---Analyzing external specific and direct environment:
(Porter’s 5 forces model)

i) When costumers have powers:
•Small number of cus tomers
•T hey make high volume purchases
•Products t hey are buy ing are undifferent iat ed
•Alt ernat ive sources of supply are available (subs t it ut e or sw it ching)
ii) When Suppliers Have Power:
•Small number of supp liers
•Few subst itut es exist
•Supp liers are not dep endent on t he buy er for a lot of t heir s ales
•Supp liers have different iat ed t heir products
•It is cost ly t o swit ch suppliers
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iii) When Rivalry Among Existing Competitors Is Intense:
•Slow industry growt h
•High fixed costs (p lant s, machinery , out lets)
•Undifferent iat ed products
•A large number of comp et itors
•High exit barriers (w hat y ou lose if y ou leave t he bus iness)
•Small changes in market share have a big p ay -off
iv) Barriers That Block New Entrants
•Economies of scale
•Large cap it al requirements
•Product different iat ion
•High swit ching cost
•Limit ed access to dist ribut ion channels
•Some government policies and regulat ions
•Other advant ages t hat are hard to dup licat e such as pat ents , great locat ions, subsidies, p artnerships, et c.
•Hist ory of aggressive ret aliat ion t oward new entrant s
v) Indirect Competitors/Substitutes
•Close subst it ut es place a ceiling on t he p rice t hat can be charged for a p roduct or service
•Close subst it ut es also set indirect performance comp arisons
•M ain p roduct is sens it ive t o price of s ubst it ut e.
Responding to the Organization/Marketing environment:
 Companies can passively take environment as uncontrollable and they must adapt to.
 Companies can take environmental management perspective i.e. actively working to change the
environment.
 Wherever possible, companies should try to be proactive rather than reactive.
Strategic Intelligence:
Strategic Intelligence is the knowledge of business environment, which enables an organization to anticipate changes
and design appropriate strategies that will create business value for customers and profit for co.
Process of creating strategic intelligence:

Sensing (Identify appropriate external indications of change)
Collecting (Gather information in ways that ensure it is relevant and meaningful)
Organizing (Structure the information in the right format)
Processing (Analyze information for implication)
Communicating (Package and simplify information for users)
Using
(Apply strategic intelligence)
Sources for strategic intelligence = Sources of information
S W Analysis ---Analyzing internal environment:
Internal analysis consists of:
 Resources Audit
 BCG Matrix
 GEBS matrix
 Value Chain analysis
 Core Competence (critically underpins organization‘s competitive advantage)
 Critical Success Factors (CSF are factors on which strategy is fundamentally dependent for its success.

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Marketing
Is market and share
increasing?

Finance/Accounting
Sufficient working
capital?

Operation
Production capacity

R&D
Adequate R&D
facilities?

Segmented
effectively?

Can we raise capital
or borrowings?

Economies of scale

Outsourcing is
cost effective?

Channel of
distribution reliable
and cost-effective?

Return on investment
& Cost of capital

Are R&D
resources allocated
effectively?

Communication

Conduct market
research?

Effective budgeting
process?

Inventory control
policies and
procedures,
effective?
Is machinery
technically updated?

Labor relations

User friendly IS?

Product priced
appropriately?

Accounting ratios,
strong or weak?

Is equipment in good
condition?

Communication
between R&S and
other units?

Are present
products
technologically
competitive?

Turnover and
absenteeism

Training provided?

Under or over
staffing?

Continuous
improvement?

Effective
promotion?

Quality control
policies and
procedures,
effective?

Brand strength

Products
Product quality and brand reputation
Age and life of products
Price elasticity of demand

Margin and contribution
Market share and growth

HRM
Efficient Or
experience
manpower
Recruitment and
Training

MIS
Is IS updated
regularly?
Contribution by all
functional
managers?
Effective
passwords for
entry?

How much
expensive?
Stocks
Sources of supply
Turnover periods
Storage capacity
Obsolescence and deterioration

Miscellaneous concepts:
A Cruciform chart summarizes significant SWOT.

Critical Success Factors are those components of strategy in which organization must excel to outperform
competition.
Gap analysis (objects – existing strategies = Gap) is a comparison between objectives and expected performance of
projects both planned and underway. E.g. Profit Gap (Target profit – Forecast Profit)
Forecasting is the identification of factors and quantification of their effect on an entity as a basis for planning. It
includes judgment.
Projection an expected future trend pattern obtained by extrapolation. It includes quantitative factors.
Extrapolation is a technique of determining projection by statistical means.
Scenario Planning:
― A scenario is an internally consistent view of what the future might turn out to be‖
An industry scenario is concerned with the future of industry.
Macro scenario uses macro economic or political factors, creating alternative ways of the future environment.
6 steps in planning scenarios:
1. Decide on the driver for change
i. Environmental analysis
ii. Important issues and degree of certainty (time horizon is 10 years)
2. Bring drivers together into a viable framework
3. Provide 7 to 9 mini scenarios.
4. Group mini scenarios into two or three larger scenarios containing all topics.
5. Write the scenario.
6. Identify issues arising.
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Chapter 7 : Performance Appraisal & Analysis
Performance Appraisal
Measurement of Performance:
Measurement of Growth and effects of inflation:

1. Revenue
2. Profits
3. Assets
4. Cash Flow
5. ROCE/ROI
6. Market share
7. Number of employees
8. Number of products

Costs:
Fixed costs
Variable costs
-------------------------------------Directly attributable costs
Shared general overheads
-------------------------------------Controllable costs
Uncontrollable costs

4 profit concepts to measure performance of divisions:
 Contribution (sales – variable cost)
 Controllable profit ( sales - variable costs - Fixed cost controllable)
 Controllable margin ( Controllable profit – other costs directly traceable)
 Net Profit/Margin ( Controllable margin – allocated service center costs and general management overhead)
Value added is cost of material and bought in service.
Measuring performance of Profit Center:
1. ROI/ROCE
2. Residual Income (measure of center‘s profit after deducting notional or imputed interest cost)
Benchmarking:
(adoption of best practices)
Benchmarking is establishment of targets and comparators (through data gathering) through which relative levels of
performance can be identified.

Types of Benchmarking:
Internal Benchmarking comparing one operating unit with another within same industry.
Functional Benchmarking internal functions compared with best external regardless of industry.
Competitive Benchmarking information about direct competitors is gathered through techniques e.g. reverse
engineering.
Strategic Benchmarking aimed at strategic action and organizational change.
Levels of Benchmarking:
1. Resources through resources audit
2. Competences in separate activities through analyzing activities
3. Competences in linked activities through analyzing overall performances.
Inflation:
-

Effect of inflation on accounting system
Effect of inflation on strategy in reference to operating in competitive market and exporting goods
overseas

Performance measurement and inflation:
i)
Fixed asset values & depreciation
ii)
Cost of sales and inflation
iii)
iv)
v)
vi)

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



Need for working capital
Borrowing benefits in period of inflation
Comparability of financial figures

Ratios for control


historical costing problem
increased profits but low stock turnover
(overstated profits)
real value of loan decreases over times
figures are ditorted
ratios will be unaffected, as both side of balance
sheet will be inflated


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Chapter 8 : Mission Goals and Objectives
Analyzing Vision, Mission and Objectives
Hierarchy
Vision--------M ission----------Goals (objectives and aims) at 3 levels----------strategy at 3 levels

Vision:
― Where the organization wants to be‖
Advantages of vision:
gives general directions to organisation
gives hope and motivation

establishes scope and boundaries
enables flexibility in choice
Problems with vision
 It ignores real, practical problems
 It can degenerate into wishful thinking
Strategic intent:
―Vision with an emotional core to energize and stretch‖
similar to vision
stretch current competencies
gives sense of direction
gives coherence to plans

Mission Statement:
This is a statement purpose of existence-What it wants to accomplish in the larger environment.
Mission statement includes Purpose, Competence, Strategic Scope, Product, Targeted customers, and Values of
various stakeholders.
It should be market oriented, specific, realistic, motivating and consistent with market environment.
e.g. ―To provide best satisfaction to customers and fair return on investment, keeping environment healthy and clean
and promising secure future to employees‖.
Place of mission statement:
Annual reports
Publicity materials
In chairman‘s office
Communal work area
Elements of mission statement:
Purpose ( e.g creating wealth, satisfy shareholders)
Strategy ( e.g logic, product, service)
Scope
Politics & behaviors
Values & culture (e.g commitment)

Characteristics of mission statement:
Bravity
Flexibility
Distinctiveness
Problems with mission statement:
Ignorance in practice
Only for public showment and not for internal decision making
Only rationalising existence of organisation
Wish list, full of generalisations
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