Untitled 2

CFAP-03
Business Management &

Strategy
(Chapter 01 – 20)
Summaries
Business Management and Strategy (BMS): Chapter Summary Chapter No. 1: Strategy, Stakeholders and Mission
CHAPTER NO. 01
STRATEGY, STAKEHOLDER AND MISSION
1 Definition of strategy and levels of strategy
1.1 Definition of strategy
Drucker defined strategy as ‘a pattern of activities that seek to achieve the objectives of the organisation
and adapt its scope, resources and operations to environmental changes in the long term.’
1.2 Levels of strategy

Corporate strategy What businesses should we be in?
Business strategy How should we compete in each selected business?
Functional strategy For each business function, how can that function contribute to the competitive
advantage of the entity?
1.3 Corporate strategy
Corporate strategy is concerned with deciding which business or businesses an entity should be in and
setting targets for the achievement of the entity’s overall objectives.
The elements of corporate strategy are as follows:
(i) Deciding the purpose of the entity.
(ii) Deciding the scope of the activities of the entity.
(iii) Matching business activities to the external environment and available resources.
(iv) Matching the purpose and activities of the organisation to the expectations of its owners.
(v) Matching the purpose and activities of the organisation to the expectations of other
stakeholders in the organisation.
Corporate strategy and the expectations of owners and other stakeholders
(i) Owners’ expectations.
(ii) Stakeholders’ expectations.
1.4 Business strategy
Business strategy, also called competitive strategy, is concerned with how each business activity within the
entity contributes towards the achievement of the corporate strategy.
According to Porter, a successful competitive strategy must be based on either:
Cost leadership means becoming the lowest-cost producer in the market.
Differentiation means making products or services that are considered by customers to be different from
those of competitors and because they are different they are better.
1.5 Functional strategy
Functional strategy relates to particular functions within an organisation, such as manufacturing,
distribution, marketing and selling, research and development, accounting, IT and so on.
The purpose of functional strategy should be to support the business strategies and corporate strategy of
the organisation.
1.6 A note on levels of planning
Strategic planning. This involves identifying the objectives of the entity and plans for achieving those
objectives, mostly over the longer term.
Tactical planning. These are shorter-term plans for achieving medium term objectives. An example of
tactical planning is the annual budget.
Operational planning. This is detailed planning of activities, often at a supervisor level or junior
management level, for the achievement of short-term goals and targets.
2 Elements of strategic management and business analysis

2.1 Johnson, Scholes and Whittington – Defining elements of strategic management
Johnson, Scholes and Whittington state that strategic management consists of three elements:
(i) Strategic position
(ii) Strategic choices
Strategy into
(iii) action.
2.2 Strategic position
‘Strategic position’ means making an analysis or assessment of the strategic position of the entity.
Johnson, Scholes and Whittington suggest that there are three aspects to strategic position:
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(i) The environment - (Threats and opportunities)

(ii) Strategic capability of the entity - (Strength and weaknesses)
(iii) Expectations and purposes.
2.3 Strategic choices
This involves identifying different possible strategies that the entity might adopt and making a choice of the
preferred strategies from the different alternatives that are available.
There are three aspects to identifying alternative strategies and making strategic choices:
(i) Corporate level and international
A company needs to decide whether it will operate internationally and if so in
what countries.
(ii) Business level strategies
(a) Cost Leadership
(b) Differentiation
(iii) Development directions and methods
(a) Market penetration
(b) Market development
(c) Product development
(d) Diversification
The nature of strategic choices
(i) Environmental based Strategy or Resource Based strategy?
(ii) Cost Leadership or Differentiation?
(iii) Single Product or Diversified Products?
2.4 Strategy into action
This means implementing the chosen strategies.
There are three aspects to strategy implementation:
(i) ‘Organising’ means putting into place a management structure and delegating authority.
(ii) ‘Enabling’ means enabling the entity to achieve success through the effective use of its
resources.
(iii) Managing change: Most entities exist in a rapidly-changing environment and they need to
adapt and change in order to survive and succeed.
2.5 The scope of business analysis
Strategy is implemented through normal day-to-day work processes and through co-ordinating the efforts of
many different individuals and groups. Work processes and relationships need to be managed efficiently, so
that the entity is able to achieve its strategic objectives. You need to understand the relationship between
strategic management and supporting business processes.
(i) Improvements in business processes
(ii) Project Management
(iii) support of management information systems
(iv) Relevant financial analysis is an essential part of strategic management.
3 Organisational purpose and strategy

3.1 A hierarchy of objectives and plans
(i) Vision Future State of organisation
(ii) Mission Overall Purpose
(iii) Goals General Overall Aims
(iv) Objectives Specific Overall Aims
(v) Strategic Plans and Aims Detailed longer term Plan
(vi) Tactical Plans and Aims Implementation Targets and Budgets
(vii) Operational Plans and Aims Action Plans and budgets
3.2 Mission and vision
‘ A mission describes the organisation’s basic function in society, in terms of the products and services it
produces for its customers’ (Mintzberg).
A mission statement should be a clear and short statement. Drucker suggested that it should answer the
following fundamental questions:
(i) What is our business?
(ii) What is our value to the customer?
(iii) What will our business be?
(iv) What should our business be?
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a vision statement represents a desired optimal future state of what the organisation wants to achieve
over time.
3.3 The relevance of the mission statement
A mission statement can have several different purposes:
(i) to provide a basis for consistent strategic planning decisions
(ii) assist in translating strategy into actions.
(iii) to provide a common purpose for all groups and individuals within the organisation
(iv) to inspire employees
(v) to establish goals and ethics for the organisation
(vi) to improve the understanding and support for the organisation from external stakeholder
groups and the public in general.
3.4 Goals and objectives
Goals are aims for the entity to achieve, expressed in narrative terms. They are broad intentions.
Objectives are derived from the goals of an entity and are aims expressed in a form that can be measured
and there should be a specific time by which the objectives should be achieved.
The objectives specified by the strategic planners should be SMART:
(i) Specific/stated clearly
(ii) Measurable
(iii) Agreed
(iv) Realistic
(v) Time-bound
3.5 Who decides mission, goals and objectives?
When an entity states its mission in a mission statement, the statement is issued by the leaders of the
entity. For a company this is the board of directors. Similarly, the formal goals and objectives of an entity are
stated by its leaders.
4 Stakeholders and stakeholder expectations

4.1 Definition of stakeholders
The stakeholders in an entity are any individuals, groups of individuals or external organisations that have
an interest (a ‘stake’) in what the entity does or is trying to achieve.
The stakeholders or stakeholder groups for a business entity usually include most of the following:
(i) the ordinary shareholders
(ii) the controlling shareholder, if there is one
(iii) other classes of shareholders (iv) bondholders
(v) the investment community (vi) lenders
(vii) suppliers, especially major suppliers (viii) customers
(ix) other senior executive managers (x) the directors
(xi) other managers and employees, or groups of employees
(xii) the government (local or national government)
(xiii) pressure groups, such as environmental protection groups and human rights groups
(xiv) local communities in which the entity operates
(xv) the general public.
4.2 The expectations of stakeholders
Shareholders
Rights: Right to vote on certain issues, Other rights are set out in the constitution of the co.
Duties: None
Expectations:Share price growth, Stable dividends, return on Investment
Possibly also an expectation of being consulted by the board on major issues
Directors
Rights: Right to take decisions in board meetings (extensive powers are given to the board under the
company’s constitution)
Duties: The directors have certain duties in law (e.g, a legal duty of due care and skill)
The board of directors has a duty to give leadership to the company
Expectations:Personal advancement – remuneration, status
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Senior Managers
Rights: Employment rights
Duties: Senior managers have a duty to carry out their delegated tasks, in accordance with their
contract of employment
Expectations:Personal advancement – remuneration, status Possibly a belief that they should have the
power to make key strategic decisions
Expectations of other stakeholder groups
(i) Employees expect to receive fair pay for the work that they do.
(ii) Customers have expectations about the nature of the goods or services they receive from a
company.
(iii) Suppliers might expect to develop a good business relationship with the company and
collaborate on achieving improvements in the value network.
(iv) Communities might expect a company to provide employment and economic prosperity by
investing in the local area
(v) The general public and government might expect a company to show concern for the
environment and to reduce pollution and develop environment-friendly ways of operating.
Stakeholders within an entity include shareholders, senior managers, middle managers and other
employees and their trade union or staff association representatives.
Their power or influence over decision-making within the entity might come from:
(i) their control over formal decision-making processes
(ii) their position in the management hierarchy
(iii) their influence
(iv) control over strategic resources, such as the work force or key workers
(v) knowledge or skills
(vi) control over access to the entity’s environment
(vii) their ability to exercise discretion.
External stakeholders include lenders, suppliers, customers and the government.
The influence of external stakeholders might come from:
(i) laws and regulations
(ii) the dependence of the entity on particular suppliers or customers
(iii) the involvement of an external entity in the implementation of strategy
(iv) the knowledge or skills of an external entity
4.3 Stakeholder mapping
A business entity should manage its stakeholders, particularly those with the greatest influence. As a part of
a review of the strategic position of a company, management should identify its major stakeholder groups,
their power and their expectations.
4.4 Mendelow’s stakeholder power/interest matrix
This matrix compares:
(i) the amount of interest of the stakeholders on a particular issue
(ii) the relative power of the stakeholders
Very Low Interest of the stakeholder Very High

Weak
Minimum Effort Keep Informed

Power of
the
Stakehold
er
Keep Satisfied KEY PLAYERS
Strong
The strength of the interest of a stakeholder group in the strategic decisions by the company will depend on
their expectations of the benefits they expect the company to provide.
The recommended course of action for the board of directors is indicated in each quadrant of the matrix.
The key stakeholders are those who have considerable power or influence and also have strong
expectations (a keen interest) about the strategic choices that the company makes.
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4.5 Stakeholder influence: the cultural context

It is also important to remember that the relative importance of different stakeholder groups for an entity and
the way in which management respond to the interest of different stakeholder groups, will also vary
according to culture; the culture of the country or region in which the entity operates and the culture of the
organisation itself and its senior management.
5 Intended and emergent strategies

5.1 Intended strategy is a strategy that is planned in advance through a formal planning process.
The choice of strategy is a conscious decision by senior management. It is therefore necessary for
managers to understand that:
(i) intended strategy is a formally-approved choice about the strategic direction that the entity
should be taking; and
(ii) this choice was considered valid and appropriate at the time that it was approved. However,
strategy should be flexible.
5.2 Emergent strategy is new strategy that develops or ‘emerges’ without formal approval being given in
advance.
It is the result of reaction to changes in the environment and might be a response to changes as they occur.
(i) Emergent strategy may be developed at different levels within an entity, in response to events
as and when they occur.
(ii) When environmental change or ‘turbulence’ is high, the responsibility for emergent strategy
might have to be decentralised entirely.
Strategic intent is a high level statement of how an organisation achieves its vision.
An intended strategy is also a statement of strategic intent. It indicates the strategic direction that the entity
is taking.
When new, emergent strategies are adopted, these should also be consistent with the entity’s strategic
intent. The entity should not continually change its view about what it is trying to achieve.
5.3 A mix of intended strategy and emergent strategy
Mintzberg argues that strategy development should be a mixture of intended strategy and emergent strategy.
Management need to understand that strategic developments can occur in either of these ways – intended
or emergent.
5.4 Enforced choice
In some cases, management might take the view that they have no real choice of strategy, and that they are
‘forced’ to adopt a particular strategy.
The reasons for having to select an enforced strategy might be that:
(i) a key stakeholder, e.g, a major shareholder, is insisting on a particular strategy, or
(ii) every competitor is doing the same thing.
6 Future-basing
6.1 Future-basing is a relatively new and alternative methodology that can be used to create a vision for
implementing strategy at any level within an organisation. This could range from overall corporate strategy
through to setting personal goals for individuals within a team.
Future-basing involves three phases:
6.2 The vision
Firstly, a compelling vision needs to be established whilst ‘based in the future’.
Establishing a future-based vision involves picking a date by which time success needs to be achieved.
Creating a series of success headings or categories and listing specific achievements under each one can
assist with establishing the vision. Examples of headings might be:
(i) Resource (ii) Innovation
(iii) Staff development (iv) Collaborations.
6.3 Milestones
Secondly, milestone events and dates need to be identified by ‘remembering back’ what you must have
done to get to the future-based vision.
The second phase is to ‘remember back’ to establish milestones that must have been achieved in arriving
at the vision. For ‘remembering back’ it is sufficient to know that something happened rather than needing to
know how it happened.
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6.4 Reality check

Reality check - the final stage involves planning and strategising how to achieve the milestones through
scheduling events and assessing the resources required.
This is achieved by returning to ‘real time’ and asking probing questions about the vision that has been
created such as:
(i) Would we accept the vision without reservation exactly as it has been described?
(ii) What resources would we need and how would we obtain them?
(iii) What could prevent us realising the vision?
(iv) What action could we take right now to make it happen?
(v) How would we ‘sell’ the vision to all impacted stakeholders?
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Business Management and Strategy (BMS): Chapter Summary Chapter No. 2: Environmental Analysis
CHAPTER NO. 2
ENVIRONMENTAL ANALYSIS
1 Models for environmental analysis
1.1 The nature of environmental analysis
A business entity cannot exist in isolation from its environment. It inter-relates with its environment, and its
survival and strategic success depend on how well it responds to the threats and opportunities that the
environment provides.
Environmental influences on an organisation vary with the size of the organisation, and the industry and the
countries in which it operates.
The importance of environmental factors for strategic management arises because:
(i) organisations operate within their environment and interact with it
(ii) changes in the environment can be large and significant – and continually happening
(iii) future changes can be very difficult to predict.
1.2 The purpose of environmental analysis
Environmental analysis is a part of the process of assessing strategic position.
the management of an entity need to understand:
(i) the factors in the environment that have a significant effect on the entity and what it does
(ii) the key drivers of change
(iii) the difference in impact that key drivers of change in the environment will have on different
industries or different markets
Environmental analysis is the process of:
(i) studying the environment in which an entity operates
(ii) identifying significant factors in the environment, particularly those that will be significant in the
future.
1.3 Two models for environmental analysis
(i) The PESTEL model is used to identify significant factors in the macroenvironment of an entity.
(ii) Porter’s Diamond model is used to analyse reasons why entities in particular countries, or
regions within a country, appear to have a significant competitive advantage over similar
entities in the same industry, but operating in other countries or other regions.
2 PESTEL analysis
2.1 The nature of PESTEL analysis
PESTEL analysis is a structured approach to analysing the external environment of an entity.
The purpose of dividing environmental influences into categories is simply to make it easier to organise the
environmental analysis and ensure that some key influences are not over-looked. It provides a useful
framework for analysis.
There are six categories of environmental influence:
2.2 Political environment
The political environment consists of political factors that can have a strong influence on business entities
and other organisations
Investment decisions by companies will be influenced by factors such as:
(i) the stability of the political system in particular countries
(ii) the threat of government action to nationalise the industry and seize ownership from private
business
(iii) wars and civil unrest
(iv) the threat of terrorist activity.
2.3 Economic environment
The economic environment consists of the economic influences on an entity and the effect of possible
changes in economic factors on future business prospects. Factors in the economic environment include:
(i) the rate of growth in the economy and per capita GDP
(ii) the rate of inflation
(iii) the level of interest rates, and whether interest rates may go up or fall
(iv) foreign exchange rates, and whether particular currencies are likely to get weaker or stronger
(v) unemployment levels and the availability of skilled or unskilled workers
(vi) government tax rates and government subsidies to industry
(vii) the existence or non-existence of free trade between countries, and whether trade barriers may
be removed
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(viii) the existence of trading blocs of countries, such as the European Community.
2.4 Social and cultural environment
An entity is affected by social and cultural influences in the countries or regions in which it operates, and by
social customs and attitudes. Some influences are more significant than others.
Factors in the social and cultural environment include the following:
(i) The values, attitudes and beliefs of customers, employees and the general public.
(ii) Patterns of work and leisure, such as the length of the working week and popular views about
what to do during leisure time
(iii) The ethnic structure of society
(iv) The influence of religion and religious attitudes in society
(v) The relative proportions of different age groups in society.
2.5 Technological environment
The technological environment consists of the science and technology available to an organisation (and its
competitors), and changes and developments in science and technology. Developments in IT and computer
technology, including the Internet, are the most obvious example.
Technology could have an important influence, for example, on investment decisions in research and
development, and investment in new technology.
2.6 Ecological influences
For business entities in some industries, environmental factors have an important influence on strategic
planning and decision-making. They are particularly important for industries that are:
(i) subject to strict environmental legislation, or the risk of stricter legislation in the future (for
example, legislation to cut levels of atmospheric pollution)
(ii) faced with the risk that their sources of raw materials will be used up
(iii) at the leading edge of technological research, such as producers of genetically modified foods.
2.7 Legal environment
The legal environment consists of the laws and regulations affecting an entity, and the possibility of major
new laws or regulations in the future.
Strategic decisions by an entity might be affected by legal considerations. For example:
(i) favourable tax law in a country
(ii) difference in employment law in different countries
(iii) environmental legislation
2.8 Limitations of PESTEL analysis
(i) It is not so easy to identify the environmental influences that will have the biggest influence in
the future.
(ii) It is used for qualitative analysis, but not for quantification
2.9 PESTEL analysis examples
3 Porter’s diamond
3.1 National competitive advantage
Business entities in some countries appear to enjoy a competitive advantage over businesses in other
countries in particular industries.
This competitive advantage is often concentrated in a particular region of a country.
Clusters A cluster is a concentration of inter-connected companies in the same geographical region.
It consists of companies in the same industry, and also specialised suppliers and service providers to the
industry.
A cluster may also contain associated institutions that promote innovation and improvements in the industry
such as universities with research departments and trade associations.
The reasons for national competitive advantage - Traditional View
Because of the natural resources that it enjoys. Natural resources include not only land and mineral
deposits, but also the labour force and size of the population.
The strategic significance of national competitive advantage
Porter argued that the national domestic market plays an important role in creating competitive advantage
for companies on a global scale.
3.2 The four elements in Porter’s Diamond
(i) Favourable factor conditions
(ii) Related and supporting industries
(iii) Demand conditions in the home market
(iv) Firm strategy, structure and rivalry.
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3.3 Favourable factor conditions
‘Factors’ are the economic factors of production – land, labour, capital (equipment) and entrepreneurship.
‘Factor conditions’ are conditions in a market with regard to one or more of these factors of production.
Basic factors: are factors of production that exist naturally in the country. These might be:
(i) large amounts of suitable land, such as land for agriculture
(ii) large quantities of natural materials
(iii) a favourable climate
Advanced factors: are factors that are ‘created’ and developed over time.
(i) Labour skills and knowledge
(ii) Technological resources
(iii) Infrastructure
Creating favourable factor conditions
A country might suffer from a disadvantage in a factor of production compared with other countries. It can
overcome this ‘factor disadvantage’ by innovating.
3.4 Related and supporting industries
When supporting industries are highly competitive, costs are reduced and innovation occurs continually.
Some of the benefits of lower costs and innovation in a supporting industry (or related industry) are passed
on to business entities in industries that the supporting industry serves.
In many industries, innovation depends on research and development. Another feature of national
competitive advantage may therefore be the existence of companies with strong R&D departments, and
universities that have research departments with specialists in the industry.
3.5 Demand conditions in the home market
Strong demand in local markets can help to make local firms more competitive in global markets.
(i) When local demand is strong, local firms will give more attention than their foreign competitors
to the needs of the local customers.
(ii) This will help to make local firms more innovative and competitive.
(iii) When local firms sell their products in global markets, the innovation and competitiveness
created in local markets will help them to succeed internationally.
(iv) Innovation in local markets will help local firms to anticipate changes in global demand.
3.6 Firm strategy, structure and rivalry
(i) Firms and their owners might have different ideas about investment strategy.
(ii) In some countries, the management structure in larger companies is formal and hierarchical.
(iii) A country is likely to retain a competitive advantage in industries whose key employees have
jobs that give the individual a high status in society.
(iv) Rivalry between local firms is also an important factor in maintaining national or regional
competitive advantage. This is because rivalry forces producers to innovate.
3.7 The role of government in creating competitive advantage
Governments can help to create suitable conditions for national competitive advantage.
(i) education and training system
(ii) raise performance levels by enforcing strict product standards.
(iii) create early demand for new and advanced products by purchasing the products themselves.
(iv) stimulate rivalry between local firms by enforcing strict anti-trust legislation.
3.8 Criticisms of Porter’s Diamond
There are some weaknesses in Porter’s Diamond theory. In particular:
(i) It is more relevant to companies in advanced economies than to companies in countries with
developing economies.
(ii) The diamond model does not consider the role of the multinational company, which locates
production operations in different countries across the world.
3.9 Using Porter’s Diamond
In your examination, you might be required to use Porter’s Diamond theory to explain the global success of
companies in a particular country. To do this, you would need to consider the four factors in the Diamond,
together with the influence of government.
4 World Trade Organisation

4.1 World Trade Organisation (WTO)
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Business Management and Strategy (BMS): Chapter Summary Chapter No. 3: Competitive Forces
CHAPTER NO. 03
COMPETITIVE FORCES
1 Competition and markets
1.1 Customers and markets
A market is a place where buying and selling takes place. Markets can be global or localised.
An important aspect of business strategy for companies is concerned with selling goods or services
successfully to targeted markets. (These strategies are ‘product-market strategies.’)
1.2 Industries and sectors
An industry consists of suppliers who produce similar goods and services. Within an industry, there may be
different segments. An industry segment is a separately-identifiable part of a larger industry. Companies
need to make strategic decisions about:
(i) the industry and industrial segment (or segments) they intend to operate in, and
(ii) the market or markets in which they will sell their goods or services.
A distinction should be made between products and markets.
(i) Companies in different industries might sell their goods or services to the same market.
(ii) Companies in the same industry might not compete because they operate in different markets.
In their analysis of strategic position, management need to recognise which industries and segments they
operate in, and also which markets they are selling to. They also need to recognise changing conditions in
industries, segments and markets, in order to decide what their product-market strategies should be in the
future.
Generic types of industry
The strategic position of a company depends to some extent on the type of industry it is operating in. The
five industry types are as follows:
Fragmented industries: In a fragmented industry, firms are small and each sells to a small portion of the
total market.
Emerging industries: These are industries that have only just started to develop, and are likely to become
much bigger and much more significant in the future.
Mature industries: These are industries where products have reached the mature phase of their life cycle.
Declining industries: These are industries that are going into decline, total sales are falling and the
number of competitors in the market is also falling.
Global industries: Some industries operate on a global scale
1.3 Convergence
Occasionally, two or more industries or industrial segments converge, and become part of the same
industry, with the same customer markets. When convergence is happening, or might happen in the future,
this can have a major impact on business strategy.
Demand-led and supply-led convergence
With demand-led convergence, the pressure for industry convergence comes from customers. Customers
begin to think of two or more products as interchangeable or closely complementary.
With supply-led convergence suppliers see a link between different industries and decide to bridge the
gap between the industries.
2 Industry competition: Five Forces model

2.1 Competition analysis
Analysing competition is an important part of strategic position analysis
(i) It is also important to assess the strength of competition in a market, and try to understand
what makes the competition weak or strong.
(ii) A company should also monitor each of its major competitors
Profitability and competition
Profitability is affected by the strength of competition: the stronger the competition, the lower the profits.
2.2 The Five Forces
Michael Porter (‘Competitive Strategy’) identified five factors or ‘forces’ that determine the strength and
nature of competition in an industry or market. These are:
2.3 Threat from potential entrants
One of the Five Forces is the threat that new competitors will enter the market and add to the competition.
The costs and practical difficulties of entering a market are called ‘barriers to entry’.
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(i) When barriers to entry are low: As a result, competition in the market will be strong and there
will be no opportunities for high profit margins.
(ii) When barriers to entry are high: When it is difficult for new competitors to enter a market,
existing competitors are under less pressure to cut their costs and sell their products at low
prices.
A number of factors might help to create high barriers to entry:
(i) Economies of scale
(ii) Capital investment requirements
(iii) Access to distribution channels
(iv) Time to become established
(v) Know-how
(vi) Switching costs
(vii) Government regulation
2.4 Threat from substitute products
There is a threat from substitute products when customers can switch fairly easily to buying alternative
products (substitute products). The threat from substitutes varies between markets and industries
When there are substitute products that customers might buy, firms must make their products more
attractive than the substitutes. Competition within a market or industry will therefore be higher when the
threat from substitute products is high. Threats from substitute products may vary over time.
2.5 Bargaining power of suppliers
‘Suppliers can exert bargaining power over participants in an industry by threatening to raise prices or
reduce the quality of purchased goods or services. Powerful suppliers can thereby squeeze profitability out
of an industry unable to recover cost increases in its own prices.’
Porter suggested that the bargaining power of suppliers might be strong in any of the following situations:
(i) When there are only a small number of suppliers to the market
(ii) When there are no substitutes for the products that are supplied
(iii) When the products of a supplier are differentiated
(iv) When the supplier’s product is an important component in the end-products.
(v) When the industry supplied is not an important customer for the suppliers
(vi) When the suppliers could easily integrate forward, and enter the market as competitors of their
existing customers.
2.6 Bargaining power of customers
Buyers can reduce the profitability of an industry when they have considerable buying power. Powerful
buyers are able to demand lower prices, or improved product specifications, as a condition of buying.
Strong buyers also make rival firms compete to supply them with their products.
Porter suggested that buyers might be particularly powerful in the following situations:
(i) when the volume of their purchases is high relative to the size of the supplier
(ii) when the products of rival suppliers are largely the same (‘undifferentiated’)
(iii) when the costs of switching from one supplier to another are low
(iv) when the cost of a purchased item is a significant proportion of the buyer’s total costs
(v) when the profits of the buyer are low
(vi) when the buyer’s product is not affected significantly by the quality of the goods that it buys
(vii) when the buyer has full information about suppliers and prices.
2.7 Competitive rivalry
Strong competition forces rival firms to offer their products to customers at a low price (relative to the
product quality) and this keeps profitability fairly low.
Porter suggested that competitor rivalry might be strong in any of the following circumstances:
(i) when the rival firms are of roughly the same size and economic strength
(ii) when there are many competitors
(iii) when there is only slow growth in sales demand in the market
(iv) when the products of rival firms are largely the same (‘undifferentiated’)
(v) when fixed costs in the industry are high, so that firms still make some contribution to profit
even when they cut prices
(vi) when supply capacity can only be increased in large incremental amounts
(vii) when the costs of withdrawing from the industry are high
2.8 The Five Forces model summarised
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2.9 Using the Five Forces model

In your examination, you might be required to use the Five Forces model to analyse the strength of
competition in a market or an industry, in a question containing a case study or scenario. To do this, you
should take each of the Five Forces in turn and consider how it might apply to the particular case study or
scenario.
3 Life cycle model

3.1 The ‘classical’ product life cycle
A product life cycle begins with its initial development and ends at the time that it is eventually withdrawn
from the market at the end of its life.
The ‘classical’ life cycle for a product, or even an entire industry, goes through four stages or phases:
Introduction phase: During this stage of a product life cycle, there is some sales demand but total sales
are low. Firms that make and sell the product incur investment costs, and start-up costs and running costs
are high. The product is not yet profitable.
Growth phase: During the growth phase, total sales demand in the market grows at a faster rate. New
entrants are attracted into the market by the prospect of high sales and profits. At an early stage during the
growth phase, companies in the market begin to earn profits.
Maturity phase: During the maturity phase, total annual sales remain fairly stable. Prices and profits
stabilise. The opportunity for more growth no longer exists, although the life of the product might be
extended, through product updates. More companies might seek to improve profits by differentiating their
products more from those of competitors, and selling to a ‘niche’ market segment.
Decline phase: Eventually, total annual sales in the market will start to fall. As sales fall, so too do profits.
This leads to companies leaving the market, which continues until it is no longer possible for any company
to turn a profit from the product. When the last supplier exits the market the product lifecycle is complete.
At each phase of a product’s life cycle:
(i) selling prices will be altered
(ii) costs may differ
(iii) the amount invested (capital investment) may vary
(iv) spending on advertising and other marketing activities may change
3.2 Cost implications of the product life cycle
(i) Product development Cost
(a) R&D costs
(b) Capital expenditure decisions
(ii) Introduction to the market
(a) Operating costs
(b) Marketing and advertising to raise product awareness
(c) Set up and expansion of distribution channels
(iii) Growth
(a) Costs of increasing capacity
(b) May be learning effect and economies of scale
(c) Increased costs of working capital
(iv) Maturity
(a) Incur costs to maintain manufacturing capacity
(b) Marketing and product enhancement costs to extend maturity
(v) Decline
(a) Close attention to costs needed as withdrawal decision might be expensive
(vi) Withdrawal
(a) Asset decommissioning costs
(b) Possible restructuring costs
(c) Remaining warranties to be supported
Benefits of Life cycle costing

Life cycle costing compares the revenues and costs of the product over its entire life. This has many benefits.
(i) The potential profitability of products can be assessed before major development of the
product is carried out and costs incurred.
(ii) Non-profitmaking products can be abandoned at an early stage before costs are committed.
(iii) Techniques can be used to reduce costs over the life of the product.
(iv) Pricing strategy can be determined before the product enters production. This may lead to
better control of marketing and distribution costs.
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Pricing strategy can be determined before the product enters production. This may lead to
better control of marketing and distribution costs.
(v) Attention can be focused on reducing the research and development phase to get the product
to market as quickly as possible.
3.3 Relevance of the product life cycle to strategic management
Strategic management should consider the cash flows and profitability of a product over its entire life cycle.
When a decision is being made about whether or not to develop a new product, management should
consider the likely sales and returns over the entire life cycle. For existing products, management need to
assess the position of a product in its life cycle, and what the future prospects for the product, in terms of
profits and cash returns, might be.
Timing market entry and market exit
The product life cycle concept might help companies to make strategic decisions about when to enter a
market and when to leave it.
(i) Entrepreneurial companies might look for opportunities to enter a new market during the
introductory phase, in the expectation that the product will become successful and the
company will win a large share of the market by being one of the first companies to enter it.
(ii) More cautious companies, looking for growth opportunities, might delay their entry into the
market until the growth phase, when the product is already making a profit for its producers.
(iii) Companies are unlikely to enter a market during the maturity phase unless they see growth
opportunities in a particular part of the market, or unless the costs of entry into the market are
low.
Life cycle analysis as a technique for competition analysis
Life cycle analysis is also useful for assessing strategic position and the nature of competition in a market.
The number of competitors in the market ‘now’, and the number of competitors that might exist in the future,
will be influenced by the phase that the product has reached during its life cycle.
3.4 Cycle of competition
A cycle of competition is another concept for understanding the behaviour of competitors in a market. When
one company achieves some success in a market, competitors might try to do something even better in
order to gain a competitive advantage.
The effect of a cycle of competition in a growing market is that prices fall and quality might improve.
In the maturity phase of a product’s life cycle, or in the decline phase, it becomes more difficult to lower
prices without reducing quality.
The concept of the cycle of competition is useful for strategic analysis, because it can help to explain the
strategies of companies in a market, and to assess what future initiatives by competitors might be.
4 Strategic groups and market segmentation

4.1 Strategic groups
‘Clusters of firms within an industry that have common specific assets and thus follow common strategies in
key decision variables’ (Oster).
A strategic group is a number of entities that operate in the same industry and that have similar strategies or
that are competing in their markets in a similar way.
When there are only a few competitors in the same industry, the concept of strategic groups has no
practical value, because each competitor can be analysed individually. However, when there are many
competitors in the industry, it can simplify the analysis to put them into strategic groups of entities with
similar resources and similar strategies. For the purpose of competitor analysis, all the entities in the same
strategic group can then be treated as if they are a single competitor.
4.2 Strategic space
A strategic space is a gap in the market that is not currently filled by any strategic group. The existence of
strategic space might provide an opportunity for a company to make a strategic initiative, and attempt to fill
the space that no other rivals occupy.
4.3 Product differentiation
In most markets, products are differentiated in various ways. They are similar, but there are also noticeable
differences. Differences in products include differences in:
(i) product design
(ii) pricing
(iii) branding.
Products might also be differentiated by the way in which they are delivered to customers.
Business entities often use differentiation to make their products attractive to customers in the market – so
that customers will buy their products rather than those of competitors.
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4.4 Market segmentation

A market segment is a section of the total market in which the potential customers have certain unique and
identifiable characteristics and needs.
Market segmentation is the process of dividing the market into separate segments, for the purpose of
developing differing products for each segment.
4.5 Methods of segmenting the market
Market segmentation is important for strategic management for two main reasons:
(i) It provides a basis for analysing competition in a market or industry.
(ii) It provides a basis or framework for making strategic choices.
There are various ways of segmenting the market, and identifying different groups of customers. Methods of
segmenting the market include segmentation by:
(i) geographical area
(ii) quality and performance
(iii) function
(iv) type of customer
(v) social status or social group
(vi) age
(vii) life style.
4.6 Market segmentation and strategic space
A similar analysis of strategic groups can be made to identify possible target market segments.
There are possibly gaps in the market for a product, and that a product is not currently being made
Identifying gaps in a market can be a particularly useful method of competition analysis for companies that
are considering whether or not to enter into a market for the first time.
5 Boston Consulting Group matrix (BCG matrix)

5.1 Boston Consulting Group matrix (BCG matrix)
The objective of the matrix is to assist with the allocation of funds to different products or business units.
The matrix is a 2 × 2 matrix
(i) One side of the matrix represents the rate of market growth for a particular product or business
unit.
(ii) The other side of the matrix represents the market share that is held by the product or business
unit.
The four categories of product (or business unit) are:

Question mark
A question mark is a product with a relatively low market share in a high-growth market. Since the market is
growing quickly, there is an opportunity to increase market share, but initially it will require a substantial
investment of cash to increase or even maintain market share.
A strategic decision that needs to be taken is whether to invest more heavily to increase market share in a
growing market. The BCG analysis states that a firm cannot last long with a small market share, as bigger
companies will be able to apply great cost and price pressure as they enjoy economies of scale.
Star
A star has a high relative market share in a high-growth market. It is the market leader. However, a
considerable investment of cash is still required to maintain its leading position. Initially, they probably use
up more cash than they earn, and at best are cash-neutral. Over time, stars should gradually become self-
financing. At some stage in the future, they should start to earn high returns.
Cash cow
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A cash cow is a product in a market where market growth is lower, and possibly even negative. It has a high
relative market share, and is the market leader. It should be earning substantial net cash inflows, because it
has high economies of scale and will have become efficient through experience. Cash cows should be
providing the business entity with the cash that it needs to invest in question marks and stars.
Dog
A dog is a product in a low-growth market that is not the market leader. It is unlikely that the product will
gain a larger market share, because the market leader will defend the position of its cash cow. A dog might
be losing money, and using up more cash than it earns. If so, it should be evaluated for potential closure.
However, a dog may be providing positive cash flows. Although the entity has a relatively small market
share in a low-growth market (or declining market), the product may be profitable.
A strategic decision for the entity may be to choose between immediate withdrawal from the market
Using the BCG matrix
Cash cow
(i) Defend and maintain market share.
(ii) Spending on innovation (R&D) should be limited.
(iii) The cash generated by a cash cow can be used to develop other products in the portfolio.
Question-Mark
(i) The product will need a lot of new investment to increase market share. The strategic choice is
between investing a lot of cash to boost market share or to disinvest/ abandon the product
Star
(i) Stars are the cash cows of the future.
(ii) An entity should market a star product aggressively, to maintain or increase market share.
(iii) A large continuing investment in new equipment and R&D will probably be needed.
(iv) Stars should at some stage generate enough cash to be self-sustaining. Until then, the cash
from cash cows can finance their development.
Dog
(i) These might generate some cash for the business, and if they do, it might be too early to
abandon the product. The product has a limited future, and strategic decisions should focus on
its short-term future.
(ii) There is a danger that the product will use up cash if the firm chooses to spend money to
preserve its market share.
(iii) The firm should avoid risky investment aimed at trying to ‘turn the business round’.
5.2 Weaknesses in BCG model analysis
(i) The BCG model assumes that the competitive strength of a product in its market depends on
its market share, and the attractiveness of a market. It can be argued that these assumptions
are incorrect.
(a) A product can have a strong competitive position in its market, even with a low
market share. Competitive strength can be provided by factors such as product
quality, brand name or brand reputation, or low costs.
(b) A company might benefit from investing in an industry or market where sales
growth is low.
(ii) Other factors, apart from market share and market size will influence what a company should
do with a product: strength of competition, cost base and brand strength are all important
considerations
(iii) It might be difficult to define the market.
(a) There might be problems with defining the geographical area of the market.
(b) It might also be difficult to identify which products are competing with each other.
(iv) It might be the BCG matrix is better for analysing the performance of strategic business units
(SBUs) and market segments.
(v) It might be difficult to define what is meant by ‘high rate’ and ‘low rate’ of growth in the market.
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6 Opportunities and threats

6.1 SWOT analysis
SWOT analysis is a technique (or ‘model’) for identifying key factors that might affect business strategy. It is
a simple but useful technique for analysing strategic position.
SWOT analysis is an analysis of strengths, weaknesses, opportunities and threats.
(i) S - Strengths. Strengths are internal strengths that come from the resources of the entity.
(ii) W - Weaknesses. Weaknesses are internal weaknesses in the resources of the entity.
(iii) O – Opportunities. Opportunities are factors in the external environment that might be
exploited, to the entity’s strategic advantage.
(iv) T – Threats. Threats are factors in the external environment that create an adverse risk for the
entity’s future prospects.
Strengths and weaknesses are concerned with the internal capabilities and core competencies of an entity.
Threats and opportunities are concerned with factors and developments in the environment.
6.2 Identifying opportunities and threats
Opportunities should be seen in terms of circumstances (or changes in the environment or in competition)
that can be used to increase competitive advantage.
Threats should be seen as circumstances (or changes in the environment or in competition) that will
weaken or remove a competitive advantage, or that could give competitors a competitive advantage over
you.
It is also worth remembering that some changes in the environment can be both a threat and an opportunity.
For example, it can be a threat if competitors of a company take advantage of a change in the environment,
but it can be an opportunity if the company takes the initiative itself.
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Business Management and Strategy (BMS): Chapter Summary Chapter No. 4: Internal Analysis
CHAPTER NO. 04
INTERNAL ANALYSIS
1 Strategic capability
1.1 The meaning of strategic capability
‘Strategic capability reflects the ability of [an entity] to use and exploit the resources available to it, through
the competences developed in the activities and processes it performs, the ways in which these activities
are linked internally and externally and the overall balance of core competences (capability) across the
[entity]. Above all the capability of the [entity] depends upon its ability to exploit and sustain its sources of
competitive advantage over time.’
Strategic capability means the ability of an entity to perform and prosper, by achieving strategic objectives.
It can also be described as the ability of an organisation to use its core competences to create competitive
advantage.
Competitive advantage comes from the successful management of resources, competences and capabilities.
1.2 Achieving strategic capability
A resource-based view of the firm is based on the view that strategic capability comes from competitive
advantage, which comes in turn from the resources of the firm and the use of those resources
(competences and capabilities). This is illustrated in the following hierarchy of requirements for strategic
capability.
(i) Strategic capability
(ii) Competitive advantage
(iii) The entity’s delivery mechanisms
(iv) Core competences
(v) Resources
Understanding customer needs is fundamental to understanding and achieving competitive advantage.
2 Customer needs
2.1 The marketing approach
Markets can be defined by their customers and potential customers. Companies and other business entities
compete with each other in a market to sell goods and services to the customers. The most profitable
entities are likely to be those that sell their goods or services most successfully.
Many business strategies are based (at least partly) on the marketing approach or the marketing concept,
which is that the aim of a business entity is to deliver products or services to customers in a way that meets
customer needs better than competitors.
2.2 What are customer needs?
A major factor in the decision to buy a product is usually price. Many customers choose the product that is
the cheapest on offer, particularly when they cannot see any significant difference between the competing
products. If the buying decision is not based entirely on price, the customer must have other needs that the
product or service provides. These could be:
(i) a better-quality product
(ii) better design features
(iii) availability: not having to wait to obtain the product
(iv) convenience of purchase
(v) the influence of advertising or sales promotions.
Customers may be grouped into three broad types:
(i) consumers: these buy products and services for their personal benefit or use
(ii) industrial and commercial customers: customers might include other business entities
(iii) government organisations and agencies.
As a general rule, the needs of different types of customer vary. Industrial and commercial customers are
more likely than consumers to be influenced by price. Consumers will often pay more for a branded product
(due to the influence of advertising) or for convenience.
2.3 The 4Ps of the marketing mix
(i) Product refers to the design features of the product and the product quality.
(ii) Price is the selling price for the product
(iii) Place refers to the way in which the customer obtains the product or service, or the ‘channel of
distribution’.
(iv) Promotion refers to the way in which product is advertised and promoted.
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3 Critical success factors for products and services

3.1 Definition of a critical success factor
‘those components of strategy in which the organisation must excel to out-perform competition’
Strategic success is achieved by identifying the CSFs and setting targets for performance linked to those
critical factors.
3.2 Marketing and CSFs for products and services
The CSFs of a product or service must be related to customer needs. They are the features of a product or
service that will have the main influence on the decisions by customers to buy it.
3.3 CSFs and key performance indicators (KPIs)
Critical success factors should be identified at several stages in the strategic planning process.
(i) CSFs should be identified during the process of assessing strategic position. Management
need to understand the main reasons why particular products or services are successful.
(ii) CSFs are important in the process of making strategic choices. A business entity should select
strategies that will enable it to achieve a competitive advantage over its competitors.
(iii) CSFs are also important for strategy implementation. Performance targets should be set for
each CSF.
Measured targets for CSFs are called Key Performance Indicators (KPIs).
3.4 Johnson and Scholes: a six-step approach to using CSFs
Step 1 Identify the success factors that are critical for profitability (long-term as well as short-term).
Step 2 Identify what is necessary (the ‘critical competencies’) in order to achieve a superior
performance in the critical success factors. This means identifying what the entity must do to
achieve success.
Step 3 The entity should develop the level of critical competence so that it acquires the ability to gain a
competitive advantage in the CSF.
Step 4 Identify appropriate key performance indicators for each critical competence. The target KPIs,
if achieved, should ensure that the level of critical competence that creates a competitive
advantage is obtained in the CSF.
Step 5 Give emphasis to developing critical competencies for each aspect of performance, so that
competitors will find it difficult to achieve a matching level of competence.
Step 6 Monitor the firm’s achievement of its target KPIs and also monitor the comparative
performance of competitors.
3.5 Competitor benchmarking
Benchmarking is a process of comparing your own performance against the performance of someone else,
preferably the performance of ‘the best’.
The purpose of benchmarking is to identify differences between your performance and the performance of
the selected benchmark. Where these differences are significant, methods of closing the gap and raising
performance can be considered.
Methods of benchmarking
(i) Internal benchmarking: An entity might compare the performance of units within the
organisation with the best-performing unit.
(ii) Operational benchmarking: An entity might compare the performance of a particular
operation with the performance of a similar operation in a different business entity in a different
industry.
(iii) Competitive benchmarking: An entity might compare its own performance and its own
products with those of its most successful competitors.
(iv) Customer benchmarking: The benchmark is a specification of what customers expect. An
entity compares its performance against what its customers expect the performance to be.
3.6 Methods of competitor benchmarking
competitors will not provide more information about themselves than they are required to by law or
regulations. Published financial statements might therefore be an important source of comparative material.
Some of the methods that might be used by a company to compare performance with its competitors are
suggested below.
(i) The published financial statements of competitors should be studied.
(ii) Financial ratios obtained from the financial statements of the competitor should be compared
with similar ratios for the company. In addition:
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(a) annual sales (by business segment or geographical segment)

(b) growth in annual sales (as a percentage increase on the previous year)
(c) return on capital employed
(d) net profit/sales ratio
(e) gross profit/sales ratio.
(iii) Where there are significant differences in performance, the possible reasons for the
differences should be considered.
(iv) The products or services of competitors should be analysed in detail.
(v) Information about competitors can be gathered by talking to customers and potential customers.
(vi) Sales prices should be compared.
4 Value chain
4.1 Definition of value
Value relates to the benefit that a customer obtains from a product or service.
Value is provided by the attributes of the product or service. Customers are willing to pay money to obtain
goods or services because of the benefits they receive. The price they are willing to pay puts a value on
those benefits.
In a competitive market, the most successful business entities are those that are most successful in
creating value. Porter has suggested that:
(i) if a firm pursues a cost leadership strategy, its aim is to create the same value as its
competitors, but at a lower cost
(ii) if a firm pursues a differentiation strategy, it aims to create more value than its competitors.
The only reason why a customer should be willing to pay a higher price than the lowest price in the market
is that he sees additional value in the higher-priced product and is willing to pay more to obtain the value.
(i) This extra value might be real or perceived.
(ii) The extra value might relate to the quality or design features of the product.
4.2 The concept of the value chain
‘the activities within and around an organisation which together create a product or service.’
Strategic success depends on the way that an entity as a whole performs, but competitive advantage, which
is a key to strategic success, comes from each of the individual and specific activities that make up the
value chain.
Within an entity:
(i) there is a primary value chain; and
(ii) there are support activities (also called secondary value chain activities).
4.3 Primary value chain
(i) Inbound logistics: These are the activities concerned with receiving and handling purchased
materials and components and storing them until needed. In a manufacturing company,
inbound logistics therefore include activities such as materials handling, transport from
suppliers and inventory management and inventory control.
(ii) Operations: These are the activities concerned with converting the purchased materials into
an item that customers will buy. In a manufacturing company, operations might include
machining, assembly, packing, testing and equipment maintenance.
(iii)
Outbound logistics: These are activities concerned with the storage of finished goods before
sale and the distribution and delivery of goods (or services) to the customers. For services,
outbound logistics relate to the delivery of a service at the customer’s own premises.
(iv) Marketing and sales: Marketing involves identifying, informing and attracting customers within
the target market(s) in which an organisation competes.
(v) Service: These are all the activities that occur after the point of sale, such as installation,
warranties, repairs and maintenance, providing training to the employees of customers and
after-sales service.
4.4 Secondary value chain activities: support activities
(i) Procurement: These are activities concerned with buying the resources for the entity –
materials, plant, equipment and other assets.
(ii) Technology development: These are activities related to any development in the
technological systems of the entity, such as product design (research and development) and IT
systems.
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(iii) Human resources management: These are the activities concerned with recruiting, training,
developing and rewarding people in the organisation.
(iv) Corporate infrastructure: This relates to the organisation structure and its management
systems, including planning and finance management, quality management and information
systems management.
Support activities are often seen as necessary ‘overheads’ to support the primary value chain, but value can
also be created by support activities.
4.5 Adding value
Strategic management should look for ways of adding value because this improves competitiveness
(creates competitive advantage).
(i) Management should look for ways of adding more value at each stage in the primary value
chain.
(ii) Similarly, management should consider ways in which support activities can add more value.
Finding ways of adding value is a key aspect of strategic management.
Methods of adding value
(i) One way of adding value is to alter a product design and include features that might meet the
needs of a particular type of customer better than products that are currently in the market.
(ii) Market segmentation is successful when a group of customers value particular product
characteristics and are willing to pay more for a product that provides them.
(iii) Value can be added by making it easier for the customer to buy a product,
(iv) Value can be added by promoting a brand name.
(v) Value can be added by delivering a service or product more quickly.
(vi) Value can also come from providing a reliable service, so that customers know that they will
receive the service on time, at the promised time, to a good standard of performance.
New product design (innovation) is also concerned with creating a product that provides an appropriate
amount of value to customers.
When a business entity is planning to expand its operations into new markets or new market segments, it
should choose markets for expansion where the opportunities for adding value are strong.
4.6 Value creation and strategic management
By adding value more successfully, a firm will improve its profitability, by reducing costs or improving sales.
The benefits can be re-invested to create more competitive advantage in the future.
There is a link between:
(i) corporate strategy, which should aim to add value for the customer
(ii) financial strategy, which should aim to add value for the shareholders and
(iii) investment strategy, which should aim to ensure that the entity will continue to add more value
in the future.
4.7 Using value chain analysis
The most important objective for success should be to add value better than competitors. Creating value for
customers will, over the long term, create more value for shareholders.
In your examination, the value chain model can be used to make a strategic assessment of performance.
Each part of the primary value chain and each of the secondary value chain activities should be analysed.
For each part of the value chain, providing answers to the following questions can assess performance:
(i) How is value added by this part of the value chain?
(ii) Has the entity been successful in adding value in this part of the value chain?
(iii) Has the entity been more successful than its competitors in adding value in this part of the
value chain?
(iv) Has there been a failure to add value successfully?
(v) Does the entity have the core competencies in this part of the value chain to add value
successfully? (If not, a decision might be taken to out-source the activities.)
5 Resources and competences

5.1 Resources
A resource is any asset, process, skill or item of knowledge that is controlled by the entity.
Resources can be grouped into categories:
(i) Human resources: These are the leaders, managers and other employees of an entity and
their skills.
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(ii) Physical resources: These are the tangible assets of an entity and include property, plant and
equipment and also access to sources of raw materials.
(iii) Financial resources: These are the financial assets of the entity and the ability to acquire
additional finance if this is required.
(iv) Intellectual capital: This includes resources such as patents, trademarks, brand names and
copyrights. It also includes the acquired knowledge and ‘know-how’ of the entity.
Threshold resources and unique resources
A distinction can be made between threshold resources and unique resources.
(i) Threshold resources are the resources that an entity needs in order to participate in the
industry and compete in the market. Without threshold resources, an entity cannot survive in its
industry and markets.
(ii)
Unique resources are resources controlled by the entity that competitors do not have and
would have difficulty in acquiring. Unique resources can be a source of competitive advantage.
A unique resource is a resource that competitors would have difficulty in acquiring. It might be obtained from:
(i) ownership of scarce raw materials, such as ownership of exploration rights or mines
(ii) location:
(iii) a special privilege, such as the ownership of patents or a unique franchise.
5.2 Competences
A competence can be defined as an ability to do something well.
Competences are activities or processes in which an entity uses its resources. They are created by bringing
resources together and using them effectively. A business entity must have competences in key areas in
order to compete effectively.
Threshold competencies and core competencies
(i) Threshold competences are activities, processes and abilities that provide an entity with the
capability to provide a product or service with features that are sufficient to meet customer
needs (the ability to provide ‘threshold’ product features).
(ii) Core competences are activities, processes and abilities that give the entity a capability of
meeting the critical success factors for products or services and achieving competitive
advantage.
(iii) Threshold capabilities are the minimum capabilities needed for the organisation to be able to
compete in a given market.
Capabilities for competitive advantage consist of core competences. These are ways in which an entity
uses its resources effectively, better than its competitors and in ways that competitors cannot imitate or
obtain.
5.3 Sustainable core competences
Competitive advantage is provided by sustainable core competences. These are core competences that
can be sustained over a fairly long period of time – over a period of time that is long enough to achieve
strategic objectives. Sustainable competences should be durable and/or difficult to imitate.
(i) Durability refers to the length of time that a core competence will continue in existence, or the
rate at which a competence depreciates or becomes obsolete.
(ii) Difficulty to imitate: A sustainable core competence is one that is difficult for competitors to
imitate, or that it will take competitors a long time to imitate or copy.
5.4 Core competences and the selection of markets
A core competence gives a business entity a competitive advantage in a particular market or industry.
Some strategists have taken the idea of core competence further. They argue that if an entity has a
particular core competence, the same competence can be extended to other markets and other industries,
where they will be just as effective in creating competitive advantage. An entity should therefore look for
opportunities to expand into other markets where it sees an opportunity to exploit its core competences.
5.5 Summary: resources and competences
(i) Resources Threshold: Resources needed to participate in an industry
(ii) Competences Threshold: Activities, processes and abilities needed to meet threshold
product or service requirements
(iii) Unique: Resources providing a foundation for competitive advantage
(iv) Core: Activities, processes and abilities that give competitive advantage
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6 Capabilities and competitive advantage

6.1 Competitive advantage
Competitive advantage is any advantage that an entity gains over its competitors, that enables it to deliver
more value to customers than its competitors. Competitive advantage is essential for sustained strategic
success. The result of competitive advantage should be an ability to:
(i) create added value in products or services, that customers will pay more to obtain, or
(ii) create the same value for customers, but at a reduced cost.
6.2 Capabilities
Capabilities are the ability to do something.
An entity should have capabilities for gaining competitive advantage. These come from using and co-
ordinating the resources and competences of the entity to create competitive advantage.
A resource-based view of the firm is based on the idea that strategic capability comes from the distinctive
capability of the entity to use its resources and competences to provide a platform for achieving long-term
strategic success.
Dynamic capabilities
Dynamic capabilities are the abilities of an entity to adapt and innovate continually in the face of business
and environmental change.
‘Dynamic capabilities’ is a term used to describe the ability of an entity to create new capabilities by
adapting to its changing business environment and:
(i) renewing its resource base: getting rid of resources that have lost value and acquiring new
resources, particularly unique resources
(ii) developing new and improved core competences.
6.3 Cost efficiency and strategic capability
Porter has argued that in order to achieve strategic capability, an entity must gain competitive advantage
over its rivals and competitive advantage can be achieved by adding value or by reducing costs.
In strategic management, cost efficiency refers to the ability not only to minimise costs in current conditions,
but to continually reduce costs over time.
A cost efficiency capability is the result of both:
(i) making better use of resources or obtaining lower-cost resources; and
(ii) improving competencies and capabilities
Ways of achieving cost efficiency
(i) Economies of scale: Reductions in cost can be achieved through economies of scale.
Economies of scale refer to ways in which the average costs of production can be reduced by
producing or operating at a higher volume of output.
(ii) Economies of scope: In some industries, reductions in costs might be achieved by producing
two or more products, so that an entity that makes all the products achieves lower costs per
unit than competitors that produce only one of the products.
Cost efficiency and strategic capability
Cost efficiency can become a strategic capability, which will give the organisation competitive advantage,
for example by achieving ‘cost leadership’.
6.4 Corporate knowledge and strategic capability
Corporate knowledge or organisational knowledge is the knowledge and ‘knowhow’ that is acquired by the
entity as a whole. It is created through the interaction between technologies, techniques and people. Within
organisations, knowledge comes from a combination of:
(i) collaboration between people, who share their knowledge and create new knowledge together
(ii) technology, which makes it possible to store and communicate knowledge
(iii) information systems that make use of the technology system; and
(iv) information analysis techniques.
Knowledge gives a company a competitive advantage. Another important characteristic of corporate
knowledge is therefore that it cannot be easily replicated by a competitor. It is something unique to the
company that owns it.
A capability in knowledge management comes from a combination of unique resources and core
competences:
(i) experience in an industry or market and acquiring knowledge through experience
(ii) the knowledge that employees have or acquire, for example through training
(iii) the management of people and success in encouraging creativity and new ideas
(iv) the management of IS/IT systems.
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7 Analysing strengths and weaknesses

7.1 Assessing resources and competences
In addition to assessing the external environment, including markets and competitors, strategic managers
should also assess the internal resources of the entity, its competences and its capabilities. The following
assessment is required:
(i) What are the resources of the entity?
(ii) Which of these resources are unique or special? What value do they provide?
(iii) Will requirements for resources change, as a result of changes in the business environment?
(iv) How are the resources used? Are they used effectively and efficiently? What core
competences does the entity have?
7.2 Techniques for assessing resources and competences
(i) Management need to understand how value is created and how value might be lost. An
assessment of the value that is created or lost by the entity can be made using value chain
analysis
(ii) Management can prepare a capability profile of the entity. This is an assessment of the key
strategic processes that are needed to provide consistently superior value to customers. This
is an assessment of capabilities and competitive advantage.
(iii) A capability profile might be prepared together with a SWOT analysis.
7.3 Resource audit
A resource audit is an initial assessment of the resources of an entity. It is carried out to establish what
resources there are, which are unique and how efficiently and effectively they are being used.
(i) Human resources (Part-time and fulltime employees, consultants, subcontractors etc.)
(a) Size and composition of the workforce
(b) Efficiency of the workforce
(c) Flexibility of the workforce
(d) Rate of labour wastage/turnover
(e) Labour relations between management and workers
(f) Skills, experience, qualifications
(g) Any particular expertise?
(h) Labour costs: salaries and wages
(ii) Management
(a) Size of the management team
(b) Historical performance
(c) Skills of the managers
(d) Nature of management structure, the division of authority and responsibility
(iii) Raw Materials
(a) Costs as a percentage of total costs
(b) Sources, suppliers
(c) Availability
(d) Future provision. Scarcity?
(e) Wastage rates
(f) Alternative materials and alternative sources of supply
(iv) Non-Current Assets
(a) What are they?
(b) How old are they? What is their expected useful life?
(c) What is their current value?
(d) What is the amount of sales and profit per Rs.1 invested in non-current assets?
(e) Are they technologically advanced or out-of-date?
(f) What condition are they in? How well are they repaired and maintained?
(g) What is the utilisation rate for each group of non-current assets?
(v) Intangible Resources
(a) Are there any intellectual rights, such as patent rights and copyrights?
(b) Are there valuable brand names?
(c) Does the organisation have any identifiable goodwill?
(d) What is the reputation of the entity with its customers? How well does it know them?
(e) Is the work force well-motivated?
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(vi) Financial Resources

(a) What is the capital of the entity?
(b) What are its sources of new capital?
(c) What are the cash flows of the entity?
(d) What are its sources of liquidity?
(e) How well does it control trade receivables?
(f) How well does it control other elements of working capital?
(vii) Internal controls and organisation
(a) How well does the entity control the use of its resources?
(b) How effective are its controls over the efficient and effective use of assets?
(c) How effective are its controls over accounting and financial reporting?
(d) How effective are its controls over compliance with regulations?
(e) How effective are its risk management systems?
(f) Is the entity organised in an efficient way?
Evaluating resources
Having identified its key resources, management can evaluate them and the entity’s ability to use them
efficiently and effectively to create value (competences). A simple framework for evaluating resources is the
VIRO framework:
(i) Value. Does the resource provide competitive advantage?
(ii) Imitability. Would it be costly for competitors to imitate the resource or acquire it?
(iii) Rarity. Do competitors own similar resources, or are the resources unique?
(iv) Organisation. Is the entity organised to exploit its resources to best advantage?
7.4 SWOT analysis and strengths and weaknesses
It is also used to identify strengths and weaknesses in the resources, competences and capabilities of the
entity.
(i) Strengths are resources and competences that an organisation has and the capabilities it has
developed. Strengths in resources, competences and capabilities can be exploited and
developed to create sustainable competitive advantage.
(ii)
Weaknesses are resources, competences and capabilities that are deficient or lacking. These
weaknesses are preventing the entity from developing or sustaining competitive advantage.
To identify strengths and weaknesses, you should consider the following:
Resources
Consider all the resources of the entity and identify those that are significant and unique.
Include the skills of management and other employees in your assessment. You should also
consider the knowledge that the entity has acquired and its intellectual capital.
Consider whether there are key resources that the entity lacks, but a competitor might have.
Competences
Consider all the activities and processes of the entity and how it uses its resources. Identify the
competences of the entity and consider whether any of these are core competences that
provide competitive advantage.
Consider the competences that the entity lacks
Capabilities
Consider the capabilities of the entity and its relative success or failure in delivering value to
the customer or in creating cost efficiency.
7.5 Preparing a SWOT analysis
Strengths and weaknesses are concerned with the internal capabilities and core competencies of an entity.
Threats and opportunities are concerned with factors and developments in the environment. Note that
strengths and weaknesses should include competences and capabilities as well as resources.
In order to prepare a SWOT analysis, it is necessary to:
analyse the internal resources of the entity and try to identify strong points and weak points
analyse the external environment and try to identify opportunities and threats.
7.6 Interpretation of a SWOT analysis
An initial SWOT analysis is simply a list of strengths, weaknesses, opportunities and threats.
A problem with SWOT analysis is that it can encourage very long lists of strengths, weaknesses,
opportunities and threats, without any differentiation between those that are significant and those that are
fairly immaterial.
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Interpretation involves identifying those strengths, weaknesses, opportunities and threats (SWOTs) that
might be significant and what their implications might be for the future. The process of interpretation
therefore involves ranking the SWOTs in some order of priority or importance.
Another problem with SWOT analysis is that it can be used to identify significant issues, but it cannot be
used for evaluation. It cannot be a substitute for a more rigorous strategic analysis. Having identified the
most significant issues facing the organisation, strategic management should then consider:
(i) how major strengths (for example, core competencies) and opportunities might be exploited, to
obtain competitive advantage
(ii) how major weaknesses and threats should be dealt with, in order to reduce the strategic risks
for the entity.
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Business Management and Strategy (BMS): Chapter Summary Chapter No. 5: Competitive Advantage
CHAPTER NO. 05
COMPETITIVE ADVANTAGE
1 Competitive advantage
1.1 Two factors affecting profitability
Porter argued that two factors affect the profitability of companies:
(i) Industry structure and competition within the industry: he used the Five Forces model to
explain the factors affecting competition
(ii) at the level of the individual company, achieving a sustainable competitive advantage.
Sustainable competitive advantage is achieved by creating value for customers.
1.2 Value and competitive advantage
Companies and other business entities in a competitive market should seek to gain an advantage over their
competitors.
Having some competitive advantage over rival firms is essential. Without it, there is no reason why
customers should buy the company’s products instead of the products of a competitor.
Essentially, competitive advantage arises from the customers’ perception of value for money. The key point
to understand is that value comes from:
(i) a low price, or
(ii) features of the product
(iii) a combination of price and product features that gives ‘best value’ to a group of customers in
the market.
1.3 Selecting business strategies for competitive advantage
Since there are different perceptions of value, companies have to make a strategic decision about how they
will try to offer value and gain competitive advantage.
(i) Companies decide their corporate strategy, and the combination or portfolio of businesses
(‘product-markets’) they want to be in.
(ii) They must then select one or more business strategies that will enable them to succeed in their
chosen product-markets.
2 The strategic clock

2.1 Purpose of the strategic clock
The two key factors in providing value to customers are the price of the product or service and the benefits
that customers believe the product or service provides. Competitive advantage comes from offering an
attractive combination of price and perceived benefits.
The strategic clock was suggested by Bowman (1996) as a way of looking at combinations of price and
perceived benefits. Companies should consider which combination of the two they should try to offer,
although to do this they must also understand the perception of customers about the benefits that the
product or service provides.
Companies can also use the strategic clock to assess the business strategies of competitors, and the
combination of price and benefits that they are offering.
2.2 Drawing a strategic clock
The strategic clock has two dimensions: price and perceived benefits. Price can be shown on a scale
ranging from ‘low’ to ‘high’. Similarly, perceived benefits can be shown on a scale from ‘low’ to ‘high’.
The different positions on the clock also represent a set of generic business strategies for achieving
competitive advantage.
There can be any number of different business strategies, each with its own combination of price and
perceived benefits. However, the different business strategies can be grouped into:
(i) five business strategies that might enable a firm to gain a competitive advantage, &
(ii) strategies that will fail because they cannot provide competitive advantage.
2.3 Using a strategic clock
A strategic clock can be used to consider different business strategies for gaining competitive advantage,
based on providing a combination of price and perceived benefits.
The five broad groups of business strategy that might succeed are:
No frills strategy: Position 1
‘no frills strategy’ is to offer a product or service at a low price and with low perceived benefits. It should
attract customers who are price-conscious, and are happy to buy a basic product at the lowest possible
price.
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With a ‘no frills’ strategy, customers understand that they are buying a product or service that gives them
fewer benefits than rival products or services in the market.
Low price strategy: Position 2

With a ‘low price’ strategy, customers perceive that the product or service gives average or normal benefits.
It is not regarded as a low-quality product. The price, however, is low compared with similar products in the
market.
Only the lowest-cost producer in the market can implement this business strategy successfully. If a
company that is not the least-cost producer tries to implement a ‘low price strategy’ there will be a continual
threat that the least-cost producer will copy the same strategy, and offer prices that are even lower. Only the
leastcost producer could win such a price war.
However, a ‘low price’ strategy can be applied in segments or sections of the market.
Hybrid strategy: Position 3
A hybrid strategy involves selling a product or service that combines:
(i) higher-than average benefits to customers, and
(ii) a below-average selling price.
To be successful, this business strategy requires low-cost production and also the ability to provide larger
benefits. It tries to achieve a mix between a low price strategy and a differentiation strategy.
Differentiation strategy: Position 4
There are various ways in which differentiation can be achieved: products or services might have different
features, so that rival products do not offer exactly the same benefits. Companies might also promote the
perception that their products or services are much better in quality.
In the strategic clock a strategy of differentiation involves charging average prices for the product or service,
or prices that are perhaps only slightly higher than average.
Focused differentiation strategy: Position 5
A focused differentiation strategy is to sell a product that offers above-average benefits for a higher-than-
average price. Products in this category are often strongly branded as premium products so that their high
price can be justified. Ferrari sports cars are an example of a product sold using this business strategy.
Business strategies on the clock that will fail
some business strategies that will not succeed, because they do not enable the company to gain a
competitive advantage. There are other strategies that competitors might adopt that will be more
successful.
(i) Products with perceived benefits that are below-average cannot be sold successfully when
there are lower-priced products offering the same perceived benefits.
(ii) Similarly products cannot be sold successfully at an above-average price when they have
below-average perceived benefits.
Conclusion: strategic clock
Each business strategy is ‘market facing’, which means that it aims to meet the needs of customers, or a
large proportion of potential customers in the market. It is therefore very important to understand the critical
success factors (CSFs) for each position on the clock.
Benefits do not have to be real: what matters is whether customers believe that a product offers more
benefits. Branding and advertising can create extra benefit in the perception of customers.
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3 Cost leadership, differentiation and lock-in strategies

3.1 Porter’s generic strategies for competitive advantage
Porter has suggested three strategies for sustaining competitive advantage over rival firms and their
products or services. These strategies, which are similar to some shown on a strategic clock, are:
(i) a cost leadership strategy
(ii) a differentiation strategy
(iii) a focus strategy
Porter argues that sustainable competitive advantage is achieved by offering customers a ‘value
proposition’. A value proposition can be created in two ways:
(i) Operational effectiveness. This means doing the same things better than competitors, and so
providing the same goods or services at a lower cost.
(ii) Strategic positioning means doing things differently from competitors, so that the company
offers something unique to customers
Operational effectiveness provides the basis for a cost leadership strategy and strategic positioning
provides the basis for a differentiation strategy.
3.2 Cost leadership strategy
Cost leadership means being the lowest-cost producer in the market. The leastcost producer is able to
compete effectively on price, by offering its products at a lower price than rival products. It can sell its
products more cheaply than competitors and still make a profit.
Companies with a cost leadership strategy must have excellent systems of cost control and should
continually plan for further cost reductions
In order to make a reasonable profit the company must sell large quantities of the product. Total profits
usually come from selling large volumes at a low profit margin per unit. A cost leadership strategy is similar
to a ‘low price’ strategy or a ‘no frills’ strategy on the strategic clock.
3.3 Differentiation strategy
Differentiation means making a product different from rival products in a way that customers can recognise.
Customers might be willing to pay a higher price for the product, because they value its different features.
Companies pursuing a differentiation strategy need to offer products and services that are perceived as
better as or more suitable than those of their competitors. To deliver better products and services usually
requires investment and innovation.
For a successful differentiation strategy, products should give more benefits to the customer, even if this
means having to spend more to deliver the product.
3.4 Focus strategy
Concentrating on selling the product to a particular segment of the market and to a particular type of
customer. Within a market segment, a business entity might seek competitive advantage through:
(i) cost leadership within the market segment, or
(ii) product differentiation within the market segment.
3.5 Porter: six principles of strategic positioning
It is useful to summarise the views of Porter about how individual firms can achieve sustainable competitive
advantage.
Principle 1: The strategic goal for a company should be to achieve a superior long-term return on
investment.
Principle 2: The strategy must offer a unique value proposition for the customer.
Principle 3: There should also be a distinctive value chain.
Principle 4: The selected strategy will involve some trade-offs. This means that by selecting one set of
strategic options, a company inevitably chooses not to select alternative options.
Principle 5: All the different elements in the strategy and in the value chain should link together and
reinforce each other.
Principle 6: There should be continuity of strategic direction. Having chosen its strategies and the direction
it wants to take its businesses, a company should apply the strategy consistently.
3.6 Target markets

An entity must decide which markets or market segments it should target. It must:
(i) identify the total market for the products or services that it sells
(ii) recognise the ways in which the market is or might be segmented
(iii) decide whether to sell its products to all customers in the market
(iv) decide whether to try to be the market leader, or whether to pursue a differentiation strategy
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(v) if it chooses a segmentation strategy (focus strategy), select the segments that it will target
with its product
(vi) within the targeted market segment (or segments), decide whether to try to be the market
leader or whether to pursue a differentiation strategy.
Market niche
A market niche is a small segment of a market. An entity might target a market niche, and expect to achieve
its corporate objectives by selling its products or services to the fairly small number of potential customers
in that niche.
3.7 Leaders, followers, challengers and nichers
A business entity can be classified as a leader, follower, challenger or nicher in its markets.
(i) The leader is the entity that sells most products in the market.
(ii) A challenger is an entity that is not the market leader, but wants to take over as the market
leader.
(iii) A follower is an entity that does not have any ambition to be the market leader, and so follows
the strategic lead provided by the market leader (or challenger). A follower will try to
differentiate its product.
(iv) A nicher is an entity that targets a particular market segment or market niche for its product,
and does not have any strategic ambition to gain a position in the larger market.
3.8 Product positioning
The concept of product positioning is now widely used in marketing. Product positioning is defined as a
concept of the product in the mind of the customer. Advertising is an important factor in creating product
position.
Being the number 1
When an entity is the market leader, it should want to maintain its market leadership. To do this, it needs to
maintain its position as number 1 in the mind of consumers.
(i) The most effective way of becoming number 1 in the mind of consumers is to be first into the
market at the beginning of the product’s life cycle.
(ii) If this is not possible an entity needs to create a new image for its product that will enable it to
take over as the perceived number 1.
Being the number 2
When an entity is only the number 2 in its market, customers will know this. Unless the entity wants to
challenge for the position of number 1, it must do what it can to win customers from its position as number
2. Advertising can help.
Product positioning for followers and nichers
It is argued that entities that are not the number 1 in their market should try to find a way of being number 1
in a particular way. It is much better to be seen as the number 1 in a market segment (or in a special way)
than the number 5 in the market as a whole.
To create a product position of number 1 in the mind of customers, entities might devise various marketing
strategies.
3.9 Lock-in strategy
The idea of ‘lock-in’ is that when a customer has made an initial decision to purchase a company’s product,
it is committed to making more purchases from the same company in the future. The customer is ‘locked in’
to the supplier and the supplier’s products.
A successful lock-in strategy often depends on becoming the industry ‘leader’ or provider of the standard
product to the industry.
Strategies that might be pursued in a hypercompetitive market are as follows:
(i) Shorter product life cycles. Seek to introduce new improved products quickly, to compete
against established products of competitors.
(ii) Imitating competitors might remove the competitive advantage that the competitors currently
enjoy.
(iii) Prevent a competitor gaining a strong initial position by responding quickly.
(iv) Concentrate on small market segments that might be overlooked by competitors.
(v) Unpredictability. Companies should continually strive for radical solutions. Be prepared to
abandon current approaches.
(vi) In some situations, it might be possible to compete by building alliances with some smaller
competitors to compete with larger companies that are financially stronger and currently are
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4 Collaboration
4.1 The nature of collaboration
In a competitive market, companies need to achieve a competitive advantage over competitors in order to
succeed (and survive).
In some situations, companies might be able to achieve competitive advantage through collaboration with:
(i) suppliers or customers in the value network/value system
(ii) other business entities in the value network
(iii) some other competitors.
Collaboration with suppliers and customers can create additional value, in areas such as:
(i) product design
(ii) delivery times
4.2 Collaboration and strategic alliances
4.3 Collaboration and joint ventures
4.4 Franchising
4.5 Licensing
4.6 Possible problems with collaboration: restricting competition
Cartels
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Business Management and Strategy (BMS): Chapter Summary Chapter No. 6: Methods of Development
CHAPTER NO. 06
METHODS OF DEVELOPMENT
1 Strategic direction: introduction
1.1 PIMS analysis
PIMS analysis stands for Profit Impact of Marketing Strategy analysis.
The PIMS database contains data provided by several thousand strategic business units (SBUs) of major
corporations. The data consists of details about the activities and performance of the SBUs, and the
database can be used to analyse the factors that appear to make some strategies more successful than
others.
The PIMS database appears to show a link between profitability and relative market share. The higher the
market share, the higher the return on investment will be. This connection between market share and
investment return or profitability is probably due to economies of scale for a large firm in its markets, arising
perhaps from the following factors.
(i) The purchasing benefits of being a large buyer
(ii) The advantage of selling in large volumes.
(iii)
Large firms can obtain greater benefits from advertising; for example by advertising nationally.
(iv) More efficient use of equipment and other non-current assets.
(v) For retailing firms, the advantages of a large market share also include:
(a) easier access to new products from suppliers
(b) easier access to retail property
Other findings of PIMS analysis
PIMS analysis has also produced several other conclusions, which appear to have remained consistent
over time.
(i) Relative quality of a product or service is an important factor in obtaining high investment
returns.
(ii) the benefits of high market share can be lost due to poor relative quality.
(iii) High investment in capital equipment seems to reduce profitability.
(iv) Acquisition strategies are not successful at increasing return on investment for shareholders.
(v) Diversification is not a particularly successful strategy in terms of return on investment.
1.2 Product-based and resource-based strategies
With a product-based strategy, a firm should identify the products that it wants to sell and the markets or
market segments in which it should sell them. The focus of attention is on which products are likely to be the
most successful in their market, and so the most profitable.
Hamel and Prahalad suggested that instead of a product-based strategy approach, entities should use a
resource-based approach. Instead of looking for the most profitable products, an entity looks instead at the
strengths and competencies in its internal resources.
Hamel and Prahalad argued that a resource-based approach to strategy selection:
(i) provides a basis for deciding which new product-market areas to enter, and
(ii) is a more flexible approach to strategic planning than the selection of target products and
markets as part of a formal, long-term business plan.
1.3 Four key areas for successful strategy development
An entity should give clear signals, to outsiders and to its own management, about:
(i) Product-market scope (strategic scope): The entity should make clear the product-market
areas in which it expects to operate.
(ii) Competitive advantage: The entity should identify those properties of the product-market
areas in which it intends to operate that will give the entity a strong competitive advantage over
its rivals.
(iii) Growth vector: A growth vector is the direction in which the entity is moving from its current
product-market position. It indicates where the entity sees its future growth. The growth vector
might be a new product area, a new market, or both.
(iv)
Synergy: An entity should also indicate how it might expect to benefit from synergy by moving
into new product-market areas. Synergy is perhaps best described as the ‘2 + 2 = 5 effect’.
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1.4 Product-based strategies and strategic direction

Strategic choices must be made about the direction that the entity should take. For companies, strategic
direction is often expressed in terms of:
(i) the products or services that the company wants to sell
(ii) the markets or market segments it wants to sell them in, and
(iii) how to move into these product areas and market areas, if the entity is not there already.
To achieve growth in the business, an entity must:
(i) sell more in its existing markets (try to make its existing markets bigger)
(ii) sell new products in its existing markets
(iii) sell existing products in new markets or new market segments
2 Strategic direction: Ansoff’s growth matrix

2.1 Growth vector analysis: Ansoff
Ansoff (1957) argued that when a firm is planning its growth strategies, there should be a link between its
current products and markets and its future products and markets.
Ansoff summarised the potential strategies for product-market development with a 2 × 2 matrix. It
sometimes referred to as Ansoff’s growth vector matrix or product mission matrix.
Product
Existing Product New Product
Existing MARKET PENETRATION PRODUCT DEVELOPMENT

Market STARTEGY STARTEGY (INNOVATION)
Market
MARKET DEVELOPMENT
New Market DIVERSIFICATION STRATEGY
STARTEGY
2.2 Market penetration strategy

With a market penetration strategy, an entity seeks to sell more of its current products in its existing
markets.
A market penetration strategy is more difficult to implement when the market has reached maturity, or is
growing only slowly.
there are three ways in which this strategy might be successful:
(i) Persuade existing customers to use more of the product or service, and so buy more.
(ii) Persuade individuals who have not bought the product in the past to start buying and using the
product.
(iii) Persuade individuals to switch from buying the products of competitors.
A market penetration strategy is a low-risk product-market strategy for growth, because unless the market is
growing fast, it should require the least amount of new investment. However, there are some risks with this
strategy.
(i) If the company fails to increase sales, its business will have no strategic direction, and will
suffer from ‘strategic drift’.
(ii) A strategic choice of ‘doing nothing new’ is a high-risk choice, because competitors are likely to
be much more innovative and competitive.
(iii) The strategies selected by major competitors might be a threat, particularly if there is a ‘war’ to
win customers from each other.
2.3 Market development strategy
Market development involves opening up new markets for existing products. Kotler suggested that there are
two ways of pursuing this strategy:
(i) The entity can start to sell its products in new geographical markets
(ii) The entity can try to attract customers in new market segments, by offering slightly
differentiated versions of its existing products, or by making them available through different
distribution channels
2.4 Product development strategy
Product development is a strategy of producing new products for an existing market. There are several
reasons for choosing this strategy.
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(i) The business entity might have a strong brand name for its products, and it can extend the
goodwill of the brand name to new products.
(ii) The entity might have a strong research and development department or a strong product
design team.
(iii) The entity has to react to new technological developments by producing a new range of
products or product designs.
(iv) The market has growth potential provided that new products are developed.
(v) The entity wants to respond to a strategic initiative by a major competitor, when the competitor
has developed a new product.
(vi) Customer needs might be changing, so that new product development is essential for the
survival of the business.
Disadvantages of a product development strategy are that:
(i) developing new products can be expensive
(ii) a large proportion of new products are unsuccessful.
2.5 Diversification strategy
Diversification is a strategy of selling new products in new markets. A distinction can be made between:
(i) concentric diversification (also called related or horizontal diversification), which means
that the new product-market area is related in some way to the entity’s existing products and
markets
The aim of concentric diversification might be to use the entity’s existing technological know-
how and experience in a related but different product-market area.
(ii) conglomerate diversification: which means that the new product-market area is not related in
any way to the entity’s existing products and markets.
The aim of conglomerate diversification is to build a portfolio of different businesses. The
reasoning behind this strategy might be as follows.
(a) Diversification reduces risk. Some businesses might perform badly, but others
will perform well. Taking the businesses as a diversified portfolio, the overall
risk should be less than if the entity focused on just one business.
(b) Synergy can only occur if costs can be saved (for example by economies of
scale)
2.6 Gap analysis
Gap analysis is a technique that might be used in strategic planning.
A gap is the difference between:
(i) the position a business entity wants to be in by the end of the planning period, in order to meet
its overall objectives, and
(ii) the position the entity is likely to be in if it does not have any new strategy or change in strategy.
In the following diagram, the forecast of where the entity will be without any new strategies might be
estimated by statistical forecasting methods, such as regression analysis. For simplicity, the forecast is a
forecast of annual profit. The corporate objectives are expressed in the same terms (in this example, profit).
The strategic gap might be closed by a combination of product-market strategies.
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2.7 Withdrawal strategy

A withdrawal strategy is a strategy for withdrawing from a particular product-market area. This might be
appropriate, for example, when:
(i) the entity can no longer compete effectively, or
(ii) the entity wishes to use its limited funds and resources in a different product-market area.
A withdrawal strategy might be adopted as a deliberate policy by deciding to:
(i) reduce the range of products offered to the market
(ii) reduce the number of markets or market segments
(iii) withdrawing entirely from the market, and no longer operating in the market.
The reasons leading to a withdrawal from a product-market area might be any of the following:
(i) A decline in the size of the market or market segment
(ii) More effective and successful competition from rival firms.
(iii) Poor financial results
(iv) A decision by the entity that the product is no longer a ‘core product’
2.8 Consolidation and corrective strategies
A consolidation strategy is a strategy for maintaining market share, but not increasing it.
(i) The entity might be managed by their owner, who does not want the business to get any larger.
(ii) Management might take the view that if the entity gets any bigger, there will be serious
problems in managing the enlarged entity.
A corrective strategy is a strategy for making corrections and adjustments to current strategy, to counter
threats from competitors or to respond to changes in customer needs.
3 Methods of strategic development

There are three main approaches to developing a product-market strategy for growth:
(i) Organic growth (also known as internal development)
(ii) Growth through acquisitions or mergers
(iii) Joint ventures and strategic alliances.
3.1 Organic growth through internal development
An entity might grow its business with its own resources, seeking to increase sales and profits each year.
There are several advantages of internal development over other forms of strategy for growth:
(i) Management can control the rate of growth more easily, and ensure that the entity has
sufficient resources to grow successfully.
(ii) The entity should be able to focus on its core competencies, and develop these in order to
grow successfully.
(iii) If the entity finds that it is short of a key labour skill, it can buy the labour skills it needs by
recruiting new staff.
There are some disadvantages with growth through internal development.
(i) There is a limit to the rate of growth a business entity can achieve with its internal resources.
Rival firms might be able to grow much more quickly by means of mergers, acquisitions and
joint ventures.
(ii) In order to expand a business beyond the limits of its current capacity, it is necessary to invest
in new capacity.
(iii) If there is an element of diversification, then internal growth presents some risks because the
organisation will have to learn new skills.
(iv) The entity will eventually need to change its organisation and management structures, in order
to handle the growth in its business.
3.2 Greiner’s growth model
In the 1970s, Greiner suggested that an entity that grows in size goes through a series of changes as it gets
bigger. Each change occurs in response to a ‘crisis’, when the existing organisation and management
structure is no longer capable of handling a business as large as it has now become.
According to Greiner, there are five phases in the life of an entity.
Phase 1: Period of growth through creativity
The early years of a successful business entity are a period of creativity and innovation. The entity is
probably managed in an entrepreneurial way, and it is producing new products that appeal to customers
and is developing new markets.
Over time, production becomes more organised. As the entity grows, the entrepreneurial method of
management and the existing organisation structure both become inefficient. The organisation needs
organisation and planning and control systems.
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There is a crisis of leadership. Management must become more ‘professional’. The entity therefore
introduces professional management, and it enters its next phase of growth.
Phase 2: Period of growth through direction

The entity is now more structured, with a ‘traditional’ management hierarchy. Formal systems are introduced.
However, as the entity grows, the hierarchical management structure becomes inefficient. The control
systems and reporting systems are designed for close control from the top by senior management.
There is a crisis of autonomy. The ‘tensions’ between senior management and local management grow.
Until local managers are given more authority to take decisions for themselves, the entity will be managed
inefficiently from the top.
Phase 3: Period of growth through delegation
In order to survive, the entity is reorganised, with much more authority delegated to ‘local’ managers. The
entity is organised in divisions, which might be profit centres.
However, as the business continues to grow, central management realise that they are losing most of their
own authority, and that the local managers are becoming perhaps too powerful and unaccountable.
This leads to a crisis of control. Central/senior management must change the organisation and
management structure, to avoid losing control.
Phase 4: Period of growth through co-ordination
In this phase of growth, central management monitor their local managers carefully, using sophisticated
reporting systems. Local managers are more accountable, although they have delegated authority to make
decisions. The focus is now on:
(i) co-ordinating the activities of all the different local operating divisions within the entity and
(ii) consolidating the business.
However, as the entity continues to grow, the reporting systems start to create a bureaucratic culture at
head office. Local managers become angry at having to provide so many reports, and explain so much to
head office, when they feel that their time would be better spent in managing operations. This leads to a
crisis of red tape – with too much form-filling, report-writing and bureaucracy.
Phase 5: Period of growth through collaboration
Greiner suggested that the crisis of red tape leads to a further change. To overcome the problems of red
tape, head office management and local managers find ways to collaborate more constructively. There is a
greater emphasis on teamwork and problem-solving, and less emphasis on formal reporting systems and
accountability. Participation in decision-making by more individuals is encouraged.
Since no entity has gone beyond Phase 5 of its development Greiner suggested that it was too early to tell
whether there is a crisis the end of Phase 5, leading perhaps to even more change.
If entities continue to grow, they will have to go through the phases of transformation. If they do not, they will
become inefficient and will fail to survive. (For example, they might become a takeover target).
3.3 Mergers and acquisitions
With a merger, the two entities that come together are approximately the same size.
With an acquisition, one entity is usually larger than the other and acquires ownership (control) by
purchasing a majority of the equity shares.
Advantages of acquisitions and mergers
(i) Growth by acquisition or merger is much faster than growth through internal development.
(ii) An acquisition can give the buyer immediate ownership of new products, new markets and new
customers, that would be difficult to obtain through internal development.
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(iii) An acquisition enables an entity to enter new market where the barriers to entry are high, so
that it would be very difficult to set up a new business in competition.
(iv) An acquisition prevents a competitor from making the acquisition instead.
(v) It might result in cost savings and higher profits (‘synergy’).
Disadvantages of acquisitions and mergers
(i) An acquisition might be expensive.
(ii) A merger or acquisition can result in a loss of proportional ownership of the entity.
(iii) The two entities will have different organisation structures, different management styles,
different cultures, different systems of salaries and wages.
(iv) When individuals from different ‘cultures’ are brought together into a single organisation, there
will probably be a ‘clash of cultures’, and it may be difficult for individuals from the different
cultures to work together easily.
Mergers and acquisitions: will there be synergy?
Synergy is often a key reason for a merger or acquisition. Synergy will occur when, as a result of a merger
or acquisition, there are operational or financial benefits.
(i) There might be over-capacity of equipment and property, so that the surplus assets can be
sold off.
(ii)
It might be possible to make operational changes to save resources In particular, an acquisition
often results in redundancies for large numbers of employees. Running costs are reduced.
(iii) Two Research and Development departments can be combined into just one, and savings in
running costs should be possible.
Acquisitions: the need for financial strength
A successful strategy of growth through acquisition requires financial strength. A company needs one or
more of the following.
(i) A large amount of cash that is available for long-term investment.
(ii) Access to additional funding, in the form of new equity or borrowing.
(iii) Highly-regarded shares. Many acquisitions are negotiated as a share-forshare exchange.
3.4 Diversification and integration
Diversification and risk
Diversification is a high-risk growth strategy, because the entity is moving into both new product areas and
new markets at the same time, and it does not have experience in either.
Conglomerate diversification is a greater risk than concentric diversification, because with concentric
diversification, the entity is moving into related productmarket areas, where it might be able to use its
experience and core competencies more effectively.
Integration
Integration is a term that means extending a business. There are two main types of integration:
With horizontal integration, an entity extends its business by obtaining a larger share of its existing
product markets. Typically, an entity might acquire one or more of its competitors.
With vertical integration, an entity extends its business by acquiring (or merging with) another entity at a
different stage in the supply chain. A strategy of vertical integration is usually a form of concentric
diversification.
3.5 Forward and backward integration
Vertical integration might be:
(i) forward, or
(ii) backward.
With forward vertical integration, also called ‘downstream’ integration, an entity enters the product
markets of its customers.
With backward vertical integration, also called ‘upstream’ integration an entity enters the product markets
of its suppliers.
Arguments for vertical integration
The reasons given for forward or backward vertical integration might be as follows.
(i) Backward integration gives an entity control over its source of supply.
(ii) Forward integration can give an entity control over its channels of distribution.
(iii) Vertical integration allows an entity to extend its expertise and skills into related product markets.
(iv) Vertical integration makes it easier to find ways of reducing costs in the supply chain, and
adding value.
(v) Vertical integration can help to differentiate the product.
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Arguments against vertical integration

(i) Avoiding the discipline of the market.
(ii) Other companies might turn out to be more successful than the one bought in by the group.
(iii) Different management skills.
(iv) Core business
(v) Use of capital.
4 Methods of business forecasting

4.1 Intuitive (qualitative) forecasting
Intuitive (qualitative) forecasting is forecasting based, not on mathematical techniques, but on the intuition
and opinion of experts – i.e. qualitative factors. Intuitive forecasting techniques include:
(i) A think tank is a group of experts who meet to discuss what might happen in the future, and
possibly to recommend a course of action or strategy for the future.
A firm might establish a think tank. This will then meet occasionally and produce reports for
senior management, setting out their views, predictions and (possibly) recommendations.
A potential weakness of think tanks is that by bringing several experts together to share ideas,
the views of stronger-minded individuals might dominate those of their colleagues.
(ii) The Delphi method of forecasting: Several different experts are each asked – individually –
to provide his or her individual opinions about what might happen in the future. The experts do
not meet and do not share their ideas.
From this data the management prepares a summary that incorporates the suggestions of all
the experts in a standard format and the same document is circulated to the experts again in
one or more further rounds.
From this exercise, management might then reach its own views about what might happen in
the future, and plan accordingly.
(iii) Sales force opinions: This involves liaising with the sales force to gather their perspectives
and forecasts on sales and market figures. A common approach is to add together the
forecasts provided by each individual sales team to produce a consolidated total forecast sales
figure. This is called a ‘bottom-up’ approach.
(iv) A market research approach involves interacting with the market, perhaps through surveys,
questionnaires and feedback forms, to establish the market’s view on a product or strategy in
order to gauge potential demand.
4.2 Scenario planning
Scenario planning is a method of forecasting based on the analysis of different possible situations or
‘scenarios’ that might occur in the future.
Each scenario should consider a different situation and combination of circumstances, but each scenario
should be realistic.
By studying the probable outcome from any given scenario, management can identify a suitable strategy in
response.
4.3 Statistical forecasting techniques
Statistical forecasting techniques are methods of forecasting with mathematical models.
In some cases, forecasts might be prepared by projecting historical trends, on the assumption that trends in
the past will continue into the future.
Other forecasting models are much more complex and sophisticated. These are based on an analysis of
key factors in the organisation and its environment and markets. Models that simulate the relationships
between these key factors can be used for forecasting, by making assumptions about what future conditions
will be.
4.4 High-low method
The high-low method provides an estimate of fixed and variable costs for an activity based on analysing two
historical costs:
(i) the total costs for the highest recorded volume of the activity, and
(ii) the total costs for the lowest recorded volume of the activity.
Where appropriate, one or both cost figures is adjusted to allow for price inflation, to bring them to the same
price level. It is assumed that these two historical records of cost are an accurate guide to expected costs
for the activity.
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Comment on the high-low method

The high-low method is a simple method of separating mixed costs into fixed and variable cost elements.
However, it is based on the assumption that two historical records of cost are reliable indicators of cost
behaviour. This assumption may be invalid, and estimates of fixed and variable costs may therefore be
unreliable.
4.5 Linear regression analysis
Linear regression analysis is a technique for estimating a ‘line of best fit’ from historical data.
(i) It can be used for analysing historical data for costs in order to estimate fixed costs and
variable costs.
(ii) It can also be used to analyse a historical trend
Linear regression analysis is a more accurate forecasting method than the highlow method.
Comment on linear regression analysis
Linear regression analysis should be more reliable than the high-low method as a method of estimating
fixed and variable costs, because it is based on more items of historical data. However, it is not necessarily
reliable. It assumes that total costs vary with changes in the selected activity. This assumption might be
incorrect. Total costs may change in response to other factors, not the selected activity.
An advantage of linear regression analysis is that the reliability of estimates can be tested by calculating a
correlation coefficient.
4.6 The nature of a time series
A time series is a record of data over a period of time.
There are several techniques that may be used to predict a future from historical data for a time series. With
these techniques, it is assumed that:
(i) There is an underlying trend, which is either an upward trend or downward trend.
(ii) There may be seasonal variations (or monthly variation or daily variations) around the trend line.
The diagram below shows a trend line with seasonal variations above and below the trend line. The general
trend in this diagram is up and the trend can be shown as a straight line. However the actual value in each
time period is above or below the trend, because of the seasonal variations.
Analysing a time series

There are two aspects to analysing a time series from historical data:
(i) Estimating the trend line
(ii) Calculating the amount of the seasonal variations
The time series can then be used to make estimates for a future time period, by calculating a trend line
value and then either adding or subtracting the appropriate seasonal variation for that time period.
5 Assessment of business strategies

5.1 The basis for assessing business strategy
Before deciding whether or not to choose a particular business strategy, an assessment should be carried
out to judge whether the strategy is acceptable. Johnson and Scholes suggested that when judging the
strengths or weaknesses of a proposed strategy, the strategy should be evaluated for its:
suitability: does it address the strategic requirements, given the circumstances and the situation?
acceptability: does it address the strategic requirements in a way that will be acceptable to significant
stakeholders?
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feasibility: is it practical?
An assessment of strategy must always consider the financial aspects. In your examination, you should
bear this in mind. If you are given a case study and asked to recommend a business strategy, you should
not recommend anything that is financially unacceptable!
5.2 Suitability of a strategy
A strategy is suitable if it would achieve the strategic objective for which it is intended.
(i) If the purpose of the strategy is to gain competitive advantage, it is necessary to assess how
the strategy might do this, and how effective the strategy might be.
(ii) If the purpose of the strategy is market development, how successful might the strategy be?
(iii) how suitable are the chosen strategies for market development, product development or
diversification?
(iv) Is the business risk in the strategy acceptable, or might the risk be too high?
Several techniques might be used to assess the suitability of a strategy. These include:
(i) life cycle analysis and the life cycle portfolio matrix
(ii) an assessment of resources and competencies
(iii) business profile analysis.
5.3 Suitability: life cycle analysis and the life cycle portfolio matrix
The life cycle portfolio matrix can be used to assess the suitability of a particular strategy in relation to the
stage of its life cycle that the entity’s product has reached.
The life cycle portfolio matrix suggests what the appropriate strategies might be, in view of both:
(i) the stage of the life cycle, and
(ii) the entity’s competitive position in the market.
A version of a life cycle portfolio matrix is shown on the next page. This suggests which business strategies
might be appropriate at each stage of the life cycle, depending on the company’s position in the market.
Some of the terms used in the table are explained below:
(i) ‘Fast grow’ means ‘grow the company’s business at a faster rate than the rate of growth in the
market as a whole’.
(ii) ‘Grow with the industry’ means ‘grow the company’s business at the same rate as the average
rate of growth in the market as a whole’.
(iii) ‘Find niche’ means try to develop a market niche for the product.
(iv) ‘Retrench’ means cut expenditure and reduce investment: usually this means accepting a
reduction in market share.
(v) ‘Renew’ means give the product new ‘life’ by introducing new and improved features.
(vi) ‘Harvest profits’ means treat the product as a ‘cash cow’: take the money from profits but do
not invest further.
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5.4 Suitability: assess resources and competencies

Another approach to strategy evaluation is to consider the strategy in relation to:
(i) the resources that the strategy will need, to carry it out, and
(ii) the competencies of the entity, and in particular its core competencies.
Unless the strategy will enable the entity to take advantage of its core competencies, it will be difficult – or
impossible – for the entity to gain a competitive advantage by pursuing the strategy. A strategy should not
be considered suitable unless it is expected to make use of the entity’s core competencies.
5.5 Suitability: business profile analysis
A strategy can also be evaluated by comparing:
(i) the features of the marketing strategy that appear to make it successful and profitable, with
(ii) whether the strategy under consideration will have these features, and if so, to what extent.
5.6 Feasibility of a strategy
The feasibility of a strategy is concerned with whether it will work. A strategy is feasible if it can be
implemented successfully. Assessing whether or not a strategy is feasible will require some judgement by
management. Some of the questions to consider are as follows:
(i) Is there sufficient finance for the strategy? Can we afford it?
(ii) Can we achieve the necessary level of quality that the strategy will require?
(iii) Do we have the marketing skills to reach the market position that the strategy will expect us to
achieve?
(iv) Do we have enough employees with the necessary skills to implement this strategy successfully?
(v) Can we obtain the raw materials that will be needed to implement this strategy?
(vi) Will our technology be sufficient to implement the strategy successfully?
An important aspect of strategy evaluation is the financial assessment.
(i) Will the strategy provide a satisfactory return on investment?
(ii) Is the risk acceptable for the level of expected return?
(iii) What will be the expected costs and benefits of the strategy? How will it affect profitability?
(iv) What effect is the strategy likely to have on the share price?
5.7 Acceptability of a strategy
The acceptability of a strategy is concerned with whether it will be acceptable to key stakeholders.
There are several aspects of ‘acceptability’.
(i) Management will not regard a strategy as acceptable if the expected returns on investment are
too low, or if the risk is too high in relation to the expected return.
(ii) Investors might regard a strategy as unacceptable if they will be expected to provide a large
amount of additional investment finance.
(iii)
Employees and investors might consider a strategy unacceptable if they regard it as unethical.
5.8 Selecting individual investments: strategic fit
When an entity has decided its business strategies, it might make new investments or undertake new
business initiatives in order to put the strategy into practice. In principle, all new investment decisions:
(i) should be expected to provide a minimum acceptable financial return
(ii) should be consistent with the chosen strategies.
In other situations, an entity may decide to undertake an investment with low financial returns, because it is
an excellent ‘strategic fit’.
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Business Management and Strategy (BMS): Chapter Summary Chapter No. 07: Strategy Implementation
CHAPTER NO. 07
STRATEGY IMPLEMENTATION
1 Organising for success
1.1 Strategy implementation
After a strategic position analysis has been undertaken, available strategies have been evaluated and the
preferred strategies have been selected, the selected strategies must be implemented. Achieving strategic
objectives requires successful strategy implementation.
Three key aspects of strategy implementation are:
(i) organisation structure, including the organisation of processes and relationships
(ii) managing strategic change
(iii) implementing strategy through a combination of intended strategy and emergent strategy.
1.2 Organisation structure
Organisation structure is an aspect of strategy implementation. Strategy is implemented through actions,
and actions are planned and controlled through the management and decision-making structure within the
entity.
The organisation structure for an entity should be appropriate for the size of the entity, the nature of its
operations, and what it is trying to achieve. Most important, the organisation structure must enable the entity
to develop plans and implement them effectively.
1.3 Entrepreneurial organisation
An entrepreneurial organisation is an entity that is managed by its entrepreneurial owner. The main features
of an entrepreneurial organisation are usually that:
(i) the entrepreneur takes all the main decisions, and does not delegate decision-making to
anyone else
(ii) the entity is therefore organised around the entrepreneur and there is no formal management
structure
(iii) operations and processes are likely to be simple
1.4 Functional organisation structure
In a functional organisation structure,

decision-making authority is delegated
in a formal arrangement, and
responsibilities are divided between
the managers of different activities or
functions. Typically, functions in a
manufacturing entity include production
(or operations), marketing and sales,
and finance and accounting.
Each function has its own
management structure and its own
staff.
1.5 Divisional organisation structure
As entities grow still further, and
develop their business operations into
different product-markets, a divisional
structure might become appropriate. A
division is an area of operations,
defined by:
(i) markets in different
geographical areas
(ii) different products
(iii) different customers
A division might be a strategic business unit of the entity (group). Each division has its own functional
departments, such as marketing and sales, operations (production), accounting and finance, and so on.
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1.6 Matrix organisation structure

‘any organisation that employs a multiple command system that includes not only a multiple command
structure but also related support mechanisms and an associated organisational culture and behaviour
pattern’
Entities where it was recognised that different functions within the entity needed to work closely together.
The difference between a matrix
organisation structure and a project
organisation is that with a project
organisation, the project management
comes to an end when the project
ends. With matrix organisation, the
matrix structure of authority and
command is permanent.
The person shown is a quality control
expert and is responsible to the quality
control manager for technical aspects
of the job, maintaining quality systems
and so on.
The person is also responsible to the
manager of Project B. That manager
will be concerned with completing the
project on time, within the cost budget
and to the proper standard.
Overall, matrix structures should:
(i) encourage communication
(ii) place emphasis on ‘getting the job done’ rather than each manager defending his or her own
position.
1.7 Project-based and team-based structures
Project teams are usually assembled to accomplish a specific task, such as introducing a new system or a
new process. The project team should consist of members from different disciplines or functions, so that a
wide range of skills is assembled to implement the project.
1.8 Span of control
The span of control refers to the number of people who directly report to a manager in a hierarchical
management ‘command’ structure. There are two extreme shapes:
(i) Tall-narrow: In this type of structure, each manager has a small number of subordinates
reporting directly to him. As a result, in a large organisation, there are many layers of
management from the top down to supervisor level. The span of control is narrow, and the
shape of the organisation structure is tall, because of the many layers of management.
(ii)
Wide-flat: In this type of structure each manager has a large number of subordinates reporting
directly to him. As a result, even in a large organisation, there are only a few layers of
management from the top down to supervisor level. The span of control is wide, and the shape
of the organisation structure is flat, because of the small number of management levels.
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The tall-narrow structure often has the following characteristics.

(i) Formality in relationships between managers and subordinates.
(ii) Close supervision
(iii) Task specialisation
(iv) A strong cultural and procedural emphasis on formal roles, job titles and job descriptions.
(v) Slow vertical communication
(vi) it can take a long time for information to get from top to bottom of the management hierarchy,
and from bottom to top. As a result, tall-narrow organisations can be slow to react to change.
The wide-flat organisation structure often shows the following characteristics, where the work is fairly
complex and non-routine.
(i) Greater egalitarianism. ‘Bosses’ and ‘subordinates’ will often respect each other for their skills
and experience, and will treat each other as equals.
(ii) Team-work and co-operation.
(iii) Greater delegation of responsibility to subordinates
(iv) Flexibility.
(v) There is rapid vertical communication and decision-making
Wider and flatter organisation structures have replaced tall bureaucratic structures in many organisations.
The reasons why wide-flat organisations are often preferred are as follows.
(i) Wide-flat structures are more suitable to rapidly-changing business environments,
(ii) Cost savings
1.9 Organisational processes
Actions are implemented within an entity through established processes. The processes that are used
within an entity vary. Processes affect the way that plans are made and implemented, and activities are
controlled. The nature of planning and control can differ widely between different entities.
(i) At one extreme, actions are controlled through direct and close supervision of the work of
individuals by their supervisor or superior manager.
(ii) At the other extreme, there is minimal supervision, and control is exercised mainly by the
individual himself.
2 Internal and external relationships

2.1 Organisational relationships and implementing strategy
Plans are put into action by the co-ordinated efforts of many individuals and groups within the entity. The
way in which plans are implemented depends on:
(i) the nature of internal relationships
(ii) the nature of external relationships
2.2 Internal relationships: centralisation versus decentralisation
An important aspect of internal relationships is the extent to which decisionmaking is centralised, so that
major planning decisions are made (and implemented) by ‘head office’, or decentralised.
(i) In a centralised organisation, senior management retain most (or all) of the authority to make
the important decisions
(ii) In a decentralised organisation, the authority to take major decisions is delegated to the
management of units at lower levels in the organisation structure, such as SBU managers, and
divisional managers.
Advantages of centralisation
(i) Decisions by management are more likely to be taken with regard for the corporate objectives
of the entity as a whole.
(ii) Decisions by management should be co-ordinated more effectively if all the key decisions are
taken centrally.
(iii) In a crisis, it is easier to make important decisions centrally.
Advantages of decentralisation/devolution of authority
(i) Tactical and operational decisions are probably better when taken by local management,
particularly in a large organisation.
(ii) Giving authority to managers at divisional level and below helps to motivate the management team.
(iii) Decisions can be taken more quickly at a local level, because they do not have to be referred
to head office.
(iv) In a large and complex organisation, many decisions have to be made – probably too many for
senior management at head office.
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2.3 External relationships

An entity might use external relationships to deliver a particular strategy. These are relationships with other
entities, or with individuals who are not a part of the entity but are external to it. External relationships may
take the form of:
(i) outsourcing of functions
(ii) virtual organisation
(iii) strategic alliances
(iv) value networks
2.4 Outsourcing
An entity does not need to carry out operations itself. Instead, it can outsource work to a sub-contractor.
The reasons for outsourcing
(i) an entity achieves competitive advantage by concentrating on its core competencies and
outsourcing its secondary funtions.
(ii) The entity should outsource work to entities that have core competencies in these areas of work.
(iii) The outsourced work might require specialist skills that the entity cannot employ internally,
because it cannot offer enough work or a career structure to full-time specialists.
Problems with outsourcing
(i) The nature of the relationship with suppliers of outsourced work is critical to the successful
implementation of strategy.
(ii) Loss of control over the outsourced activities can be significant when something goes wrong,
and action performance does not meet expectations.
2.5 Shared services
‘Shared services’ involves centralising functions that are currently duplicated within a number of parts of an
organisation. The resultant central function is then shared internally. Examples might include shared IT
services, logistics, purchasing and HR.
Benefits are typically similar to those of outsourcing, such as lower costs, specialisation and enabling
functions to focus on core tasks.
2.6 The virtual organisation
The virtual company or virtual organisation does not have an identifiable physical existence, in the sense
that it does not have a head office or operational premises. It might not have any employees.
A virtual organisation is operated by means of:
(i) IT systems and communications networks – normally telephone and e-mail
(ii) business contacts for outsourcing all operations.
A key to a successful virtual organisation is the successful management of all the different external
relationships, and successful co-ordination of their activities.
3 The most appropriate organisation structure

3.1 Contingency theory of organisation structure
Contingency theory of organisation structure is that the most effective organisation structure for an entity
depends on the circumstances. An entity should use the organisation structure that is best suited to its size,
complexity and strategies. Organisation structure will vary according to differences in organisational
processes and internal and external relationships.
3.2 Burns and Stalker: mechanistic and organic structures
Burns and Stalker found that entities with an organisation structure better suited to their environment
perform better than entities whose structure is not well suited to their environment.
Burns and Stalker found from their research that one type of organisation is not necessarily better than the
other. However, they did find that:
(i) an organic structure is better-suited to an entity that needs to be responsive to change in its
products and markets, and in its environment
(ii) a mechanistic structure is better suited to an entity in a stable environment, where change is
gradual.
The differences between the two types of structure are set out in the table below.
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Mechanistic Structure Organic Structure

(i) Authority is delegated through a There is a network structure of control. Individuals
hierarchical management structure. influence decisions on the basis of their knowledge
Power over decision-making is and skills, regardless of their position in the
obtained from a person’s position in the organisation.
management hierarchy.
(ii) A bureaucracy. Control is cultural, not bureaucratic.
(iii) Communication is vertical, up and There is much more horizontal communication and
down the chain of command. free-flow of information.
(iv) Jobs are specialised, and individuals Specialist knowledge and expertise are shared, and
concentrate on their specialist area. contribute to the ‘common task’ of the entity.
(v) Doing the job is the main priority. Contributing to the common task is the main priority.
(vi) Job descriptions are precise. Job descriptions are less precise.
(vii) Tasks and operations are governed by Communications consist of information and advice,
instructions from a superior manager. rather than decisions and instructions from a
manager.
3.3 Mintzberg’s five building blocks for organisational configurations
The nature of the organisation structure varies with differences in processes and internal and external
relationships. He suggested that there are five elements or ‘building blocks’ in an organisation. The way in
which an entity is organised most effectively depends on which of these elements is dominant.
These five elements are shown in the diagram below.
Strategic apex: This is the top management in the organisation.
Operating core: This represents the basic work of
the organisation, and the individuals who carry out
this work.
Middle line: These are the managers and the
management structure between the strategic apex
and the operating core.
Support staff: These are the staff who provide
support for the operating core, such as secretarial
staff, cleaning staff, repair and maintenance staff, IT
staff and so on.
Technostructure: These are staff without direct
line management responsibilities, but who seek to
standardise the way the organisation works. They
produce procedures and systems manuals that
others are expected to follow.
Mintzberg argued that the group that has the greatest influence determines the way in which the entity is
organised, and the way that its processes and its relationships operate.
3.4 Mintzberg’s six organisational configurations
Mintzberg identified six different organisational configurations, each having a different mix of the five
building blocks. He suggested that the most suitable organisational configuration would depend on the type
and complexity of the work done by the entity. The six configurations are:
(i) Simple structure
This is found in an entrepreneurial company. The strategic apex exercises direct control over the operating
core, and there is no middle line. There is also little or no support staff or technostructure. The strategic
apex might be an ownerdirector of the company who gives the organisation its sense of direction and takes
most of the decisions.
This type of structure is very flexible, and can react quickly to changes in the environment, because the
strategic apex controls the operating core directly.
(ii) Machine bureaucracy
In a machine bureaucracy, the technostructure is the dominant element in the organisation. The entity is
controlled and regulated by a bureaucracy and the emphasis is on control through regulation. It is difficult
for an entity with this type of organisation to react quickly to environmental change. This structure is
therefore more suitable for entities that operate in a stable business environment
(iii) Professional bureaucracy
In this type of structure, the operating core is the dominant element. Mintzberg gave the name ‘professional
bureaucracy’ to this type of structure because it is often found in entities where the operating core consists
of highly-skilled professional individuals. e.g, Banks.
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(iv) Divisionalised form

In this type of structure, the middle line is the dominant element. There is a large group of powerful
executive managers, and the organisation structure is a divisionalised structure, each led by a divisional
manager. In some divisionalised structures, divisional managers are very powerful, and are able to restrict
the influence of the strategic apex on decision-making.
(v) Adhocracy
This is an organisation with a complex and disordered structure, making extensive use of teamwork and
project-based work. This type of organisation will be found in a complex and dynamic business
environment, where innovation is essential for success. These organisations might establish working
relationships with external consultancies and experts. The ‘support staff’ element can therefore be very
important.
(vi) Missionary organisations
In this type of organisation, all the members share a common set of beliefs and values. There is usually an
unwillingness to compromise or accept change. This type of organisation is only appropriate for small
entities that operate in simple and fairly static business environments.
3.5 Conclusion: the most appropriate organisation structure
The key point to note is that the organisation structure should be designed to enable the entity to implement
its strategies successfully.
Johnson, Scholes and Whittington have commented: ‘Poor performance might be the result of an
inappropriate configuration for the situation or inconsistency between structure, processes and
relationships.’
4 Strategic change
4.1 The nature of change
Strategic development inevitably results in some change, which needs careful management.
(i) Planned change (or proactive change) is deliberate and intended. The entity makes the
change to move from an existing situation (or way of doing things) to a new situation.
(ii) Unplanned change (or reactive change) happens in response to developments, events and
new circumstances that have arisen. The change is not intended in advance.
(iii) Incremental change is a fairly small change. This type of change happens without the need
for a major reorganisation or restructuring of the organisation and its systems and procedures.
The entity should be able to adapt easily to the change.
(iv) Transformational change is a big change. A transformational change requires a major
reorganisation or a restructuring of the organisation and its systems and procedures. The
change has a big impact on the entity, and also on the people working in it.
Change is also either:
(i) a ‘one-off’ event, so that the entity moves quickly from the old state of affairs to a new state of
affairs, or
(ii) a continuing process of development and change over a long period of time.
4.2 Triggers for change
Triggers for change are the reasons for making a change, or the reasons for the motivation to change. A
trigger for change might come from either outside or inside the entity.
External triggers for change
External triggers for change are caused by changes in the environment. The PESTEL analysis of the
external environment provides a useful framework for analysing external reasons for change.
(i) Political reasons for change
(ii) Economic reasons for change
(iii) Social and cultural reasons for change
(iv) Technological reasons for change
(v) Ecological/environmental reasons for change
(vi) Legal reasons for change
Internal triggers for change
Change might be motivated or caused by developments within the organisation.
(i) Change of senior management
(ii) Acquisitions and mergers.
(iii) Demergers and divestments
(iv) Reorganisation, downsizing and rationalisation.
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4.3 Achieving planned benefits

Many changes fail to achieve the planned benefits because of the difficulties experienced with implementing
the change. Furthermore, it is extremely difficult to introduce major changes without causing disruption.
Transformational change must therefore be managed carefully. This includes:
(i) identification of the strategic changes that should be made
(ii) recognising the need to change systems and organisation structures to make the changes
work successfully
(iii) recognising the effect of change on employees: this aspect of change management is often
overlooked
(iv) careful planning and implementation of the change
(v) making sure that the changes ‘stick’ and remain in place, after they have been made.
4.4 Attitudes to change
Some employees might welcome change and support the changes. More often, however, employees fear
change and resist change. Attitudes and culture may therefore act as blockages to change. Here are
several reasons for opposing change:
Reasons related to the job
(i) Employees might believe that the change will put their job at risk, and make them redundant.
(ii) Employees might believe that their existing skills will no longer be required.
(iii) Employees might fear that their working conditions will change for the worse.
Personal reasons and fears
(i) Employees might fear that the change will make them less important to their employer.
(ii) the call for a change is a criticism of the way they have been working.
(iii) They might think that after the change, their work will be less interesting.
(iv) They might fear the unknown.
Social reasons
(i) it will break up their work group, and separate them from the people they enjoy working with.
(ii) they will be forced to work on their own more, and there will be less interaction with colleagues.
(iii) They might dislike the manager who is forcing through the change.
(iv) They might dislike the way that the change is being introduced
Change and organisation culture
The management writer Rosabeth Moss Kanter suggested that there are cultural reasons why an
organisation might be more change-adept than others. According to Kanter, change-adept organisations
have three key attributes:
(i) The imagination to innovate
(ii) The professionalism to perform
(iii) The openness to collaborate
It is appropriate to see change as an opportunity for the successful implementation of business strategies.
5 Managing strategic change

5.1 Guidelines for change management: change levers and management skills
A general guideline for managing strategic change is as follows:
(i) managing the change involves deciding how to get from where we are to where we want to be
(ii) the change process consists of planning the changes, implementing them and then maintaining
the change
Levers of change
The following requirements are needed for successful implementation of change.
(i) clear understanding of the need for change
(ii) The commitment of the entity’s leaders to the change.
(iii) Effective communication with everyone affected by the change
(iv) Management should have the required qualities to implement change successfully.
(v) The organisation structure and relationships within the organisation should be adapted to meet
the requirements of change.
(vi) Reward systems should be amended
(vii) Critical success factors and key performance indicators should be revised
(viii) Employees should be given education in the purpose of change and training
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Skills for managing change

(i) Tuning in to the environment
(ii) Challenging the prevailing organisational wisdom
(iii) Communicating a compelling aspiration: A change manager should have a clear idea of what
he wants to achieve and should communicate this ‘vision’ to everyone he deals with.
(iv) Building coalitions
(v) Learning to persevere
(vi) Making everyone a hero
5.2 Lewin: force field analysis
This analysis describe the forces that came into conflict over planned changes. He suggested that there are
two opposing forces:
(i) the driving forces that support the need for change; and
(ii) the restraining forces that oppose and resist the change.
Any of the following factors might be a driving force or a restraining force:
(i) the people involved in the change, and what they want for themselves
(ii) the habits and customs of the individuals
(iii) their attitudes
(iv) the relationships between the people involved
(v) organisation structures within the entity
(vi) vested interests
(vii) the entity’s policies
(viii) the resources available to make the change
(ix) regulations
(x) events (happenings).
Lewin also argued that:
(i) Change will not occur if the forces
resisting the change are stronger than
the driving forces for change.
(ii) Change is only possible when the driving forces for change are stronger than the restraining
forces against change.
5.3 Lewin: unfreeze, change, re-freeze (prescriptive planned change theory)
He suggested that a planned process for change should begin with:
(i) identifying the cause of the problems, and the reasons why change is needed, and
(ii) identifying the opportunities of making improvements through transformational change.
Unfreeze
The process of ‘unfreezing’ is persuading employees that change is necessary. Employees should be
‘unfrozen’ out of their acceptance of the current situation
Unfreezing is therefore the process not only of making employees dissatisfied with the current situation, but
also persuading them about the nature of the changes that should be made.
Movement (change)
Management should be given sufficient resources to implement the changes. Having sufficient resources to
make a change can be a driving force for change.
Re-freeze
once change has happened, employees should be encouraged to carry on with the new way of doing things.
One way of doing this might be to reward employees for performance based on the desired behaviour and
results. The process of getting employees to carry on with the new system is called refreezing.
5.4 The ‘change agent’
When a transformational change is implemented, there has to be a ‘change agent’ who drives the change
and is responsible for its successful implementation. Often the change agent is an outside consultant. This
individual must have certain skills.
(i) He must explain the reasons for the change
(ii) he should involve the individuals affected
(iii) He should maintain communications with employees at all time
(iv) Where appropriate, he should provide training to the employees affected.
(v) He should emphasise the benefits of the change to the individuals affected.
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A consultant is often used because:

(i) independent and fair.
(ii) experience in managing the change process.
(iii) experience of many organisations
(iv) there should be all the help and advice available.
5.5 The Gemini 4Rs
Another model for introducing transformational change was promoted by Gemini Consultants. This is known
as the 4Rs model. The elements of the model are as follows.
(i) Re-frame
(a) Create the desire for change.
(b) Create a vision of what the entity is trying to achieve.
(c) Create a measurement system to set targets for change and measure performance.
(ii) Re-structure
(a) Examine the organisation structure
(b) Re-design the processes
(iii) Revitalise
(a) Find new products and new markets
(b) Invent new businesses.
(c) Change the rules of competition by making use of new technology.
(iv) Renew
(a) Develop individuals within the organisation
(b) Create a reward system to motivate individuals
(c) Develop individual learning and creativity
6 Business processes
6.1 What is a business process?
A business process is a set of linked tasks or activities performed by individuals, groups, departments or
other organisational units within a business entity. A business process:
(i) consumes inputs/resources
(ii) adds value, and
(iii) produces an output
6.2 Process redesign as an aspect of strategy in action
Processes might be changed or introduced as a result of implementing planned or emergent strategies.
(i) New processes might be needed for new work.
(ii) Existing processes might be improved.
Process change exists at various levels:
(i) Automation
(ii) Rationalisation – This involves streamlining standard operating procedures
(iii) Business process redesign or design
6.3 Technological change and process change
Technological change, particularly new IT systems and methods of communication and processing, often
contribute to business process redesign.
6.4 The Business process redesign patterns
Business process redesign can be classified into a number of patterns. The basic process redesign patterns
are described in the table below.
(i) Reengineering
Major reorganisation is needed. New technology is to be introduced: This is a radical redesign of the
process that involves re-designing the process from scratch.
(ii) Simplification
Remove unnecessary activities and duplication: This is redesign that simplifies the processes
(iii) Value-added analysis
Eliminate activities that do not add value: This involves asking how each activity adds value to the product
or service.
(iv) Gaps and disconnects
Information or materials are not passed correctly between departments: This involves looking at each
interface between processes and analysing what needs to pass and what needs to happen. This pattern
usually achieves modest improvements.
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6.5 Methodology of business process redesign

There must be a clear strategic goal for the process and for the process redesign. This goal must be
identified and understood.
The focus for process redesign should be on the value chain rather than on functional (departmental)
activities. Processes are often multifunctional.
The value chain should be analysed into lower-level processes, and lower-level processes further analysed
etc., down to the level of individual activities.
A measure must be established for the outputs of the process. This measure is for comparison with the
objectives of the process or process redesign.
The methodology of business process redesign includes the use of process diagrams, also called process
maps. Process maps are used to create a ‘model’ or description of the process:
(i) ‘is’ diagrams or ‘is’ maps show the current process (= the process that ‘is’ now)
(ii) ‘could’ diagrams or ’could’ maps should a possible new way of performing the process (= a
process that ‘could’ be used)
(iii) ‘should’ diagrams or ‘should’ maps show the process redesign that has been selected (= the
process as it ‘should’ be).
6.6 Business process re-engineering (BPR)
‘the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements
in critical, contemporary measures of performance, such as cost, quality, service and speed.’
There are three important elements in their definition:
(i) Fundamental: The redesign of a process should be fundamental, and old assumptions about
the way things are done must be questioned.
(ii) Radical: The redesign of the process results in a completely different way of doing things.
(iii) Dramatic: The improvements resulting from process change are not small. They are dramatic,
in terms of lower cost, better quality, better service or improved speed.
The main principles of BPR have been described (by Hammer 1990) as follows:
(i) There must be a complete re-think of business processes in a crossfunctional manner.
(ii) The objective should be to achieve dramatic improvements in performance through a radical re-
design of the process.
(iii) Where possible, the number of links in the chain of activities should be reduced.
(iv) The decision points for controlling the process should be located where the work is done.
In a BPR process, there should be a review of critical success factors for the organisation and a re-
engineering of the critical processes so as to achieve targets for the CSFs and improve customer
satisfaction.
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Business Management and Strategy (BMS): Chapter Summary Chapter No. 08: Finance, R17/11/2016 and Marketing Strategies
CHAPTER NO. 8
FINANCE, R&D AND MARKETING STRATEGIES
1 Finance Strategy
Finance Issues:
(i) Main corporate objective - even for a not-for-profit entity
(ii) Strategic support function
1.1 Finance Objective - Providing a return to the shareholders
1.2 Financial performance
a system for setting performance targets and measuring actual results against the targets.
Analysing financial performance
(i) Annual sales growth over a period of time
(ii) The gross profit ratio and the net profit ratio
(iii) The ratio of expenses to sales revenue
(iv) The total borrowings of the business entity
(v) The ratio of non-current assets to sales
(vi) The ratio of inventory to sales, or the average inventory turnover time
(vii) Investment in innovation (R&D).
to carry out a financial analysis for a case study
(i) Look at trends and changes over time.
(ii) calculate whether historical trends are expected to continue into the future.
(iii) Consider the possible implications of any trend or change that you have identified.
Financial analysis and strategic analysis
1.3 Funding and resource allocation
Obtain the funding that the entity needs for the implementation of its strategies.
Some entities have fixed and some entities have variable amount of Finance allocation.
1.4 Role of the accountant in business strategy
Traditionally (i) Avoid risk taking, (ii) Short term reward (iii) Avoid innovation
Today role of the accountant in business strategy should include:
(i) R&D and marketing with new product screening and decisions about whether to develop and
market a product.
(ii) Strategic investment appraisal
(iii) Providing a reporting system for the marketing function
(iv) Working with marketing colleagues to assess the effectiveness of marketing initiatives and the
marketing mix.
(v) Helping colleagues to identify and measure added value throughout the value chain.
2 Research and Development Strategy

2.1 The need for innovation
Innovation is necessary for several reasons.
(i) Product renewal
(ii) Product adaptation
(iii) Developing new products
(iv) Developing new technology
2.2 A research and development function
with research laboratories:
(i) where the pace of technological change is rapid or
(ii) where new product innovation is a major strategic objective.
Alternatively:
(i) might use product design teams
(ii) entities rely on the skills of their employees
2.3 R&D strategy
Issues regarding R&D application are:
(i) A decision has to be made about how much in total to spend on R&D each year.
(ii) Allocate the spending between research and more specific project development.
(iii) R&D strategy must allow for failures. Research might not lead to any specific product
development. Development projects might fail.
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2.4 Intrapreneurs:
intrapreneur is a person within a large business entity who takes direct responsibility for converting a new
product idea into a profitable finished product, by taking risks and innovating.
A large entity can try to deal with this risk in several ways:
(i) establish a formal research and development function, or
(ii) a design Team, or
(iii) a strategy of acquisitions, or
(iv) Through intrapreneurs
3 Marketing Mix Strategies
3.1 Marketing, segmentation and the marketing mix
(i) Marketing Process
(ii) Marketing Segmentation Methods
3.2 Product strategy
Product strategy is concerned with:
(i) designing new products
(ii) designing new variations of existing products
Features of product design that might be relevant to marketing are:
(i) Its functions (vi) Reliability
(ii) Comfort (vii) Safety
(iii) Convenience (viii) Uniqueness
(iv) The quality of its materials (ix) Packaging
(v) Useful life
Levels of a Product are:
(i) Core Product
(ii) Actual Product
(iii) Augmented Product
3.3 Price strategy
Uses of Pricing Strategy are:
(i) Pricing can also be used as a means of selling products or services
(ii) The pricing strategy is to attract customers by offering the same/nearly the same quality of
product for a lower price.
Pricing Strategy for New Products are:
(i) Market penetration price - Low Price
(ii) Market skimming price - High Price
3.4 Place strategy
Ways to implement place strategy are:
(i) For many consumer products, availibilty of the product is a key.
(ii) For consumer goods manufacturers, place strategy will involve developing an adequate
distribution network for its products
(iii) Some manufacturers might base their place strategy on delivery of the product to the
customer’s home or office.
(iv) e-commerce (Internet shopping) and internet banking.
A ‘place strategy’ might be used to gain a foothold in a market.
3.5 Promotion strategy
There are several different aspects to promotion:
(i) Advertising: Advertising can be by several different media, such as television, radio,
magazines, newspapers, billboards and Brouchers.
(ii) Sales promotions: Sales promotions are activities other than advertising that are designed to
prompt customers into buying a product (for example, buy one, get one free).
(iii) Direct selling (personal selling): Some entities use direct selling where the potential value of
individual sales orders might be very high.
(iv) Sponsorship: Some entities use sponsorship to increase public awareness of their product,
and improve their general image.
(v) Public relations: Public relations is concerned with attracting favourable media attention to an
entity and its products.
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Push strategy and pull strategy:

(i) The Push Strategy: The aim is to ‘push’ the product through the distributor to the end consumer.
(ii) The pull strategy: is aimed at getting the end-consumer to want to buy the product
3.6 Physical environment strategy
(i) Customers can be attracted to a sales location by the qualities of the environment. for
example, a store that is easy to get around and easy for finding products, the comfort and
luxury of the surroundings, ‘mood music’ and so on.
(ii) With internet shopping, seller’s website can be a crucial factor in persuading visitors to the site
to make a purchase.
3.7 People strategy
Companies might train employees in providing good service and some companies have based advertising
campaigns on the message that they are a ‘people-friendly’ business.
3.8 Processes strategy
Processes involved in obtaining service might include receiving reminders, having to register, annual
subscriptions and form filling. Internet technology can help to make these processes much more efficient
and convenient for the customer.
4 International Perspectives
4.1 Global competition
The reasons for the internationalisation of markets and competition can be summarised as follows.
(i) economies of scale
(ii) markets in many countries are converging, and national differences might be fairly small.
(iii) currency risk
(iv) Porter suggested that some countries obtain a competitive advantage over others in a
particular industry
(v) to compete against rival entities that are pursuing the same strategy.
(vi) a company might choose to set up new operations within an economic trading bloc, to
overcome the difficulties of trying to export goods into the bloc due to import control regulations
4.2 Corporate strategies for international business
(i) Standardisation: If a company will not change its product design for the foreign markets, and
will sell an identical product in all the countries where it operates.
(ii)
Adaptation: Customers in each different market will have slightly different needs and
preferences. The entity might therefore alter its products to suit the needs of each local market.
4.3 International scale operations, international diversity and globalisation
International Scale Operations: company might decide to sell a standard product in many different
countries. To do this, it needs to establish operations on an international scale.
A strategy of international diversity is also called multi-domestic strategy. The company recognises the
differences in customer needs in each different country, and bases its strategy on the view that most or all
value-adding activities must be located in the country where the target national market is located. In each
country, the product is adapted to suit the unique requirements of the local customers. It is even possible
that the company’s products will be sold under different brand names in each country, and the group does
not attempt to obtain global recognition for a single global brand name.
A globalisation strategy is similar to an international scale operations strategy, selling a single product
under a single global brand name. However, the group operates in every country (or most countries) rather
than having centralised regional locations for production.
Choosing a suitable international strategy - Standardisation and Adaptation Startegy.
4.4 Multinational organisations and global organisations
An international company is a company with all or most of its production operations in a single country.
Most of its senior managers are nationals of the country. The company sells its products in different
countries, through local sales agents or local sales offices in each country, or using international sales
representatives.
A global company is a company with operations in a large number of different countries, making a similar
range of products or providing a similar range of services. Its senior managers are nationals of a variety of
different countries.
When companies expand their business outside their ‘home country’, they will usually begin as an
international company, but may eventually develop into a global company.
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Multinational Company Global Company

(i) Management make strategic decisions for each Management develop worldwide
foreign market individually. strategies for all their markets.
(ii) Products are adapted and designed to the The company produces core products.
requirements of the local market. These are standardised for all markets,
with only minimal design changes for
individual national markets.
(iii) Marketing (for example, advertising) is adapted in There is a uniform approach to
each country to suit the local culture. marketing in all countries, with only
small variations.
(iv) Countries are selected as a target for production Countries are selected for their ability to
and sales entirely on the basis of their potential for contribute to the integrated global
profitability. strategy.
(v) The aim is to optimise the value chain in each The value chain is broken up, and
country of operation. different parts of the value chain are in
different countries. The aim is to
optimise the value chain globally.
(vi) A multinational company often has the culture of the A global company develops a global
country where its head office is based (for example, culture. Its senior managers are likely to
the US). come from different countries.
5 Assessing the Nature and Size of the Markets (Market Research)

5.1 Relevance of market intelligence
Marketing Intelligence is the systematic collection and analysis of publicly available information about
consumer, competitor and the development in the market place.
Porter’s five forces model is used to assess the competitive rivalry between firms in a market. This section
considers market intelligence from a quantitative perspective in establishing an overall target market size.
5.2 Tolerance levels
The preparation of financial information involves balancing the need for speed vs. the need for accuracy. In
general the more time taken to prepare financial information the greater the level of accuracy that can be
achieved.
In general, high degrees of accuracy are increasingly necessary when:
(i) the investor targets a large market share and plans a significant investment in the market;
(ii) the investor needs to understand the trends within a market, particularly year on year;
(iii) it is necessary to understand the dynamics of market segments when following a focus or
niche strategy.
5.3 Approaches to market sizing
Top-down approach
A top-down approach involves starting with market-wide information then refining the information down to a
specific target market.
The overall market is sometimes referred to as ‘Total Available Market’
Bottom-up (demand-side) approach
The bottom-up approach to assessing the nature and size of markets involves engaging consumers and/or
distributors of a product. This could involve primary sources such as:
(i) focus group discussions
(ii) interviews and questionnaires
(iii) field observations.
Supply-side approach
The supply-side approach to assessing the nature and size of markets involves performing research on
companies who are active in the chosen target market. In broad terms this involves adding together the
sales of competing companies to establish an overall market size.
Internal sources
With the ongoing rapid evolution of information systems, database technologies and data mining
techniques, organisations should not overlook the value and intelligence available from internal records.
Page 4 of 4
Business Management and Strategy (BMS): Chapter Summary Chapter No. 09: Operations Strategy
CHAPTER NO. 09
OPERATIONS STRATEGY
1 Operations management
1.1 Operations (production) strategy
‘Operations’ (production) describes the process of transforming inputs such as raw materials and
components into outputs such as products and services.
Operations management and strategy deal with the operational processes such as purchasing,
warehousing and transportation.
The aim of operations strategy is to maximize the effectiveness of production whilst minimizing costs in a
way that aligns with an organisation’s overall strategic objectives
Operations strategy involves making decisions regarding such things as:
(i) Capacity (iii) Location (v) Processes
(ii) Technology (iv) Timing
1.2 Operations management
Operations management involves planning and controlling day-to-day activities in the operations
department such as:
(i) Product (or service) design
(ii) Process design (e.g. layout of a factory)
(iii) Job design
(iv) Capacity management
(v) Planning and control of daily operations
(vi) Inventory control
(vii) Quality control.
Production planning and control
Production planning and control involves reconciling demand for resources and outputs with their supply.
Management must deal with uncertainties in demand and provide for unforeseen variations such as:
(i) Insufficient supplies due to shortages or delivery delays
(ii) Insufficient output of finished products – hold-ups, bottlenecks and inefficiencies.
Inventory management
Inventory management involves making decisions about:
(i) How much inventory to hold including buffer inventory (safety stock) to cover unexpected
demand, and when to make orders.
(ii) Anticipation inventory in seasonal businesses
Capacity planning and control
Capacity planning and control aims to achieve a suitable balance between the demand for production
capacity and the provision of that capacity.
Factors to consider include:
(i) Cost and cash-flow of under-utilised capacity
(ii) Quality
(iii) Set-up costs
1.3 Creating value and competitive advantage
Value is added by a series of activities and processes which occur in a coordinated way. These activities
and processes must be linked effectively to add value.
Value relates to the benefit that a customer obtains from a product or service.
(i) A customer will be willing to pay more for something that provides more value.
(ii) Given a choice between two competing products or services, a customer will select the one
that provides more value
Value for money, quality, reliability, functions, convenience, and so on
Porter suggested that an entity can adopt either of two competitive strategies:
(i) a cost leadership strategy
(ii) a differentiation strategy
1.4 The value chain
A value chain refers to inter-connected activities that create value.
By analysing value-creating activities, decisions can be made about:
(i) how the creation of value can be improved
(ii) how to improve a competitive advantage over rivals, and
(iii) whether some activities should be stopped because they cost more than the value they create
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1.5 The supply chain

There is a value chain within every business entity. There is also a supply chain from the producers of raw
materials and equipment through to the entities that sell the end consumer product to customers.
The four main characteristics of a product supply chain are:
(i) the location of each link in the chain
(ii) manufacturing
(iii) inventory management
(iv) distribution.
Value systems
The value system is the sum of the value chains in all the firms in a supply chain.
The value that customers pay for when they buy goods or services comes from the value created by the
entire value system.
Management accounting systems should be able to provide information to managers to help them identify
ways of adding value across the entire length of the value chain, in the firm’s relationships with suppliers as
well as in its own internal systems.
1.6 Procurement and vendor development
Procurement is the process of buying the resources for the entity such as materials, plant, equipment and
other assets. Larger organisations are likely to have a dedicated procurement team with experienced
procurement professionals. In smaller operations the procurement process may only form part of one
employee’s role.
Negotiating and managing supply relationships
Purchases represent a large percentage of operating costs in a manufacturing company.
Organisations typically pursue one of two forms of strategic supply relationships:
(i) Competitive relationship – this is where buyers negotiate hard to achieve the lowest possible
price. This creates a win/lose and ‘us’ vs. ‘them’ mentality often focusing on short term gains.
(ii) Long-term strategic relationships – this is where organisations collaborate with key suppliers
and form long-term strategic partnerships. Organisations and vendors work together to add
value to the end-customer for their mutual benefit.
Reck and Long – strategic positioning tool
Reck and Long developed a tool to describe the evolution of a typical purchasing function from short-term
opportunistic supplier relationships (which they considered undesirable) to long-term collaborative
relationships (desirable).
The four stages in development that a purchasing function passes through in becoming a ‘competitive
weapon’ are:
(i) Passive
(a) Purchasing reacts to requests from other departments
(b) Administrative role emphasising transaction efficiency.
(ii) Independent
(a) Improved professionalism and attempt to formalise communication links with
technical functions.
(b) Awareness of financial implications – price negotiations
(iii) Supportive
(a) Purchasing department is viewed as essential by top management.
(b) Greater awareness of how purchasing affects strategic goals.
(c) Now supports and strengthens firm’s competitive advantage.
(d) Timely information regarding price change, emphasise internal coordination.
(iv) Integrative
(a) Significant reliance on purchasing for competitive success.
(b) Purchasing now a ‘facilitator’ to its functional peers.
(c) Management led development process over period of time.
(d) Suppliers seen as vital strategic partners.
Supply agreements
Supply (master) agreements are commonly used to establish the terms on which supply will be undertaken.
Every purchase transaction then becomes subject to the same terms of the service agreement thus saving
time through removing the need to create an agreement for every new purchase.
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Supply agreements typically include details of:

(i) Product range
(ii) Response time / supply lead times
(iii) Minimum purchase requirements
(iv) Price information.
The responsibility for maintaining relationships between vendors and buyers commonly involves:
(i) The purchasing manager/department of the buyer; and
(ii) Sales and marketing representatives of the vendor.
Supply arrangements in JIT (just-in-time) systems
Where JIT systems operate it is crucial that deliveries from suppliers are reliable. Suppliers must deliver
quickly and purchased materials and components must be of a high quality in order to minimise waste (such
as production delays, faulty components and product defects).
Jit therefore relies on selecting the right suppliers and building long-term strategic relationships to ensure
efficient. reliable and unbroken supply.
Supply networks and sourcing strategies
Traditional supply networks include a large number of suppliers for each majorraw material. Suppliers
compete on price and organisations avoid the risk of over-relying on a single supplier. However, if risks can
be managed sufficiently and collaborative relationships established then single supplier sourcing can offer
the following benefits:
(i) Streamlined processes leading to shortened lead times
(ii) The ability to share R&D and design work if time to market is critical
(iii) Favourable treatment from the supplier if material is in short supply
(iv) The development of strategic relationships which may develop into core competencies and
hence become a source of competitive advantage.
(v) Reduced costs, improved efficiency and hence increased profits.
Parallel sourcing describes the situation in larger companies where each plant/factory/location operates
single supplier sourcing but from different suppliers.
Network sourcing originated in Japan (although is not yet prevalent in the West) and has the following
features:
(i) Network sourcing is founded on a tiered network of small business suppliers
(ii) A small number of relationships exist between each tier which creates a pyramid structure of
suppliers within a network.
(iii) An organisation benefits from access to a large number of supplier firms but only needs to
service a relationship with firms in the next tier down
(iv) Combines the key benefits of both single sourcing and dual sourcing arrangements
(v) Risk is shared between supplier and customer – asset investment to support single customers
is prevalent
(vi) Outsourcing should be maximised within the network
(vii) Networks demonstrate high degrees of bilateral design (cost/quality collaborations) and
supplier innovation
(viii) Network members tend to form long-term relationships founded on coordination and mutual trust
(ix) Members of the network are able to focus on strategic issues rather than
transactional/operational aspects as activities are better co-ordinated
(x) First tier suppliers (i.e. those supplying organisation at the top of the pyramid) are:
(a) often high cost/complex sub-assembly e.g. a car engine;
(b) heavily dependent on top level purchasers and hence focus on forging long
term relationships; and
(c) typically put in charge of the vendor base of top level purchasers.
Supplier associations
Supplier associations are trade associations that might be found at regional, national or global levels. They:
(i) promote the interest of members e.g. through government lobbying
(ii) promote industry-wide standards
(iii) provide information, news, statistics, education and training.
The benefits of supplier associations include:
(i) improving skill and communication levels
(ii) producing uniform supply systems.
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2 E-business and the supply chain

2.1 E-commerce and the supply chain
E-commerce involves making agreements to buy and sell goods and services through electronic dealing. E-
commerce transactions can occur at any stage of the supply chain, from the supplier of raw materials to the
end consumer of the finished consumer goods.
E-business is a method of increasing value by reducing costs, and also by improving the value of benefits
offered to customers.
(i) Added value can be created at any stage in the supply chain and at any link in the supply chain
between a company and a supplier.
(ii) E-business provides opportunities for improvements throughout a company’s own value chain
and within its entire value network.
The virtual supply chain
A virtual supply chain consists of electronic communications links between suppliers and customers in the
supply chain.
The role of a virtual supply chain may be either to:
(i) Improve information flows with suppliers and customers, and so improve the efficiency and
effectiveness of the physical supply chain, or
(ii) Replace some of the ‘traditional’ links in the supply chain, to provide a more efficient and
effective supply chain.
A virtual supply chain makes use of web-based technology and facilities such as the internet, intranets and
extranets, e-mail, e-purchasing and electronic ordertracking systems. A virtual supply chain can improve the
efficiency and effectiveness of the physical supply chain, by improving the information flow from customers
back through the supply chain to suppliers.
To be competitive, a manufacturing company must try to reduce the cycle times or lead times that:
(i) Cost money at all stages in the supply chain, and
(ii) May persuade customers to buy what they want somewhere else.
Information about changes in demand or supply conditions should be communicated along the virtual
supply chain. Customers and suppliers at each link in the chain should then collaborate to respond to the
new supply or demand conditions.
Checking the efficiency of the virtual supply chain
An efficient supply chain will use technology to sustain and improve their competitive position continually. All
the links in the chain need to operate as an integrated ‘team’, to make sure that it remains competitive.
2.2 The push and pull models of the supply chain
E-business and push and pull strategies
A push strategy or a pull strategy can also be used for e-commerce, but in a slightly different way.
(i) With a push strategy, a company uses the internet to try to persuade customers to buy its
products or services.
(ii) Selling goods through the internet, particularly to consumers, is largely a pull strategy.
customers coming to its website (or to the websites of intermediaries) and asking for product
2.3 E-procurement
Components of e-procurement
E-procurement is a term used to describe the electronic methods used in any stage of the procurement
process
There are three areas in particular where e-procurement methods can improve efficiency in the supply
chain:
(i) E-sourcing is the use of electronic methods for finding new suppliers and negotiating terms for
purchase agreements. The internet can be used to identify potential new suppliers, and to find
out more about the business of potential suppliers by visiting their websites.
(ii) E-purchasing is the process of making purchase orders electronically. The process of making
a purchase might involve:
(a) Submitting requests for quotations to suppliers
(b) Receiving quotations/tenders from potential suppliers
(c) Placing the order electronically.
(iii) E-payment is the use of electronic methods for payment, such as electronic invoicing and self-
billing. Many companies also arrange to pay suppliers by sending electronic payment
instructions to their bank.
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2.4 Benefits of e-procurement

(i) The ability to source products and services electronically can be extremely cost effective,
saving time and money.
(ii) Improvements in efficiency can be shared between suppliers and customers, adding value to
the supply chain.
Benefits of e-sourcing
(i) E-sourcing enables companies to purchase more easily from other countries or new suppliers
that they have not considered previously.
(ii) It might be possible to find suppliers who can offer better value, in terms of lower prices or
better-quality products.
Benefits of e-purchasing
(i) Electronic purchasing methods reduce the time for suppliers to respond and a purchase to be
made.
(ii) Savings in time and the use of electronic communications can save costs and improves
efficiency in the purchasing process.
(iii) Purchasing efficiency is improved still further if suppliers link their purchasing system to a
computerised order fulfilment and delivery system.
(iv) Some form of e-purchasing arrangements is needed to make a system of just-intime
purchasing feasible.
Benefits of e-payment
E-payment can streamline the payment processes for both the purchaser and supplier,
reducing costs and errors.
2.5 E-procurement and collaboration with major suppliers
E-procurement methods can also provide opportunities for achieving a competitive advantage through
collaboration with suppliers.
Effective collaboration with major suppliers involves the joint design of new materials and components, and
new product design. It can also include collaboration between a company and key suppliers for improving
efficiency in purchasing.
One method of improving purchasing efficiency is to exchange information directly between the computer
system of a company and its supplier. The electronic exchange of information with a supplier might simply
involve sending emails with documents attached.
Any of the following methods can be used for linking computer systems of a company and a supplier:
(i) Extranets
(ii) Electronic data interchange or EDI
(iii) supplier can be given direct access to a company’s intranet
3 Inventory management
3.1 Benefits of holding inventory
The objective of inventory control should be to manage the level of inventory so that the maximum net
benefit (benefits minus costs) is achieved.
The major benefits of holding inventory are as follows:
(i) Stock-outs are avoided, and sales will not be lost to competitors.
(ii) Production process is not disrupted due to a shortage of materials.
(iii) Inventories can be bought at a bulk purchase discount price.
(iv) Buying in large quantities reduces the number of orders from suppliers each year, and this will
reduce annual ordering costs.
(v) The risk of price increases is avoided in hyper-inflationary economies.
3.2 Costs of holding inventory
Holding inventory can be very costly.
(i) The annual cost of holding inventory can be measured as:
(ii) The cost of the average inventory levels × the annual cost of capital (%)
(iii) There are running expenses incurred in holding inventory, such as the warehousing costs
(warehouse rental, wages or salaries of warehouse staff).
(iv) Inventory often suffers loss through damage, deterioration, obsolescence and theft.
A distinction can be made between variable inventory holding costs (cost of capital, cost of losses through
deterioration and loss) and fixed inventory costs (wages and salaries, warehouse rental).
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3.3 Economic order quality (EOQ)

The Economic Order Quantity model (EOQ) is a mathematical model that can be used to calculate the
quantity of stock to order from a supplier each time that an order is made. The aim of the model is to identify
the order quantity for any item of stock that will minimise total annual stock costs.
Assumptions in the basic EOQ model
(i) There are no bulk purchase discounts for making orders in large sizes.
(ii) Annual demand for the stock item is constant throughout the year.
(iii) The order lead time is predictable, so that the delivery of a new order is always timed to
coincide with running out of stock.
(iv) As a result, there are never any stock-outs.
(v) The minimum stock level at any time is 0, and the maximum stock level is the size of the order
quantity.
The EOQ formula
The EOQ formula gives an order size, the economic order quantity or EOQ, that minimises the total
combined annual costs of:
(i) ordering the stock from the supplier, and
(ii) holding the stock.
Annual holding costs for an item of stock are the average stock multiplied by the holding cost per year for
one unit of the stock item.
3.4 Two bin system
When a two-bin system is used in a warehouse or stores department, each item of stock is stored in two
bins or large containers. Stock is taken from Bin 1 until it is empty, and a new order is placed sufficient to fill
Bin 1 again.
However, the delivery of more units of the item will take time, and since Bin 1 is empty, units are now taken
from Bin 2. Stock is now taken from Bin 2 until it is empty, and a new order is placed sufficient to fill Bin 2
again. By this time, Bin 1 should be full again, and units will then be taken from Bin 1.
This cycle continues indefinitely.
3.5 Periodic review system
In a periodic review system, there is a reorder quantity and a reorder level for each item of inventory.
Inventory levels are checked periodically, say every one, two, three or four weeks. If the inventory level for
any item has fallen below its reorder level, a new order for the reorder quantity is placed immediately.
3.6 ABC method of inventory control
With the ABC method of inventory control, it is recognised that some items of inventory cost much more
than others to hold. Inventory can perhaps be divided into three broad categories:
(i) Category A inventory items, for which inventory holding costs are high.
(ii) Category B inventory items, for which inventory holding costs are fairly high, but not as high as
for category A items.
(iii) Category C inventory items, for which inventory holding costs are low and insignificant.
The ABC approach to inventory control is to control each category of inventory differently, and apply the
closest control to those items in the most costly category A. For example:
(i) Category A items might be controlled by purchasing the EOQ as soon as the inventory level
falls to a set reorder level.
(ii) Category B items might be controlled by a periodic review system, with orders placed to
restore the inventory level to a maximum level.
(iii) Category C items might be purchased in large quantities, and controlled by means of a two-bin
system (perhaps with one bin much larger than the other.
4 Just-in-time (JIT) systems

4.1 JIT production and JIT purchasing
The principle of JIT is that producing items for inventory is wasteful, because inventory adds no value, and
holding inventory is therefore an expense for which there is no benefit.
It follows that in an ideal production system:
(i) there should be no inventory of finished goods: items should be produced just in time to meet
customer orders, and not before (just in time production)
(ii) there should be no inventories of purchased materials and components: purchases should be
delivered by external suppliers just in time for when they are needed in production (just in time
purchasing).
JIT has also been called ‘stockless production’ and ‘fast throughput manufacturing’.
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4.2 Practical implications of JIT

In practice, this means that:
(i) Production times must be very fast.
(ii) Production must be reliable
(iii) Deliveries from suppliers must be reliable
JIT therefore depends for its success of highly efficient and high-quality production, and efficient and
reliable supply arrangements with key suppliers.
Flexibility in production: The production system must be flexible, so that it can be switched immediately to
making products that are ordered by customers, as soon as the order is received.
Lower costs: Another aim of JIT is to reduce costs. Costs can be reduced by:
(i) eliminating waste in production
(ii) speeding up production times and
(iii) reducing inventory levels to zero.
4.3 Eliminating waste
Waste is any activity that does not add value.
(i) Over-production.
(ii) Waiting time.
(iii) Transport (movement of materials).
(iv) Waste in the process.
(v) Inventory.
(vi) Motion.
(vii) Defective goods are ‘quality waste’.
4.4 JIT techniques
(i) The layout of the factory floor should be designed in a way that minimises waste of
transportation and waste of motion.
(ii) Reducing Set-up Time: ‘Set-up’ activities are the activities that have to be carried out to get
ready for the next job
(iii) Total productive maintenance (TPM): The aim of Total Productive Maintenance is to prevent
breakdowns in equipment that cause an unscheduled hold-up in production, by improving
maintenance systems.
(iv) ‘Kanban’ systems and visibility in the work place: In a JIT system, ‘kanban’ cards might be
used as a signalling system. These are signals – similar to flags – that send messages to other
parts of the production system.
4.5 JIT in service operations
JIT can be applied to service operations. In particular, JIT regards queuing as wasteful, because it wastes
the time of the individuals waiting in the queue.
It might also be expensive to provide a system for holding customers in a queue (such as a system for
making people wait in a telephone answering system).
4.6 Problems with JIT
There might be several problems with using JIT in practice.
(i) Zero inventories cannot be achieved in some industries, where customer demand cannot be
predicted with certainty and the production cycle is quite long. In these situations, it is
necessary to hold some inventories of finished goods.
(ii) It might be difficult to arrange a reliable supply system with key suppliers.
4.7 Information requirements and JIT
In a JIT production and purchasing system, managers have information requirements that are different from
those of managers in traditional manufacturing systems. In particular:
(i) When inventory levels are small and insignificant, inventory costs are immaterial.
(ii) Managers need information about bottlenecks in production that create delays for just-in-time
production.
(iii) If employees are ‘empowered’ to take more decisions themselves, the information system must
be capable of providing these employees – probably through an on-line and on-demand
information system – with the information they need to take decisions about their work.
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5 Production management systems

5.1 Materials requirements planning (MRP I)
Materials requirements planning or MRP I is a computer system for scheduling production in a complex
manufacturing environment where:
(i) many raw materials and components are purchased from external suppliers
(ii) the raw materials and components are used to manufacture sub assemblies
(iii) the sub-assemblies are assembled, possibly with other components and sub-assemblies
purchased from external suppliers, into a finished product.
The purpose of an MRP I system is to plan purchasing and production scheduling exactly, so that:
(i) all the raw materials and components are purchased and available in time to manufacture the
sub-assemblies or finished products, and
(ii) the finished products are manufactured on time to a planned production schedule.
The MRP I system therefore produces a detailed schedule of external purchases and internal production
activities.
Benefits of MRP I systems
MRP I systems have provided several benefits to manufacturing companies.
(i) The MPS and MRP can be amended quickly when sales estimates change. This is because
the system is computerised.
(ii) An MRP I system gives early warning of possible problems with production due to capacity
limitations, or problems with purchasing due to delays in supply times.
(iii) MRP I systems can be used with JIT (just-in-time purchasing and just-intime production).
Limitation of MRP I
MRP I is not appropriate when sales demand is difficult to estimate accurately in advance. When future
sales cannot be estimated accurately, a MRP I production schedule based on the sales estimates is likely to
result in production of the wrong products at the wrong time.
5.2 Manufacturing resource planning (MRP II)
Manufacturing resource systems (MRP II systems) are an extension of MRP I, and an MRP I production
scheduling system is a central feature of MRP II.
MRP II systems extend MRP I systems by adding other planning processes, such as:
(i) financial requirements planning
(ii) labour scheduling
(iii) equipment utilisation scheduling
MRP II has been defined as ‘a game plan for planning and monitoring all the resources of a manufacturing
company: manufacturing, marketing, finance and engineering’ (Wight).
5.3 Optimised production technology (OPT)
Optimised production technology or OPT is a computer system that provides a different approach to
production planning and capacity management.
To increase throughput and optimise production, management should identify the key constraint and find
ways of removing it. When the key constraint is removed, another constraint will become the key constraint
that now restricts output capacity in the system.
To optimise production, management should continually identify and remove constraints in order to raise
output capacity.
Concepts in OPT
(i) A bottleneck or key constraint limits production capacity for the entire production system.
(ii) Losing time in a bottleneck activity means time lost – and output lost – for the entire production
system.
(iii) Saving time in a non-bottleneck activity is a wasted effort, because it has no effect on output.
(iv) There is no reason to produce items faster than a bottleneck activity can use it.
(v) Inventories are wasteful and expensive. They add no value.
(vi) The process batch sizes should be variable, to optimise throughput, and should not be a fixed
or standard size.
5.4 Enterprise resource planning (ERP)
An ERP system performs similar functions to an MRP II system, but in addition it integrates data from all
operations within the organisation. This should improve the co-ordination and integration of planning and
control decisions throughout the organisation.
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An ERP system might provide an integrated database for:

(i) manufacturing (v) sales and marketing
(ii) purchasing (vi) logistics (distribution activities)
(iii) finance and accounting (vii) customer services
(iv) human resource management (viii) strategic reporting.
6 Quality management
6.1 The importance of quality
(i) An essential part of meeting customer needs is to provide the quality that customers require.
(ii) Quality is an important aspect of product design and marketing.
(iii) Quality is also important in the control of production processes.
(iv) Poor quality in production will result in losses due to rejected items and wastage rates, sales
returns by customers, repairing products sold to customers
6.2 Quality-related costs
The CIMA’s Official Terminology defines quality-related costs as: ‘the expenditure incurred in defect
prevention and appraisal activities and the losses due to internal and external failure of a product or service,
through failure to meet agreed specification’.
An organisation must incur costs to deal with quality.
(i) It might incur costs to prevent poor quality, or detect poor quality items when they occur.
(ii) It might incur costs in correcting the problem when poor quality does occur.
Quality costs can be classified as:
(i)
Prevention costs are the costs of action to prevent defects (or reduce the number of defects).
They are costs incurred to prevent a quality problem from arising. Prevention costs include:
(a) designing products and services with in-built quality
(b) designing production processes of a high quality
(c) training employees to do their jobs to a high standard.
(ii) Appraisal costs are the costs of checking the quality of work that has been done. Appraisal
costs include inspection and testing costs.
(iii) Internal failure costs are costs incurred when defective production occurs. They include:
(a) the cost of scrapped items
(b) the cost of re-working items to bring them to the required quality standard
(c) the cost of production time lost due to failures and defects.
(iv) External failure costs are costs incurred when the quality problem arises after the goods have
been delivered to the customer. They include the costs of:
(a) dealing with customers’ complaints
(b) the costs of carrying out repair work under a guarantee or warranty
(c) the costs of recalling all items from customers in order to correct a design fault
(d) legal costs, when a customer takes the organisation to court
(e) the cost of lost reputation
6.3 Managing quality-related costs
An organisation should spend more money on prevention and detection costs, if this reduces internal and
external failure costs by a larger amount. On the other hand, there is no reason to spend more on
preventing poor quality if the benefits do not justify the extra cost.
The TQM view is that it is impossible to identify and measure all quality costs. In particular, it is impossible
to measure the costs of lost reputation, which will lead to a decline in sales over time. The aim should
therefore always to be to work towards zero defects. To achieve zero defects, it will be necessary to spend
more money on prevention costs.
The TQM approach to quality costs is to ‘get things right the first time’.
6.4 Total Quality Management (TQM)
‘the continuous improvement in quality, productivity and effectiveness obtained by establishing

management responsibility for processes as well as outputs. In this, every process has an identified
process owner and every person in an entity operates within a process and contributes to its improvement’.
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TQM has several different aspects, including:

(i) statistical quality control systems and
(ii) a ‘zero defects’ policy – similar to the approach in JIT
(iii) continuous improvement
(iv) quality circles.
Continuous improvement (kaizen)
TQM applies the concept of continuous improvement (or ‘kaizen’).
The ISO 9004 international quality standard describes continuous improvement as an eight-step method:
(i) Involve the entire organisation
(ii) Initiate quality improvement projects or activities
(iii) Investigate possible causes of quality problems
(iv) Establish cause-and-effect relationships
(v) Take preventative or corrective action to improve quality
(vi) Confirm the improvement
(vii) Sustain the gains
(viii) Continue the improvement.
Quality circles
A quality circle is a small group of employees, usually five to eight people, who meet regularly to discuss
work-related problems and possible solutions to them. The main focus for discussion is on the quality of
processes and work systems.
Potential benefits from TQM
(i) Formally establishing a TQM system will establish the importance of ‘quality’ in a way that all
employees and managers should recognise.
(ii) The commitment to quality should also establish ‘customer satisfaction’ as a prime business
objective.
(iii) A successful introduction of a TQM approach should result in continuous improvements in all
processes and operations.
However, the successful application of TQM will depend on the provision of relevant and useful quality-
related information, and in particular information about quality-related costs.
6.5 TQM and JIT compared
Many of the concepts applied by total quality management are similar to those in a just-in-time management
philosophy.
(i) The aim in both should be to have zero inventory. Raw materials should be delivered from
suppliers only when they are needed, and items should be produced only when they are
required for sale to a customer.
(ii) A ‘pull system’ should therefore operate, with items being manufactured only when they are
required by customers.
(iii) The aim should be to create a uniform factory load and continual rate of production, so that the
speed of manufacture matches the rate of customer demand.
(iv) The key aim should be to provide a level of quality that satisfies customers and meets their
needs.
(v) Set-up times between jobs should be minimised, because setting up does not add value.
(vi) There should be a focus on simplification of products and processes, in order to maximise the
utilisation of available resources.
(vii) Successful implementation of both TQM and JIT requires a flexible work force.
Page 10 of 10
Business Management and Strategy (BMS): Chapter Summary Chapter No. 10: I.T. Strategy
CHAPTER NO. 10
IT STRATEGY
1 IT strategy
1.1 Information systems (IS)
All organisations process and use information.
(i) Basic transactions must be recorded and processed
(ii) Management also use information to plan and make decisions.
The main types of information system in organisations include:
(i) Transaction processing systems: These are systems for processing routine transactions,
such as bookkeeping systems and sales order processing systems.
(ii) Management information systems: The purpose of a management information system (MIS)
is to provide management with the information they need for planning and controlling
operations.
(iii) Decision support systems: A decision support system (DSS) is used by managers to help
them to make decisions of a more complex or ‘unstructured’ nature, Such as forecasting
models, statistical analysis models and linear programming models.
(iv) Executive information systems: An executive information system (EIS) is an information
system for senior executives. It gives an executive access to key data at any time, from
sources both inside and outside the organisation. The purpose of an EIS is to improve senior
management’s decision-making by providing continual access to up-to-date information.
(v) Expert systems: An expert system is a system that is able to provide information, advice and
recommendations on matters related to a specific area of expertise.
1.2 IS systems as strategic support
IS systems provide strategic support within an organisation
(i) the quality of decision making depends on the quality of information to management.
(ii) assist the entity in achieving its long-term strategies.
(iii) helps in making better-informed (and faster) decisions.
(iv) If an entity has inadequate IS systems, it will almost certainly be at a serious competitive
disadvantage.
1.3 Information technology (IT)
Information technology consists of both computer technology and communications technology.
(i) IT developments have resulted in many new products and improvements in many existing
products
(ii) IT developments have also radically altered methods of communication, e.g, mobile
telephones and e-mail
(iii) The Internet has emerged as a major source of external and easily accessible information.
(iv) Internal databases are a major source of data
(v) Commercial transactions can be processed more quickly.
(vi) E-commerce transactions are processed through the Internet.
1.4 IT as strategic support
IT should be used constructively as a means of setting strategic targets and implementing product market
strategies.
1.5 Information and organisation structure
(i) Databases and intranet systems can make information accessible to any employee.
(ii) IT makes it possible for head office management to control an organisation centrally.
(iii) Information can be made immediately available to local managers and senior managers.
Changes in IS and IT systems have already affected the organisation of many entities.
(i) Many organisations have a ‘flatter’ management hierarchy, with fewer middle managers.
(ii) there are ‘virtual organisations’ consisting of individuals working on their own, often at home,
linked only by IS/IT systems.
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2 Principles of e-business
2.1 Definition of e-business
E-commerce can be described as: ‘all electronically mediated information exchanges between an
organisation and its external stakeholders. E-commerce is sell-side if it is between an organisation and its
customers and is buy-side if it is between an organisation and its suppliers’.
It is better to think of the communication networks for e-business as:
(i) The internet and corporate websites
(ii) Company intranets
(iii) Telecommunications networks, including mobile telephony
(iv) Interactive television (especially in consumer markets).
2.2 E-business and its implications for performance management
The objective of e-business is to increase the competitiveness and efficiency of an entity by using electronic
information exchanges to improve processes.
E-business opportunities can alter the strategic position of an entity, and provide different strategic choices.
(i) E-business can change the nature of the market place in which goods and services are bought
and sold.
(ii) E-business also changes the nature of the relationships with suppliers and customers.
2.3 The impact of the internet on business strategy and competition
Porter argued that the two main factors that determine the profitability of a business entity are the structure
of the industry in which it competes, and the ability of the entity to achieve a sustainable competitive
advantage.
The internet and industry structure
The impact of the internet on competition in many industries can be analysed within the framework of
Porter’s Five Forces model.
(i) Competitive rivalry with existing competitors: The internet encourages greater competition.
(ii) Threat of new entrants: In many industries, the barriers to entry have been lowered. By using
the internet, new competitors can enter the market more quickly and more cheaply.
(iii) Bargaining power of suppliers: Suppliers are able to use the internet to increase the number
of clients or customers for their products. As a result, the bargaining power of suppliers is likely
to increase.
(iv) Bargaining power of customers: The internet has increased the bargaining power of
customers substantially. Customers are able to obtain information about the rival products of
many different competitors
Individual firms and competitive advantage
Competitive advantage is achieved through operational effectiveness (reducing costs) and strategic
positioning (differentiation).
2.4 Main business and marketplace models for delivering e-business
E-business is based on the exchange of information in real-time, between entities and their suppliers,
customers and potential customers.
(i) Selling goods and services: ‘E-shopping’ is a term for consumers buying goods or services
by placing orders on a company’s website.
(ii) Providing electronic auctions: These are websites where customers can auction goods for
sale, and put in bids for auctioned items. eBay is perhaps the most well-known example.
(iii) New intermediary companies: a large number of intermediary companies have established
themselves in business. Their business is based on acting as agents for selling the (similar)
products or services of a large number of different companies, and attracting customers to their
website.
(iv) Alliances of suppliers: In some markets, businesses have created alliances with shared
websites for selling their products to customers over a wider geographical area. For example,
companies selling residential property (such as estate agents) can join with similar companies
in other regions and towns
(v) E-procurement
(vi) Advertising
(vii) Promotion: Opportunities are provided by the chance to send promotional messages by e-mail
to potential customers
(viii) Customer relationships: The internet provides opportunities for companies to build customer
relationships, for example by providing support, user forums and FAQ pages.
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2.5 E-commerce and the globalisation of business

E-commerce has been a major factor in the globalisation of business.
(i) The internet and e-mail in particular have made it much easier for suppliers to make contact
with customers in geographically-distant countries.
(ii) The internet and e-mail have also made it easier for customers to search for suppliers in other
countries of the world.
(iii) Suppliers and customers can communicate with each other much more quickly and easily, in
spite of differences in time zones.
The implications of globalisation of markets
An important implication of the globalisation of markets is that the size of the market increases, but
competition is more international.
(i) international or global companies competing for market share in countries around the world.
(ii) Companies may need to become international or global in order to compete successfully
2.6 Barriers to e-business
The difficulties with e-business can include the following.
(i) Set-up costs.
(ii) Type of business
(iii) On-going operating costs.
(iv) Time to establish the system.
(v) No in-house skills.
3 Infrastructure
3.1 Layers of infrastructure
The infrastructure necessary to support a business is a combination of computer hardware, software, data
files and communication networks.
3.2 The internet
The internet is a network of computer networks.
A website is a presence on the internet. Each website is hosted on a computer which has permanent
access to the internet.
In a site which offers online ordering, it would be possible to link to the inventory database to show up-to-
date inventory balances. Linking to a database is done through a piece of software called middleware.
Unauthorised access to a user’s computer from the internet can be prevented by installing a piece of
software called a firewall.
3.3 Intranets and extranets
An intranet is the use of internet technology within one entity. For example, a company can set up its own
intranet, which allows its employees to exchange and share information with each other. Customer
information and product information are usually available on intranets, together with other shared data files,
newsletters, company procedures, and so on.
The benefits of an intranet are:
(i) Better communication within the organisation
(ii) Access to more information and better information within the organisation for senior
management
(iii) Internet access (access to external information on other websites) and email.
An extranet is a network in which the intranet of one company can connect with the intranet of another
company, usually a supplier or customer.
3.4 Designing a website for e-commerce
The design of a website is extremely important, for persuading customers to use the site and buy from it.
(i) The website must be easy to use.
(ii) Screens should also be visually attractive
(iii) Design features
(iv) The system must allow users to interact with it
(v) The website must be kept up to date.
(vi) the user’s attention is drawn to additional products that he or she might be interested in buying.
(vii) The website must be available ‘all the time’ to users
(viii) The system must integrate with the company’s other transaction processing systems
(ix) The system must be able to reassure users that it is secure.
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4 E-marketing
4.1 E-marketing and the 7Ps of the marketing mix
E-marketing is marketing using electronic technology, particularly the internet.
(i) Product: Some products sold on the internet can be customised so that they are constructed
to the customer’s specifications.
(ii) Price: This is more transparent on the internet and users can often compare prices easily.
(iii) Place: Some goods, such as music, video and software can be delivered over the internet.
(iv) Promotion: Websites and e-mail are new ways of advertising goods and services.
(v) Physical evidence/environment: In terms of e-marketing, the design of a website is important
(vi) People: The internet does not involve ‘people’ in marketing
(vii) Processes: Buying goods or services by internet is a process, and the quality of this process
is another element in the marketing mix for ebusiness.
4.2 The 6Is of the e-marketing mix
(i) Interactivity: Traditional advertising media are ‘push media’, in the sense that the flow of
information is all one way, from the advertiser to the customers, and the advertiser is trying to
persuade the customers to buy its products.
A website is a pull medium. The internet can also be used to establish interactivity with
customers, and create a dialogue. Interactivity is a very powerful marketing device. Connection
with the customer helps to establish a long-term relationship, which companies can try to
benefit from.
(ii) Intelligence: The internet can be used as a relatively low-cost method of collecting market
research data and data about customers and other visitors to a website. This data can be
analysed to produce marketing information about what customers buy, and what information on
a website interests them most.
(iii) Individualisation: In traditional media the same message tends to be broadcast to everyone.
Communication via the internet can sometimes be tailored or ‘personalised’ to the individual.
(iv) Integration: The internet provides scope for integrated marketing communications
(a) The website can have a call-back facility built into it.
(b) The internet can be used to support the buying decision
(c) The internet can be used to support customer service
(v) Industry Restructuring: The internet can lead to a re-structuring of the industry supply chain.
Disintermediation is the removal of intermediaries such as distributors or agents e.g, a
company starts selling directly to end-consumers through its website
(vi) Independence of location: The internet introduces the possibility of increasing the impact of
an entity on a global market. Users of a website cannot easily tell from the website whether it is
owned by a small local company or a large multinational or global company. This gives small
companies opportunities to sell into global markets.
4.3 E-marketing: promotion strategy
The objectives of e-marketing with a website should be to:
(i) Get as many potential customers as possible to visit the website.
(ii) Keep visitors at the website long enough to make a marketing proposal to them.
(iii) Achieve a successful marketing outcome, so that the marketing process can continue.
Advertising: traditional media and the internet compared
(i) Advertising space:
TM: An expensive commodity
Internet: Cheap and virtually unlimited
(ii) Time consumed
TM: Expensive for the advertisers
Internet: Expensive for the internet users
(iii) Advertising image
TM: Creating an image is more important than the content of the advertising message
Internet: The content of the message is usually more important than creating an image.
(iv) Communication
TM: Push, one-way from advertiser to customers
Internet: Pull, drawing the customers to the website. Or interactive.
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(v) How are customers persuaded to act?

TM: Provide an incentive
Internet: Offer them information (and possibly incentives) Information is the main
currency of the internet.
Electronic marketing has become much more sophisticated in recent years, and we can expect more
changes in the future. The changes are happening for a combination of reasons.
(i) Individuals (customers and potential customers) are spending a substantial amount of their
time on the internet.
(ii) Many more people have started to make regular use of the internet
(iii) Individuals are also much more familiar with the internet
(iv) more information, ease of finding information, ease of use, a two-way ‘dialogue’ with the website
(v) Customers are increasingly using the internet as their first-choice method of finding suppliers.
4.4 E-mail marketing (direct mail and the internet)
Interactivity with the customer allows a company to build up a relationship with the customer through the
internet.
The great disadvantage of e-mail advertising is that since it is so cheap, many businesses – even very
small ones – can use it for direct mail, often to internet users who do not want to receive the mail.
Spam is unsolicited and unwanted e-mail.
Regulation of direct mailing by e-mail: The problem of unwanted e-mail advertising has already gone
beyond the point where legislation and regulation are required. Companies planning to use electronic direct
mailing need to be aware of what those regulations are and what must be done to comply with them.
4.5 E-branding
A brand image can be defined as a collection of perceptions in the mind of the consumer. (These
perceptions can be positive or negative.)
When an established company is planning to market its products by internet for the first time, it has to
consider what to do about its brand identity. There are four choices:
(i) Duplicate its existing brand identity online.
(ii) Extend the traditional brand by creating a slightly different version of the brand.
(iii) Partner with an existing e-brand.
(iv) Create a new brand for the web. The new brand name allows an entity to break free from the
perceptions associated with the old brand name.
5 Customer relationship management

5.1 Definition and scope of customer relationship management
The purpose of customer relationship management (CRM) is to help companies to understand better the
behaviour of their customers, and modify their marketing operations to service customers in the best way
possible. Its objectives are to:
(i) Find out more about the purchasing habits and preferences of customers
(ii) Profile the characteristics and needs of individuals customers and groups of customers more
effectively
(iii) Change the way the company operates, in order to improve its service to customers and the
marketing of its products.
5.2 CRM software solutions
A CRM software system is available as an off-the-shelf application package. This is the cheapest software
solution for companies, although off-the-shelf packages are not always ideally suited to the specific
requirements of the individual company.
The main functions of a CRM system are to:
(i) Collect information for identifying individual customers and categorising their behaviour.
(ii) Store the customer information and keep it up-to-date.
(iii) Access the information, often instantly, whenever it is needed.
(iv) Analyse customer behaviour.
(v) Use the analysis of customer behaviour to develop a more effective marketing strategy.
(vi) Provide customers with a better ‘experience’ when they contact the company.
(vii) Monitor key customer management performance indicators, such as the number of customer
complaints.
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6 IT control
6.1 Threats to systems security
Business organisations rely on IT systems to function. Some of the major risks to IT systems are as follows:
(i) Human error.
(ii) Technical error
(iii) Natural disasters
(iv) Sabotage/criminal damage
(v) Deliberate corruption
(vi) The loss of key personnel with specialist knowledge about a system.
(vii) The exposure of system data to unauthorised users.
In addition, there are risks within the computer software itself:
(i) The software might have been written with mistakes in it
(ii) The software should contain controls as a check against errors in processing
6.2 General controls and application controls
General controls are controls that are applied to all IT systems and in particular to the development,
security and use of computer programs.
Examples of general controls are:
(i) Physical security measures and controls
(ii) Physical protection against risks to the continuity of IT operations
(iii) General controls within the system software such as passwords, encryption software, and
software firewalls
(iv) General controls over the introduction and use of new versions of a computer program
(v) The application of IT Standards.
Application controls are specific controls that are unique to a particular IT system or IT application. They
include controls that are written into the computer software, such as data validation checks on data input.
6.3 General controls in IT
Physical access controls
Physical controls in an IT environment are the physical measures to protect the computer systems
Computer systems are vulnerable to physical disasters, such as fire and flooding.
Passwords
‘a sequence of characters that must be presented to a computer system before it will allow access to the
systems or parts of a system’
Passwords can also be placed on individual computer files, as well as systems and programs. To gain
access to a system, it may be necessary to input both a user name and a password for the user name.
Encryption
Encryption involves the coding of data into a form that is not understandable to the casual reader. Data can
be encrypted (converted into a coded language) using an encryption key in the software.
Preventing or detecting hackers
Controls to prevent or detect hacking include:
(i) Physical security measures to prevent unauthorised access to computer terminals
(ii) The use of passwords
(iii) The encryption of data
(iv) Audit trails
(v) Network logs
(vi) Firewalls.
Firewalls
The purpose of a firewall is to detect and prevent any attempt to gain unauthorised entry through the
Internet into a user’s computer or Intranet system.
A firewall:
(i) Will block suspicious messages from the Internet, and prevent them from entering the user’s
computer, and
(ii) May provide an on-screen report to the user whenever it has blocked a message, so that the
user is aware of the existence of the messages.
Firewalls are necessary for computers with Internet access because:
(i) They are continually exposed to corrupt messages and unauthorised access for as long as
they are connected to the Internet
(ii) The volume of ‘suspicious’ messages circulating the Internet is immense.
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Computer viruses
Viruses are computer software that is designed to deliberately corrupt computer systems. Viruses can be
introduced into a system on a file containing the virus.
Other methods of corrupting systems have also been developed such as:
(i) A Trojan horse is a type of virus that disguises itself often hidden within other software or files.
Whilst the user thinks that the system is carrying out one program, the Trojan horse secretly
carries on another.
(ii) Worm: This is corrupt data that replicates itself within the system, moving from one file or
program to another.
(iii) A trap door is an entry point to a system that bypasses normal controls to prevent
unauthorised entry.
(iv) Logic Bomb: This is a virus that is designed to start ‘working’ (corrupting the files or data
processing) when a certain event occurs.
(v) Time Bomb: This is a virus that is designed to start ‘working’ (corrupting the files or data
processing) on a certain date.
(vi) Denail of Service: Rendering the system unusable by legitimate users – for example by
overloading a website with millions of computer-generated queries
New viruses are being written continually. Some software producers specialise in providing anti-virus
software, which is updated regularly (perhaps every two weeks). This includes software for dealing with the
most recently-discovered viruses. Anti-virus software is able to:
(i) Detect known viruses in a file
(ii) Report the virus to the computer user
(iii) Isolate the virus so that it is not able to corrupt software or data in the computer.
There are a number of measures that might be taken to guard against computer viruses. These include the
following:
(i) The computer user should buy and install anti-virus software.
(ii) The computer user might restrict the use of floppy disks and re-writable CDs, because these
are a source of viruses.
(iii) Firewall software and hardware should be used to prevent unauthorised access from the Internet.
(iv) Staff should be encouraged to delete suspicious e-mails without opening any attachments.
(v) There should be procedures, communicated to all staff
(vi) When a virus is detected in the computer system, it may be necessary to shut the system down
until the virus has been eliminated.
IT Standards
A range of IT Standards have been issued. For example, the International Standards Organisation (ISO)
has issued IT security system standards. There are also IT Standards for the development and testing of
new IT systems. IT Standards are a form of general control within IT that help to reduce the risk of IT
system weaknesses and processing errors, for entities that apply the Standards.
6.4 Application controls in IT
Application controls are controls that are designed for a specific IT system.
Data validation checks are checks on specific items of data that are input to a computer system, to test the
logical ‘correctness’ of the data.
Application controls of this kind are unique to a particular IT system, but are a way of preventing errors from
entering the computer system for processing, and reporting errors so that they can be corrected.
6.5 Monitoring of controls
It is important within an internal control system that management routinely review and monitor the operation
of the control system to satisfy themselves that controls remain adequate, effective and appropriately
applied.
IT controls audit
Large organisations might employ an internal audit team which is then responsible for testing and assessing
systems of internal control including IT controls. The organisation could also employ IT auditors who
specialise in a particular IT system relevant to their business.
The steps involved in IT Control audits typically include the following:
(i) Firstly, the auditor must understand the risks faced by the systems.
(ii) Secondly, having understood the risks faced by the IT systems, the auditor would then
consider the design of the controls that have been put in place.
(iii) Finally, the auditor will then test the key controls to ensure they have been operating effectively.
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Exception reporting
IT control systems must incorporate exception reporting to ensure management are alerted to any control
failures. This might occur on a periodic (e.g. daily / weekly / monthly) or real-time basis.
Exception reporting should:
(i) describe control failures that occurred
(ii) describe the impact of the control failure
(iii) suggest the new control(s) that should be adopted
Effectiveness of IT control monitoring
The ultimate effectiveness of IT control monitoring is driven by the action taken by management to address
control failures when they occur.
6.6 COBIT (Control Objectives for Information and Related Technologies)
Introduction
COBIT is an IT governance tool that has been of tremendous benefits to IT professionals and has
contributed immensely to effective control of information systems. Linking information technology and
control practices, COBIT consolidates and harmonises standards from prominent global sources into a
critical resource for management control professionals and auditors. As such, COBIT represents an
authoritative, up-to-date control framework, a set of generally accepted control objectives and a
complementary product that enables the easy application of the Framework and Control Objectives,
referred to as the Audit Guidelines.
COBIT applies to enterprise-wide information systems, including personal computers, mini-computers,
mainframes and distributed processing environments. It is based on the philosophy that IT resources need
to be managed by a set of naturally grouped processes in order to provide the pertinent and reliable
information which an organisation needs to achieve its objectives.
COBIT has been developed as a generally applicable and accepted standard for good information
technology (IT) security and control practices that provides a reference framework for management, users
and information system audit as well as control and security practitioners.
The Purpose of COBIT
The purpose of COBIT is to provide management and business process owners with an information
technology (IT) governance model that helps in understanding and managing the risks associated with IT.
COBIT helps to bridge the gaps between business risks, control needs and technical issues. It is a control
model to meet the needs of IT governance and ensure the integrity of information and information system.
The Users of COBIT
COBIT is used by those who have the primary responsibilities for business processes and technology;
those who depend on technology for relevant and reliable information, as well as those providing quality,
reliability and control of information technology.
Application of COBIT in Business process
COBIT is business process oriented and therefore addresses itself in the first place to the owners of these
processes. Generic business model refers to core processes such as procurement, operations, marketing,
sales, etc., as well as support processes (human resources, administration, information technology). As a
consequence, COBIT is not applied only by the IT department, but also by the business as a whole.
COBIT components
COBIT, issued by the IT Governance Institute and now in its third edition, is increasingly internationally
accepted as good practice for control over information, IT and related risks. Its guidance enables an
enterprise to implement effective governance over the IT that is pervasive and intrinsic throughout the
enterprise. In particular, COBIT’s Management Guidelines component contains a framework which
responds to management’s need for control and measurability of IT by providing tools to assess and
measure the enterprise’s IT capability for the 34 COBIT IT processes. The tools include:
(i) Performance measurement elements (outcome measures and performance drivers for all IT
processes)
(ii) A list of critical success factors that provides succinct, non-technical best practices for each IT
process; and
(iii) Maturity models to assist in benchmarking and decision-making for capability improvements.
COBIT comprises six specific components:
(i) Management Guidelines
To ensure a successful enterprise, one has to effectively manage the union between business
processes and information systems. The Management Guidelines are composed of:
(a) Maturity models, to help determine the stages and expectation levels of control
and compare them against industry norms
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(b) Critical Success Factors, to identify the most important actions for achieving
control over the IT processes
(c) Key Goal Indicators, to define target levels of performance; and Key
Performance Indicators,
(ii) Executive Summary
Sound business decisions are based on timely, relevant and concise information. Specifically
designed for time pressed senior executives and managers, COBIT includes an executive
overview which provides thorough awareness and understanding of COBIT’s key concepts and
principles. Also included is a synopsis of the Framework providing a more detailed
understanding of the concepts and principles, while identifying COBIT’s four domains
(Planning & Organisation, Acquisition & Implementation, Delivery and Support, and Monitoring)
and 34 IT processes.
(iii) Framework
A successful organisation is built on a solid framework of data and information. The Framework
explains how IT processes deliver the information that the business requires to achieve its
objectives. This delivery is controlled through 34 high-level control objectives, one for each IT
process, contained in the four domains. The Framework identifies which of the seven
information criteria (effectiveness, efficiency, confidentiality, integrity, availability, compliance
and reliability), as well as which IT resources (people, applications, technology, facilities and
data) are important for the IT processes to fully support the business objective.
(iv) Control Objectives
The key to maintaining profitability in a technologically changing environment is how well
control is maintained. COBIT’s Control Objectives provide the critical insight needed to
delineate a clear policy and good practice for Information Technology controls. Included are the
statements of desired results or purposes to be achieved by implementing the specific and
detailed control objectives throughout the 34 Information Technology processes.
(v) Audit Guidelines
To achieve desired goals and objectives one has to constantly and consistently audit one’s
procedures. Audit Guidelines outline and suggest actual activities to be performed
corresponding to each of the 34 high level IT control objectives, while substantiating the risk of
control objectives not being met. Audit Guidelines are an invaluable tool for information system
auditors in providing management assurance and/ or advice for improvement.
(vi) Implementation Tool Set
Implementation Tool Set contains:
(a) Management Awareness and IT Control Diagnostics
(b) Implementation Guide FAQs;
(c) Case studies from organisations currently using COBIT; and
(d) Slide presentations that can be used to introduce COBIT into organisations.
The Tool Set is designed to facilitate the implementation of COBIT, relate lessons learned from
organisations that quickly and successfully applied COBIT in their work environments, and lead
management to ask about each COBIT process: Is this domain important for our business
objectives? Is it well performed? Who does it and who is accountable? Are the processes and
control formalised?
6.7 WebTrust
WebTrust is a seal of assurance attached to a Website to assure users of its integrity and safety.
WebTrust enables consumers and businesses to purchase goods and services over the Internet with the
confidence that vendors' web sites have historically met specific high standards for privacy, security,
business practices, transaction integrity and more.
Three principles are used to evaluate a site:
(i) Business and information privacy practices
(ii) Transaction integrity
(iii) Information protection
The WebTrust seal provides assurance of an unqualified report with respect to the above three objectives
for a particular website.
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Business Management and Strategy (BMS): Chapter Summary Chapter No. 11: Recruitment
CHAPTER NO. 11
RECRUITMENT
1 Human resource strategy
Human resources are a key resource. The success of a business entity depends on the skills and experience of its
human resources.
Human resources are mainly employees (full time, part time, home workers). These may be who provide
consultancy services or expert services, but are not employed by the entity or sub-contractors and other
organisations to which work is outsourced.
1.1 The objective of human resource strategy
A responsibility of the human resource management function is to:
(i) assess the quantity and quality of human resources currently available, including numbers and
skills
(ii) estimate the quantity and quality of human resources that will be needed in the future, including
numbers and skills
(iii) consider ways of ‘filling the gap’ and ensuring that the entity has the human resources that it
needs.
1.2 Human resource planning
A human resource plan consists of a forecast of the human resources that will be required at a given time in
the future, and plans for ensuring that the required numbers and skills will be available.
There are four main stages in the planning process:
(i) Studying the corporate objectives of the entity and the strategic objectives of each division
and department.
(ii) Demand forecasting: The required numbers and skills of human resources should be
estimated. Estimates of requirements should allow for any expected changes in technology,
including the introduction of laboursaving equipment.
(iii) Assessing current resources: An assessment should be made of the current human
resources, and what might happen to these existing resources each year over the forecast
period.
(iv) Preparing policies and plans: The final stage in the planning cycle is to develop policies and
plans to fill the gap between the required numbers and current forecasts of future human
resources.
These plans will include plans for:
(i) recruitment of new staff
(ii) training and development to improve skills
(iii) performance appraisal, to monitor and control the development of skills
(iv) promotion
(v) redundancies, where some employees will be surplus to requirements, and
(vi) re-training.
The plans should be realistic, and should therefore take into consideration environmental factors such as:
(i) changes in population trends,
(ii) changes in government policy
(iii) changes in the educational system
(iv) the availability of individuals who are trained in a particular skill or vocation
(v) changing patterns of employment
(vi) competition for human resources from competitors and other businesses
(vii) trends in sub-contracting and outsourcing
(viii) trends in IT and other technological changes
2 The recruitment and selection process

2.1 The importance of effective recruitment and selection
Without its employees, an organisation would not exist and could not operate. The efficiency and
effectiveness of an organisation depend on the skills and abilities of its employees.
Over time, changes occur in the work force.
(i) Some existing employees leave the organisation
(ii) Employees who have acquired enough skills and experience might be moved on to other jobs
(iii) The labour requirements of the organisation will change
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Changes in a work force must be properly managed, in order to make sure that the work force remains
efficient and effective.
2.2 Stages in the recruitment and selection process
Recruitment and selection are two stages in the process of filling job vacancies.
(i) Recruitment starts when a job vacancy is identified. It is the process of obtaining a supply of
suitable possible candidates to fill the vacancy.
(ii) Selection is the process of appointing the most suitable candidate to a job vacancy, by
choosing the best individual from the candidates available.
Recruitment is therefore concerned with quantity – getting candidates to apply for job vacancies – and
selection is concerned with quality – choosing the individual who seems the best for the job.
Stages and details are as follows::
Agree the vacancy to be filled
Recruitment Identify the skills needed for the job.
Obtain applicants for the job vacancy.
Select candidates for interview/short-listing.

Selection
Selection interview: offer the job to the selected candidate.
2.3 Roles and responsibilities in recruitment and selection
The roles and responsibilities for recruitment and selection are normally shared between:
(i) operational management (‘line’ management); and
(ii) staff ins the HR department (‘staff’ specialists).
Operational managers should be involved in the recruitment and selection process in several ways.
(i) They should report any vacancies arising in their department or section
(ii) They should identify individuals already working for them
(iii) They should be involved in specifying the nature of the job
(iv) They should normally be involved in the process of selecting individuals
HR ‘staff’ specialists should be involved in the recruitment and selection process in a larger organisation in
the following ways.
(i) They should be involved in HR planning
(ii) They should have specialist skills in recruitment and selection
(iii) Typically, they work with line management, taking on responsibility for ensuring that enough
candidates apply for vacancies.
In some cases, an organisation might use the services of an external recruitment agency (or firm of ‘head
hunters’) to identify potential candidates for job vacancies. e.g, NTS, FPSC, ISSB.
2.4 Recruitment and the HR plan
Large organisations may have a human resources plan for the organisation. This is a plan for:
(i) how many employees the organisation expects to have by the end of the planning period;
(ii) what types of job they will be doing;
(iii) how many employees the organisation has now; and
(iv) how many employees it expects to lose
(v) estimates of the number of job vacancies that are likely to be filled by internal promotion
2.5 Reasons for ineffective recruitment and selection
The recruitment and selection process might be ineffective for various reasons.
Poor recruitment
The reasons for a failure to attract a sufficient number of suitable applicants for a job may be any of the
following:
(i) The requirements of the job are not properly considered before the job is advertised
(ii) There is a failure to agree the minimum acceptable requirements for the job, only the ideal
requirements.
(iii) The job itself is not attractive enough, or the pay is too low, so that not many people apply for
the vacancy.
(iv) The job vacancies are advertised in an unsuitable way
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Poor selection
The reasons for poor selection could be any of the following.
(i) The application form for the vacancy is badly-designed
(ii) The selection techniques are inappropriate.
(iii) The individuals making the selection are not trained in selection, and do not have the
necessary skills to do the task well.
(iv) The effectiveness of the selection process is not monitored and reviewed regularly
3 Effective recruitment
3.1 A plan for the recruitment process
Recruitment should be properly planned. The main aspects of recruitment are as follows:
Job analysis
Job analysis is performed as part of human resources management which includes defining the scope of
jobs, writing job descriptions, holding performance appraisals, selecting and promoting staff, performing a
training needs assessment and as the basis for compensation and organisational planning.
The purpose of a job analysis is to:
(i) produce a detailed specification of the job (a ‘job description’); and
(ii) produce a specification of the qualities needed from the individual who will do the job (a
‘person specification’).
3.2 Advertising the vacancy
Jobs must be brought to the attention of individuals who might want to apply for them.
Internal and external recruitment
A job vacancy might be ‘advertised’:
(i) within the organisation (internally) to existing employees;
(ii) externally, to people outside the organisation; and
(iii) both internally and externally.
Both internal promotion and external recruitment have their advantages.
Internal promotion advantages
(i) Internal promotion can help to improve the morale and motivation of the work force.
(ii) Internal recruitment may be preferred over external recruitment in order to provide a career
development opportunity to existing employees.
(iii) Good employees might leave to find work somewhere else unless they are given promotion
opportunities.
(iv) The employer will know quite a lot about its existing employees – how they have performed at
work so far, and the nature of their strengths and weaknesses.
(v) Making appointments internally may therefore be less risky than an external appointment.
(vi) Existing employees will understand the culture of the organisation and how it operates.
(vii) The employees may already know the people they will be working with, if they are successful in
getting the job.
(viii) Internal promotion is an inexpensive method of recruitment – avoiding the costs of advertising
or recruitment consultants’ fees.
(ix) Internal recruitment may also be much quicker.
External recruitment advantages
(i) The organisation might not have employees with the skills required for the job.
(ii) External recruitment may be desirable to introduce ‘fresh thinking’ and new ideas into the
organisation.
(iii) Recruits from other organisations will bring their knowledge and experience of working
practices in those other organisations.
(iv) There may not be an existing employee who is the right person for the job.
(v) There might be more vacancies than there are candidates to fill them by internal promotion.
(vi) The vacancies may be for junior jobs that existing employees do not want to apply for.
3.3 Methods of advertising vacancies
The methods used to advertise job vacancies should depend on:
(i) whether the vacancies are advertised internally or externally; and
(ii) the nature of the job or jobs.
The aim should be to:
(i) select an effective method of advertising
(ii) avoid excessive spending
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The main methods are described briefly below.

Recruitment agencies
An organisation may inform an external recruitment agency of its job vacancies. The agency attracts
individuals looking for a job, and tries to match individuals ‘on its books’ with the job vacancies. Some
recruitment agencies (‘head hunters’) specialise in finding suitable external applicants for senior
management positions.
Media advertising
An organisation (or a recruitment agency) may advertise job vacancies in the media.
(i) A national newspaper may be used to advertise vacancies for managers, some professional
staff and some senior technical staff.
(ii) A local newspaper may be used to advertise jobs where only local people are expected to be
interested in applying.
(iii) Specialist journals and magazines are used to advertise job vacancies in particular industries.
(iv) Radio or television might be used to advertise job vacancies, but this is unusual – especially
TV advertising.
Media advertising or recruitment agency?
(i) Recruitment agencies usually operate on a ‘no win, no fee’ basis. An agency will charge a high
fee if it is successful.
(ii) Advertising is less expensive than using a recruitment agency, but only if it attracts applicants
and only if the job vacancy is then filled. If an advertisement is unsuccessful, the spending on
Other methods of recruiting
(i) The internet. Many organisations advertise job vacancies – both internally and externally – on
their own web site.
(ii) Facebook and LinkedIn are increasingly being used to advertise job vacancies.
(iii) An organisation may keep a list of individuals who have written in the past to ask for a job
Identifying candidates for internal recruitment and selection
When vacancies are filled by internal recruitment, the following methods may be used, individually or
together:
(i) Performance reports and appraisals of individuals
(ii) The ‘in-house’ or company magazine
(iii) The organisation’s website
(iv) Open-house (also called open-days) are commonly used in universities to attract fresh graduates.
3.4 Job application form
Applicants for a job are often asked to fill in a job application form. This is usually a standard application
form, used by an organisation for all its job vacancies.
An application form usually asks questions about the following.
(i) Personal details about the applicant – name, address, contact telephone number or e-mail
address, age.
(ii) Details of education and educational qualifications, or other formal qualifications (diplomas,
certificates and so on).
(iii) Details of the individual’s current job (possibly including details of the applicant’s current wage
or salary) and previous work experience
(iv) The applicant’s social and leisure interests and activities.
The purpose of a job application form
(i) It provides basic details about the applicant for a job
(ii) It gives the applicant for a job an opportunity to ‘sell’ himself or herself to the organisation.
(iii) The job application forms from all the applicants are compared, and the numbers invited for an
interview can be restricted to a manageable number.
(iv) The organisation is able to rankthem in order of preference for interview into:
(a) ‘probables’: candidates to invite for interview
(b) ‘possibles’: candidates to invite for interview only if the ‘probables’ decide not to
come for interview or if the ‘probables’ are interviewed and none of them are
found suitable
(c) ‘definitely not’ – individuals who are clearly unsuited for the job
The limitations of a job application form
(i) They usually contain only superficial information about the applicant.
(ii) The application forms cannot be used to identify the best candidate for the job.
(iii) Applicants might provide false information
(iv) It is impractical to check every application form for honesty.
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3.5 References
The preferred referees are typically:
(i) a former employer, senior manager or supervisor that the applicant has worked for in the past,
or the applicant’s current employer or boss, or
(ii) if the applicant has not had a job before, a senior teacher or course tutor who has taught the
individual, or
(iii) an eminent person who knows the applicant socially, such as a religious leader, a solicitor, a
doctor or an accountant.
A reference may provide useful information about the applicant, and may:
(i) confirm matters of fact that the applicant has stated in the application form and in the selection
interview
(ii) confirm impressions about the character of the individual and his or her suitability for the job.
The problem with references

(i) The main problem with references is that the referee may not give an honest opinion about the
individual.
(ii) There may also be a risk of legal action against the referee by the applicant, if the information
in the reference is unfair.
4 Job analysis
4.1 Definition and purpose of job analysis
‘the determination of the essential characteristics of a job in order to produce a job specification’ (British
Standards Institute).
Job analysis is ‘the process of collecting, analysing and setting out information about the content of jobs in
order to provide the basis for a job description and data for recruitment, training, job evaluation and
performance management. Job analysis concentrates on what job holders are expected to do.’
The purpose of job analysis
(i) preparing a job description and person specification for a job.
(ii) It is used for job evaluation. Job evaluation is the process of studying a job, and comparing one
job with other jobs, to decide what the job is ‘worth’ in terms of:
(a) salary or wage, and
(b) in a large organisation, ranking or grading.
(iii) By identifying the responsibilities for a particular job, it can help with organisation structure,
(iv) By identifying the specialised skills for a particular job, it can help management to plan a
training programme for the job holder.
(v) Job analysis can also be used when job content is reviewed.
4.2 Methods of job analysis
There are three main ways of obtaining this information, and all three methods might be used for the same
job analysis. These methods are:
(i) Observation: The analyst can observe the job holder at work over a period of time, and record
what the job holder does in that period.
(ii) Interviews: The analyst can ask questions about the job and what the job holder does, by
interviewing:
(a) the job holder, and
(b) the job holder’s boss.
(iii) Questionnaires: The job analyst might use questionnaires or checklists when conducting
interviews, to make sure that all the important questions are asked and nothing is forgotten
A systematic approach to job analysis might be carried out in four stages. These four stages apply where
the job is not currently vacant.
(i) Collect all the available documentation about the job and its content. Analyse this documentary
evidence.
(ii) Interview the manager (or managers) in charge about the job
(iii) Interview the job holder and ask the same questions about the job. Compare any differences of
perception between the manager and the job holder.
(iv) Observe the job holder doing the job.
The information gathered at all four stages of the process should then be analysed, and a job analysis
prepared.
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4.3 The information gathered for analysis

The information gathered during a job analysis exercise can be divided into eight categories:
(i) Purpose: The reason for the job or activity. The purpose of a job should be described within
the context of the organisation as a whole and its objectives.
(ii) Content: The tasks that the job holder is required to perform.
(iii) Accountability: What results or performance is the job holder responsible for, and to whom is
the job holder accountable?
(iv) Performance Criteria: What are the measurements of performance by which the job holder is
judged? What is used to assess whether the job holder is performing well or badly?
(v) Responsibility: What is the decision-making responsibility of the job holder? To what extent
are these decisions routine (‘programmed’) and to what extent does the job holder need to use
discretion or judgement?
(vi) Position in the organisation: Who does the job holder report to? Does the job holder have
line management responsibility, or is the job holder a staff adviser?
(vii) Career Development: What job development and career development opportunities are
available for the job holder?
(viii) Environmental factors: relate to the working conditions, such as working surroundings, hours
of work, health and safety issues, and so on.
4.4 The skills required for job analysis
A job analysis might be carried out by senior management, or the boss of the job holder.
The analyst must also be able to carry out the analysis, and apply the analysis to its specific purpose, such
as:
(i) preparing job description and person analysis for the job, or
(ii) evaluating the job, and deciding what level of wage or salary is appropriate
4.5 Justifying the use of job analysis
Job analysis is difficult to justify when …
(i) Job content is already well-defined
(ii) Job content within the organisation is continually changing
(iii) the cost of analysis might therefore be very high.
Job analysis may be justified when
(i) Creating job descriptions and person specifications will improve the quality of recruitment and
selection.
(ii) The organisation wishes to carry out a job evaluation exercise, to review wages and salaries
and job grades, or in order to re-design the content of some jobs.
5 Job descriptions and person specifications

5.1 Definitions
A job description is a formal description of a job, its purpose and scope, and the formal duties and
responsibilities of the jobholder.
A person specification is a formal statement of the personal qualities and characteristics of the type of
person who should be expected to do the job well.
5.2 Job descriptions
A job description is usually developed by conducting a job analysis and typically includes:
(i) the job title
(ii) the date the job description was prepared
(iii) the name of the department or section in which the job is located
(iv) the relationship of the job to other jobs in the organisation structure
(a) who is the ‘boss’ of the job holder?
(b) who, if anyone, are subordinates of the job holder?
(c) what is the relationship between the job and other jobs in the organisation?
(v) is the job a part of a team, and if so, what is the size of the team?
(vi) the purpose of the job, and the objectives of the job
(vii) the tasks associated with the job
(viii) the responsibilities associated with the job
(ix) limits to the job holder’s authority
(x) the accountability of the job holder
(xi) the salary range or wage range for the job
(xii) conditions of employment
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5.3 The purpose of a job description

A job description can be used for several purposes.
(i) job evaluation exercise
(ii) to make employee aware of the exact requirements of the job.
(iii) advertise a vacancy for the job
(iv) recruitment and selection of staff
5.4 Person specifications
A person specification is a formal statement of the personal qualities that the job holder should have in
order to do the job well. It is based on:
(i) the job description and
(ii) experience
The specification might include characteristics for the job holder such as qualifications, work experience,
age, physical characteristics, numerical or reading ability, an ability to communicate, an ability to get on well
with other people, and so on.
A person specification is used in recruitment and selection:
(i) to advertise a job vacancy
(ii) applicants can be judged on the basis of whether they seem to have the appropriate personal
qualities for the job.
Two different approaches to the design of person specifications are:
(i) the seven-point plan of Alec Rodger, and
(ii) the five-point plan of J Munro Fraser.
5.5 Rodger: seven-point plan
a framework for collecting and analysing information about a person’s individual strengths and weaknesses
at work.
The seven points or seven categories of personal qualities in Rodger’s model were as follows:
(i) Physical make-up: Does the applicant have an important physical defect? For some jobs,
height might be an important physical characteristic.
(ii) Attainments refer to the education, qualifications and work experience of the individual.
(iii) General intelligence: How much general intelligence does the individual have?
(iv) Special aptitudes: The individual may have some special aptitudes, such as:
a mathematical ability
manual dexterity
an ability with words or figures.
(v) Interests: The individual’s interests are included as a category of personal characteristic.
(vi) ‘Disposition’ refers to the way in which an individual thinks and behaves, particularly in
relation to other people.
(vii) ‘Circumstances’ refer to the domestic circumstances in which the individual lives.
Rodger suggested that the personal characteristics of job applicants should be matched with the personal
requirements for the job holder. He grouped the personal requirements for the job into five categories:
(i) intellectual requirements;
(ii) practical requirements;
(iii) physical activity requirements;
(iv) working with other people; and
(v) artistic requirements.
Limitations of Rodger’s seven-point plan
(i) It matches individuals with jobs on the basis of superficial information about the individual.
(ii) It matches individuals with jobs on the basis of assumptions about the qualities required to do a
job well, but these assumptions might be incorrect.
(iii) It ignores individual choice. It is important to consider the type of job that an individual wants to
do, not just the type of job that he or she seems well suited for.
5.6 Munro Fraser: five-point plan
This approach, which he called a Five Point Plan, was based on grading candidates for a job vacancy
according to five personal qualities.
(i) Impact on other people: This is the impact or effect that the individual has on other people.
(ii) Qualifications: These are the acquired knowledge and experience of the individual
(iii) Brains and abilities: The individual is also graded according to his or her abilities
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(iv) Motivation: The Individual is graded according to:

(a) his or her determination and motivation to pursue and achieve individual goals, and
(b) his or her success rate in achieving them
(v) ‘Adjustment’ refers to the emotional stability of the individual and his or her ability to get on
well with other people and to handle stress.
6 The changing nature of employment

6.1 Changing attitudes to work
In some countries, attitudes to work are changing.
For workers, a significant development has been the increasing reluctance of individuals to work full time for
large and formally-structured organisations.
(i) More people are choosing to work from their home.
(ii) They are seeking more job satisfaction, possibly through flexible working
(iii) In portfolio working, individuals do part-time work or contract work for a number of different
employers.
(iv) There may be an increase in downshifting, where individuals are prepared to sacrifice some
income
Attitudes of employers are also changing.
(i) Employers might expect new recruits to remain with them for only a short time,
(ii) There is a growing trend towards ‘flatter organisations’
(iii) As technology advances, employees must have relevant skills and education.
6.2 Charles Handy: the shamrock organisation
Charles Handy (in the Age of Unreason, 1989) identified changes in the nature of organisations and
employment, and predicted a movement towards ‘shamrock organisations’.
Handy used as a comparison a shamrock with three leaves, each leaf representing a different type of worker.
(i) Core full-time workers: an organisation needs a core of full-time professionals, technicians
and managers to deal with the general day-to-day running of operations. The core workers are
essential, because they have a detailed knowledge and understanding of the organisation, its
aims, objectives, policies and procedures.
(ii) Flexible workers: temporary and part-time workers: They do work for the employer when the
work is required, and are not paid at other times. They might be on permanent employment
contracts (as part-time employees) or on fixedterm contracts, so they are not independent of
the employer organisation.
(iii) Outsourcing: sub-contractors: consists of independent subcontractors or entities that provide
services on an outsourcing basis.
7 Selection methods
7.1 Alternative methods of selection
Selection is the process of identifying the best candidate to fill a job vacancy, from among all those who
have applied. selection may involve identifying several suitable candidates to fill a job vacancy and offering
the job to the ‘best’ of the suitable candidates.
7.2 Application forms
Applications forms can be used in the selection process:
(i) in the selection process as a ‘first screening’ to make an initial assessment of the applicants
and their suitability for the job; and
(ii) in selection interviews as a basis for asking further questions in the interview.
Letters of application
Instead of using application forms, an employer may ask applicants for a job to submit a letter of application,
written in the applicant’s own words. The purpose of asking the applicant to write his or her own application
letter (or a covering letter to an application form) is to obtain an insight into his or her character.
Advantages are:
Useful as a first screening process in selection, to eliminate applicants who are clearly unsuitable.
Weaknesses are:
The information provided on an application form is not enough (except perhaps for very junior or low-level
jobs) to make a selection decision.
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7.3 Interviews
A selection interview is a face-to-face interview at which the applicant is asked a number of questions, and
is assessed by the quality of his or her answers.
Face-to-face interviews can take different forms:
(i) One-on-one interview
(ii) Panel interview
(iii) Sequential interview
A stress interview is a type of face-to-face selection interview, where the interviewers deliberately put the
applicant under stress. Stress interviews may be used to interview applicants for a senior management
position.
Major disadvantage of stress interviews is that they might put off good applicants from wanting to take the
job even if they are offered it.
A problem-solving interview is another particular type of face-to-face interview. The applicant for the job
is given a hypothetical problem by the interviewer and asked to solve it.
A difficulty with this type of interview is that it may be difficult to assess and compare the answers of the
applicants, and decide which applicant has given the best answer.
Advantages are:
(i) Interviews give the employer an opportunity to see and listen to the applicants.
(ii) Reveal more about each applicant than testing can reveal.
(iii) It is unusual to offer a job of any importance to an applicant without first having an interview.
Weaknesses are:
(i) Not all interviewers have the skills to conduct a good interview.
(ii) Some individuals are good ‘professional interviewees’, who can perform well in interviews (they
can ‘talk the talk’) but they cannot actually perform well in a job.
(iii) Interviewers might be biased
7.4 Tests
The purpose of tests is to learn something about the applicants for the job. The type of test that is used
depends on the type of information the employer is looking for.
There are four main types of selection test:
Intelligence Test: These are tests (such as a general IQ test) to establish the general level of intelligence
of the job applicants. They may also test the problem-solving skills of the job applicants, and their speed of
thought. Candidates are usually required to complete the test, or as many questions in the test as possible,
within a limited amount of time.
Aptitude Test: These are tests designed to establish a particular aptitude or ability of the job applicants.
Competence Tests: A test of competence is a test to establish whether the candidate has reached a
certain level of competence in a specific area. It tests what the candidates have learned in the past.
Personality Tests or Psychometric Tests: These are tests designed to analyse personality and character.
The purpose of a personality test is to identify candidates who have suitable personality characteristics for
the job.
Advantages are:
(i) Tests are precise and can be used to obtain measurable or quantifiable information about job
applicants.
(ii) Tests can be administered to applicants in groups, and so the testing process is quicker than
interviews.
Weaknesses are:
(i) It is not clear that the test results will show which candidates are best suited to the job.
(ii) A clear link between good test results and ability in the job has not been clearly proved.
(iii) It is often impossible to exclude bias entirely from the testing process. Some types of individual
perform better than others in particular types of test.
(iv) It might be possible for candidates to improve their test scores by coaching and practice before
the formal test.
(v) Test conditions are artificial, and might not give candidates an opportunity to demonstrate their
ability in an actual working environment.
(vi) Candidates might guess the correct answer to some questions.
(vii) The results of tests often need experts to interpret their meaning.
(viii) Tests can also be expensive to administer.
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7.5 Group selection methods

Group selection is an alternative method of selection that can be used either:
(i) instead of individual interviews and testing, or
(ii) in addition to individual interviews and testing.
In a group selection process, a number of people from the organisation observe a number of applicants for
a job as they go through a series of specially-designed activities. The activities may include role play, where
each applicant is required to perform a particular role in a work-related scenario.
Advantages are:
(i) They provide the employer with an opportunity to compare the candidates directly.
(ii) They can be used to study the candidates in work-related scenarios.
Weaknesses are:
(i) They are expensive to administer and time-consuming.
(ii) These are generally only appropriate when the employer is trying to fill several similar and
senior vacancies.
8 The selection decision

8.1 Involvement in the selection decision
The selection decision is made by either:
(i) the manager with authority over the job where the vacancy exists
(ii) staff in the human relations (HR) department
(iii) a committee of individuals, possibly a mixture of line management and HR staff experts.
There are no rules about who should make the selection decision, but as a general guide:
(i) low-level job: the selection decision will be taken by a manager with direct authority over the job.
(ii) If the vacancy is for a job where the successful candidate will have good career development
prospects, the HR department should be involved in the selection decision.
(iii) External experts, such as recruitment consultants or a ‘head hunting’ agency, might offer
advice on selection. However, the actual decision should be taken by the organisation’s own
8.2 The importance of good selection
Good selection decisions improve the quality of employees within the organisation.
(i) The individuals offered employment are not the best people available.
(ii) The capabilities of the organisation will be less than if better people had been selected.
(iii) The individuals given the jobs might be disappointed with the work, which does not live up to
the expectations they were given during their interview.
(iv) The individuals who are selected either perform badly or are disappointed with their job, labour
turnover might be high.
(v) It might become necessary to dismiss some employees for incompetence.
(vi) Poor selection decisions could affect the long-term human resources plan of the organisation
(vii) Difficulties with selection might take up significant amounts of senior management time and
attention.
8.3 The offer of employment
The selection process ends with an offer of employment and acceptance of the offer by the chosen
applicant.
If the candidate at the top of the list refuses the job, the next person on the list can be made an offer, and so
on until someone in the list accepts the offer of the job.
Employment legislation might require that the new employee should be given a formal written contract of
employment.
In addition to offering the job to the successful applicant, the employer should also contact the unsuccessful
applicants, usually in writing. The unsuccessful applicants should be thanked for their interest in the job, and
for their application.
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Business Management and Strategy (BMS): Chapter Summary Chapter No. 12: Training and Development
CHAPTER NO. 12
TRAINING AND DEVELOPMENT
1 Learning in the workplace
1.1 The process of learning
Organisations benefit from individuals learning as people become more efficient and more effective as they
learn.
The learning curve: According to learning curve theory, when an individual begins a new task, he or she will
do the job more quickly with each repetition of the task. Eventually the learning process comes to an end
when the individual will be completely familiar with the work.
Learning through training and development
Well-motivated individuals also learn through training and development.
A well-designed programme of training and development will:
(i) give employees the knowledge, ability or insight that they need to do their work better, and
(ii) in a way that is the most effective.
1.2 Learning styles: Honey and Mumford
Honey and Mumford argued that each individual has a preference for a particular style of learning. They
therefore suggested that:
(i) individuals need to understand what their ‘natural’ learning style is, and
(ii) they should seek opportunities to learn in that style.
The four learning styles in the Honey and Mumford model are:
Theorist: This individual likes to understand the theory that supports the practice. Theorists learn with facts,
concepts and models.
Theorists learn best when:
(i) they are put into complex situations where they have to use their skills and knowledge; and
(ii) they have an opportunity to look at the ideas involved in a problem.
Theorists do not learn well when they are required to:
(i) participate in situations where emotions and feelings are important;
(ii) take part in an unstructured activity; and
(iii) do things without knowing the concepts or principles involved.
Theorist training models are: Statistics background information
Reflector: This individual learns by observing and thinking about what he has seen. Reflectors prefer to
avoid ‘jumping in’ to a task, and prefer to watch from the side-lines.
Reflectors learn best when:
(i) they can watch others at work;
(ii) when they are not given tight deadlines for writing reports; and
(iii) when they have time to think and reflect.
Reflectors do not like learning when:
(i) they are given tasks to do and complete without time to plan or think; and
(ii) in a training situation, they are asked to act as the leader or to play a role in front of others.
Reflector training models are: One-to-one discussion interview, Observing activities, Feedback from others
coaching, Taking time out to think.
Activist: This individual learns by doing and acting. Activists like to ‘get their hands dirty’.
Activists learn best when:
(i) they are involved in new experiences and opportunities;
(ii) they work with others in team tasks: in a training situation, they enjoy role play;
(iii) they are ‘thrown in at the deep end’ and are expected to get on with a task; and
(iv) they are leading discussions or chairing meetings.
Activists do not learn well when they are required to:
(i) listen to lectures and long explanations;
(ii) read, write and think on their own; and
(iii) follow precise instructions about what to do.
Activist training models are: Group discussion, Case studies, Brainstorming, Role play, Puzzles,
Competitions.
Pragmatist: This individual likes to see how theory is put into practice in the ‘real world’. Pragmatists find
abstract theories and concepts of no use unless they can see their relevance to practical action
Pragmatists learn best when:
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(i) they have an opportunity to apply ideas and techniques in practice, and are then given
feedback on how well they have done; and
(ii) there is a model that they admire and can copy (such as a boss who acts as a ‘role model’).
Pragmatists do not learn well when:
(i) there is no obvious immediate purpose to what they are learning, and so no immediate benefit;
(ii) the learning is ‘all theory’; and
(iii) there are no practical aspects or practical guidelines in the learning.
Pragmatist training models are: Case studies, Problem solving.
1.3 Barriers to learning
Within an organisation, employees often fail to achieve their full potential. The barriers to learning within an
organisation can be analysed into three categories:
Barriers to learning: the motivation of the individual
(i) A heavy work load.
(ii) Low morale
(iii) Lack of interest
(iv) Lack of support and encouragement
(v) Under-achievement at school
(vi) Family commitments
Barriers to learning: the organisation
(i) The organisation might be unwilling to give employees time off work for training.
(ii) It might not commit enough resources (money and employees’ time) to training.
(iii) It might be unwilling to give employees money for external training.
(iv) There might be no plans for employee development
(v) Supervisors and managers might show no interest in staff development
(vi) There might be no appraisal system, or the system of appraisal might be ineffective.
Barriers to learning: the training itself
(i) Training rooms might be over-crowded or uncomfortable
(ii) Training programmes might be badly designed
(iii) The training methods might not be well-suited to the learning style of the trainees.
(iv) The quality of the trainers might be poor
(v) The quality of the training materials might be poor.
there are three fundamental problems that create barriers in the learning process:
(i) The learning programme tries to teach individuals without using the object that the training is all
about.
(ii) the trainee has not mastered the basic skills before going on to learn more complex and
difficult items.
(iii) Training materials are badly written, and the reader does not understand (or misunderstands)
important words.
1.4 Organisation development
“Organisation development is the planned and systematic approach to enabling sustained organisation
performance through the involvement of its people.”
The Australian Human Resources Institutes describes the benefits of OD as:
(i) empowering leaders and individual employees
(ii) creating a culture of continuous improvement and alignment around shared goals
(iii) making change easier and faster
(iv) putting the minds of all employees to work
(v) enhancing the quality and speed of decisions
(vi) making conflict constructive instead of destructive
(vii) sharing of new ideas
(viii) giving leaders more control over results, by giving employees more control over how they do
their jobs.
In practice, OD typically involves:
(i) Team-building (ii) Career development
(iii) Training and e-Learning (iv) Innovation
(v) Talent management (vi) Change management
(vii) Organisational assessments (viii) Coaching and leadership development
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2 The role of training and development

2.1 Definitions: education, training and development
Training is a planned process with the goal of improving knowledge or skill, or to amend attitudes or
behaviour through learning experiences.
Common types of training include:
(i) Technical or technology training
(ii) Quality training – this involves ensuring employees understand the quality levels necessary in
their job. Controls include ISO models.
(iii) Skills training – this goes beyond pure technical or technology training in that it provides
employees with a broad range of skills necessary to perform their job.
(iv) Health and safety training – this is aimed at maintaining healthy employee wellbeing and
protecting employees from work-related injuries.
Education is the process of facilitating learning. Education differs from training in that it is not just related to
a work environment and improving performance at work.
Development is achieved through gaining experience and therefore developing a career. Individuals learn
and develop through experience in different work situations.
2.2 Benefits of training and development
Benefits for the employer
(i) Training and development creates a more talented and skilled work force leading to:
(a) higher productivity, therefore lower costs of output;
(b) less waste;
(c) better performance by employees in their jobs; therefore higher standards of
achievement;
(d) less need for close supervision of subordinates by their managers; and
(e) an ability to compete more effectively with business rivals.
(ii) Improve their morale, and increase their commitment to the organisation.
(iii) Easier to attract external applicants for job vacancies.
Benefits for the employee
(i) improves the motivation of the individual and gives them a sense of being more valuable.
(ii) Career development increases job satisfaction.
(iii) improve the individual’s prospects for promotion and higher pay.
2.3 Role of the training manager
The role of the training manager is to plan, implement, monitor and control the training and development
process.
(i) Identify the training needs of the organisation.
(ii) Identify the objectives of training for the employer
(iii) Plan training programmes
(iv) Implement the training programmes
(v) Monitor the implementation of the training programmes
(vi) Evaluate the benefits of the training
(vii) validation of the training.
(viii) Consider methods of improving the training.
3 Training needs
3.1 The training and development process
The process from identifying needs to delivering training is made up of four key stages.
(i) Identify Needs
(a) The training needs are analysed and identified by assessing the organisations
training gap.
(b) The target audiences for the trainings are defined.
(ii) Set objectives: The objectives are identified; this means that the aims of the training and what
is meant to be achieved are outlined.
(iii) Design programme: The training programme is designed. This includes:
(a) The content of the training
(b) Delivery method (e.g. classroom / webinar)
(c) Who will deliver the training
(d) Delivery logistics (e.g. classroom booking)
(e) Decision on the training styles and approaches to be used
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(iv) Deliver training: The training is delivered by the trainer to the trainees.
(v) Review and evaluate training: The training is evaluated and reviewed to check whether it has
been successful and achieved its objectives.
3.2 Analysing training needs: the training gap
A responsibility of the training manager (or human relations manager) is to analyse training needs. This
analysis of training needs should be linked to the human resources plan for the organisation, which provides
a forecast of the numbers of employees the organisation expects to have through the planning period, and
the types of job that they will be doing.
The training gap: Training needs can be estimated by comparing:
(i) the skills, knowledge and abilities that the organisation will require from employees in all its
jobs, with
(ii) the skills, knowledge and abilities that the organisation’s employees will have if there is no
training, and allowing for:
(a) the promotion of some employees to more senior positions
(b) movements of employees between jobs in the organisation
(c) staff turnover, as existing employees resign or retire and are replaced
(d) changes in the job structure and total employee numbers
(e) recruiting employees from outside the organisation, who already have the
required skills and abilities.
The training gap is the difference between the skills that the work force will have if there is no training and
the skills that the organisation expects that it will need.
A responsibility of the training manager is to plan how to eliminate the gap. The training gap therefore
identifies the training needs of an organisation. The training needs are detailed in the training needs
analysis document, which details all the information that has been gathered.
3.3 Meeting training needs
Top-down planning
Top-down planning involves the training manager and training department planning training programmes,
with the intention that all employees in each category of employees should go through a particular training
programme.
Bottom-up applications for training
Employees may be encouraged to apply for training.
(i) The need for training might be identified from the appraisal process.
(ii) Individuals might be responsible for their own personal development plan. This should identify
gaps in their development that might be filled by training.
(iii) Alternatively, the training manager may notify employees and their managers about training
programmes that will be available, and invite applications from individuals to attend any of the
programmes.
4 Methods of training and development

4.1 Methods of training
Methods of training can be grouped into the following categories:
(i) Formal training in a training room environment:
(a) ‘in house’, where all the trainees are from the same organisation.
(b) external’, where the training is provided by an external trainer or training firm,
e.g, lectures and talks, group discussions, training films, case studios, Role-play activities,
interpersonal skills, business games, Film delegates, Presentation skills, Selling skills.
(ii) Computer-based training (CBT) where trainees work at their own pace from a computer
training package.
(iii) Training in the work place: Training in the work place is a method of development of
individuals, as well as a method of training. Work place training is training in technical or
practical skills
(iv)
Induction: In-house training may be provided by the organisation’s own trainers and experts.
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4.2 Methods of development

Development improves the skills, knowledge and abilities of an individual through experience in working.
(i) Job rotation means moving an individual from one job to another at fairly regular intervals, so
that the individual gains familiarity with the work done in each job.
(ii) Secondment: An individual might be ‘seconded’ to work somewhere else for a period of time.
Secondments are periods of time spent away from the normal working environment, in another
department or as part of a project team.
(iii) Deputising for a manager or supervisor: An individual may be given the opportunity to
deputise for his or her boss when the boss is absent from work for an extended period, on
holiday or due to illness. The individual gains experience by doing the job of the boss for a
period of time.
(iv) Delegation: A boss who wants to develop individuals will give the individuals additional
responsibilities, and delegate authority to the individuals to make their own decisions.
(v) Mentoring: An individual might be given a ‘mentor’. The mentor provides guidance and
assistance to the individual, and may occasionally discuss the individual’s work and work
problems.
(vi) Appraisals: Formal appraisals are a part of a system of development.
4.3 Job design: job enrichment and job enlargement
Employees can be given opportunities for development through careful job design.
Job enrichment means making the job ‘richer’ by building more responsibility into it. When a job is
enriched, the job holder is given more authority (authority for a higher level of decision-making).
The additional responsibilities enrich the job and provide greater job satisfaction by giving the job holder a
higher level of authority that the job did not have before.
Job enlargement means giving the job holder more tasks to do, but without any additional authority. All the
additional tasks are at the same ‘level’ as the existing tasks in the job.
Job enlargement might be used:
(i) to increase the work load in a job where the job holder is under-worked, or
(ii) to give the job holder a greater variety of tasks, in order to reduce the monotony and dullness
of carrying out the same repetitive tasks.
4.4 Self-development
‘Self development’ is a term for the activities and learning that provide lifelong personal development, and
at the same time contribute to the individual’s professional competence or the achievement of the
organisation’s goals.
Enhancing self-development: There are several ways in which individuals can try to achieve more self-
development.
(i) They should use the staff appraisal system to agree targets for achievement and initiatives for
training and development.
(ii) They should follow up on their appraisal interview.
(iii) If they do not get the training they want from their employer, they could arrange for some
training in their own out-of-work time.
4.5 Skills development programmes
Individuals who want to develop themselves and their career are often able to benefit from skills
development programmes.
(i) Training needs analysis involves a comparison of the current skills of the work force with the
skills that the organisation requires now or will require at some time in the future.
(ii) A management development programme identifies the management skills that will be
required, and arranges training and development initiatives to groom existing managers for
promotion.
(iii) Graduate recruitment programme: A large organisation with a large management structure
may have a graduate development programme.
The skills of individuals can also be improved by mentoring.
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Business Management and Strategy (BMS): Chapter Summary Chapter No. 13: Appraisals and Working Environment
CHAPTER NO. 13
APPRAISALS AND WORKING ENVIRONMENT
1 Performance assessment and appraisal
1.1 Performance assessment
The success of an entity in achieving its objectives depends on the performance of its employees, and
senior management should assess the performance of its work force.
In addition to assessing the performance of the work force as a whole, or the performance of departments
and workgroups, there should be a system for appraising the competence and the performance of
individual employees.
1.2 Competence
An assessment of competence is an assessment of what a person is capable of doing.
Competence may relate to an individual’s:
(i) technical skills (ii) practical ability
(iii) judgement and insight (iv) ability to work with others
(v) ability to provide leadership.
Competence assessment may be an assessment of an individual’s ability to:
(i) do his or her current job to a satisfactory standard
(ii) do a different job
Competence and performance
Competence is often judged according to the performance of the individual in his or her job.
Competence can be measured by education and examination.
Competence and performance are often assessed within a system of staff appraisal.
1.3 The nature of performance appraisal
Performance appraisal (staff appraisal) is a formal process for reviewing and assessing the competence of
individual employees, and considering what might be done to develop them.
The appraisal process involves an interview or discussion between the employee and a manager.
Appraisal interviews should be carried out within a formal appraisal system.
The aim of an appraisal interview should be to have a discussion between the employee and his or her
manager, in which the following matters are discussed:
(i) How are things going?
(ii) What has gone well?
(iii) What has gone badly?
(iv) What have been the problems and difficulties?
(v) What is needed to develop the employee and improve his or her competence?
(vi) What can be done to meet these needs?
In addition to the appraisal interviews, there should also be a system for:
(i) recording the outcome of the appraisal interview, and keeping these records
(ii) agreeing measures for training or development, in order to improve the employee’s competence
(iii) agreeing targets or standards for future performance, that will be used for future appraisals
(iv) implementing the agreed measures for training and development.
1.4 The main components of staff appraisal
A staff appraisal may have three different components.
(i) A reward review: The annual appraisal interview may be seen as an opportunity for the
employee and his or her manager to discuss pay and other rewards.
(ii) A performance review: An appraisal system might be used to assess the performance of the
employee since the previous appraisal.
(iii) Potential review: Staff appraisal interviews can also be used to discuss the employee’s
potential for career development and promotion.
1.5 The benefits of performance appraisal
Benefits for the employer
(i) provides a formal system for assessing the performance and potential of employees
(ii) provides a system for identifying ways of improving the competence of employees
(iii) ensuring that employees are ready for promotion
(iv) it can improve communications between managers and their employees, and so improve
working relationships.
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Benefits for the employee

(i) The employee gets feedback
(ii) an opportunity to discuss his future prospects and ambitions.
(iii) may be used as a basis for considering pay and rewards.
(iv) to identify and agree measures for further training and development
1.6 Barriers to effective performance appraisal
(i) It has no purpose: Employees see the appraisal interview as nothing more than an informal
chat with the manager.
(ii) Confrontation: Employees see the appraisal interview as an occasion for criticism from the
manager.
(iii) The interview is one-sided
(iv) Annual event
(v) Lack of training in appraisal interview techniques
(vi) Lack of a record system
(vii) Appraiser bias
(a) The halo effect
(b) Central tendency bias
(c) Recency bias: this describes biasing the review towards more recent events to
the detriment of objectively appraising performance over the whole review
period.
(d) Personal bias: describes the situation where a reviewer favours certain
employees and discriminates against others for personal (subjective) reasons
rather than objective performance-driven reasons.
2 The appraisal process

2.1 Approaches by management to the appraisal interview
It is vitally important that the employee should accept the appraisal process and its outcome.
The interviewer may approach the interview in any of four ways:
Tell and sell method
The interviewer tells the employee how the assessment will be made. The appraisal will often include some
criticisms of the employee, but this should be constructive criticism in order to:
(i) avoid confrontation and
(ii) motivate the employee to want to improve
The employee does not have much opportunity to reply to the appraisal by the interviewer.
Tell and listen method
The interviewer tells the employee how the assessment will be made, but then invites the employee to
respond to the assessment. The interviewer must then listen to the comments from the employee, and
encourage the employee to become involved in a constructive discussion.
Problem solving method
The approach to the interview is based on the joint agreement that there is a problem: how to develop the
employee or how to improve the competence of the employee.
360 degree approach
With the 360 degree approach the performance appraisal interview is based on:
(i) an assessment of the individual by a number of other people (‘raters’)
(ii) a self-assessment by the individual.
There should be at least 3 to 5 raters, and all of them should be ‘credible’ to the individual they are appraising.
2.2 Preparing for an appraisal interview
To help with the planning:
(i) the organisation should issue guidelines to both the interviewer and the employee,
(ii) there should be documents for the interviewer to look at in advance of the interview
Questions for the employee to prepare
(i) What have been the achievements during the year with which the employee is pleased?
(ii) How do the achievements during the year compare with previously-agreed objectives or action
plans?
(iii) In what respects does the employee consider that further improvements can be made?
(iv) What factors outside the employee’s control have affected his or her performance?
(v) What extra training or new work experience will help the employee to do the job better?
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(vi) What personal aspirations and ambitions would the employee like to discuss, with a view to
deciding how these ambitions might be met?
Questions for the interviewer to prepare
(i) What do you think were your most significant achievements during the year?
(ii) What aspects of your job caused you the most difficulty?
(iii) Have you met the targets or objectives we discussed at the previous appraisal interview?
(iv) What should be your objectives or targets for the next period?
(v) What training or coaching do you need in order to improve your performance and abilities?
(vi) What are your career ambitions? Is there anything that we can (reasonably) do to help you to
achieve them?
(vii) Are there any other issues about your work and your job that you would like to talk about?
Location of the interview
The location for an appraisal interview should be appropriate, and should encourage the employee to feel
that the appraisal is important for the employer as well as for the employee.
(i) manager’s office
(ii) special location such as a small conference room in a local hotel.
The documents for an appraisal interview
the interviewer should obtain and look at the following documents:
(i) job description
(ii) Records of previous appraisals
(iii) Self-assessment form
(iv) Other comments about the employee
(v) The employee’s HR record
Interviewing skills
(i) Do not ask ‘closed questions’.
(ii) give the employee time to ask questions and give opinions.
(iii) Don’t ask complicated questions
(iv) Ask follow-up questions
(v) Listen. Don’t talk too much.
(vi) Keep the discussion focussed on relevant issues.
(vii) Handle difficult areas with sensitivity and consideration.
(viii) Let the employee know that you are listening and that you have understood the points that he
or she is making.
(ix) Look for constructive solutions to problems
2.3 Recording the results of an appraisal interview
This should include details of what was discussed, and what training and development measures were agreed.
Criteria for assessment
Whatever appraisal method is used, the employee needs to be clear about the criteria for appraisal.
Aspects of performance and ability could be any of the following, or a combination of any of the following
factors:
(i) volume of work
(ii) personal time management
(iii) meeting deadlines
(iv) Knowledge of the work
(v) Quality of work produced
(vi) Management skills
(vii) Personal qualities
(viii) Performance targets
Techniques of assessment
(i) Ranking: When employees are interviewed by the same manager, the manager can rank
them in order of competence.
(ii) Scoring: An organisation may use rating scales to score the competence of an employee.
(iii) Grading
(iv) Critical incident method: Another method of appraisal is to focus on any critical incident that
has occurred during the time since the previous appraisal interview.
(v) Performance-related assessment: The competence of an employee may be based on a
comparison between the targets or objectives that had been set for the employee (at the
previous appraisal interview) and whether those targets have been achieved.
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2.4 Feedback from the appraisal interview

To make appraisal interview effective, there must be a system of follow-up and feedback.
(i) There may be agreement about further training that the employee needs, These agreements
should be recorded as part of the official record of the appraisal interview.
(ii) action plan that has been agreed should be reported to senior management and the HR
department.
(iii) At the next appraisal interview the interviewer and the employee should discuss whether the
training, job rotation, secondment etc. helped with the employee’s development, and if so in
what ways?
3 The management of health, safety and security

3.1 Risks to health, safety and security at work
In all places of work, there are hazards to the health, safety and security of employees (and other people).
Hazards occur in an office environment as well as in factories, warehouses and other sites of manual
labour.
3.2 Consequences of breaching regulations
(i) fines and other penalties levied
(ii) suspension and/or revocation of an operating licence.
(iii) loss of reputation and subsequent loss of business
(iv) injury, death or other loss suffered by employees as a direct result of breaching regulations
(v) the payment of compensation to injured parties such as employees and customers.
3.3 Preventative and protective measures
Preventing risks means stopping the risk from existing. Ways of preventing risks vary between different
types of working environment, and it is often impossible to eliminate risks entirely.
Providing protection against risks: When risks cannot be avoided, measures might be taken to reduce
the chance of injury or ill health.
3.4 General policies for reducing risks in the work place
An organisation should have several general policies for reducing (or preventing) risks in the work place.
(i) Safety procedures: Organisations may have formal procedures for minimising risks.
(ii) Reporting accidents: Organisations should have a rule that all accidents must be reported
formally and investigated by the manager in charge of the work place where the accident
occurred.
(iii) Encouraging safety-consciousness: Management can reduce risks by making employees
more aware of them through short training courses.
(iv) Dialogue with employees: Management may discuss health and safety issues regularly with
employees or their representatives, or with safety officers.
(v) Employing people to deal with risks: Some organisations employ safety officers, whose job
is to monitor risks in the work place and either deal with them or discuss them with
management.
(vi) Safe materials handling: Hazardous materials should be stored in safe containers, and
warning signs should be placed on any doors or buildings where such materials are located.
3.5 Health and safety training
all employees might be required to undergo training programmes on safety procedures.
Legal aspects of health and safety management
In many countries, employers have a legal obligation for aspects of the health and safety relating to
employees and others.
3.6 Responsibilities of employees
Employees would have a legal duty to comply with an organisation’s health and safety guidelines to the
extent they are incorporated in an organisation’s handbook. Employees also have a moral and ethical duty
to comply with health and safety guidelines in order to protect both themselves and others from harm.
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4 Conflict at work
4.1 The nature of conflict at work
People in conflict see each other as opponents.
4.2 Causes of conflict
Conflict can occur between individuals in the same work team or work unit. More often, conflict arises
between different workgroups or departments, and between people in different workgroups.
4.3 Characteristics of conflict
(i) There may be unfriendly rivalries
(ii) unlikely to communicate openly with each other.
(iii) There may be inter-departmental disputes and arguments.
(iv) There will be a refusal to co-operate.
(v) constantly make accusations of wrongful treatment or improper behaviour.
(vi) feel frustrated in their work, and put the blame on the ‘enemy’.
(vii) There may be disputes over rights and responsibilities
4.4 Managing conflict
(i) ignore it and pretend that it does not exist.
(ii) trying to impose a solution
(iii) move the individual to a different position in the organisation.
(iv) encourage them to talk through their differences
(v) encourage each side to take a more rational and constructive approach to the problem
4.5 Taking disciplinary action
Disciplinary or corrective action is the way to communicate to the employee to improve his conduct or/and
performance.
The goal of this disciplinary action is to guide the employee towards a better performance or an appropriate
conduct. The process has to be constructive and should not be meant for punishing the employee.
The alternatives may include:
(i) Oral Warning:
(ii) Written Warning:
(iii) Suspension without Pay:
(iv) Reduction of Pay within a Class:
(v) Demotion to a Lower Classification
(vi) Dismissal
4.6 The disciplinary process
(i) Establish the facts of each case
(ii) Inform the employee of the problem
(iii) Allow the employee to be accompanied at the meeting
(iv) Decide on appropriate action
(v) Provide employees with an opportunity to appeal
5 Incentives and rewards

5.1 Motivating and supporting employees (revision)
5.2 The scope of reward management
5.3 Methods of reward
5.4 Alignment of reward practices with strategy
5.5 Relationship of reward practice to specific areas
5.6 Advantages of linking reward schemes to performance measurement
5.7 Disadvantages of linking reward schemes to performance measurement
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Business Management and Strategy (BMS): Chapter Summary Chapter No. 14: Strategic Performance Measurement
CHAPTER NO. 14
STRATEGIC PERFORMANCE MEASUREMENT
1 Financial performance – controlling strategy
1.1 The primary performance objective
The primary objective of financial performance targets should be consistent with the long-term objectives of
both:
(i) Business growth; and
(ii) Survival.
1.2 Critical success factors (CSFs) and key performance indicators (KPIs)
Critical Success Factors (CSFs)
Critical success factors (CSFs) are factors that are critical to the success of an organisation and the
achievement of its overall objectives. They are the key areas where targeted performance must be
achieved.
At a strategic level, there are usually just a small number of CSFs. They might be expressed in terms of:
(i) Profitability (iv) Market share
(ii) Product innovation (v) Human resource development
(iii) Achieving a balance between long-term and short-term goals.
There may be other CSFs, depending on the nature of the company and its business. e.g, other CSFs may
be quality standards, capacity utilisation, the rate of innovation, and so on.
Key Performance Indicators (KPIs)
For each critical success factor, there should be a measure of performance. These performance measures
might be called key performance indicators or KPIs. A target should be set for each KPI and actual
performance can be measured against the target.
1.3 The characteristics of operational performance
Although the main corporate objective may be expressed in financial terms, operational performance
should be measured by a combination of financial and non-financial measures.
Performance measurement at an operational level also normally focuses more on providing information
about actual performance for control purposes. Compared with strategic performance information, there is
less emphasis on planning information at the operational level.
Performance targets should also be set for both the long-term and the short-term. The strategic aim should
be directed towards long-term goals, but the long-term goals will not be achieved unless intermediate
shorter-term goals are also achieved.
Organisations should have a process in place for reviewing and monitoring their progress against
objectives. This may result in revisiting and revising strategy at one or all levels of the strategic hierarchy
(corporate, strategic business unit and operational strategies).
1.4 Differing primary measures of financial performance
It is appropriate to measure financial performance in terms of conditions that should lead to share price
growth and dividend growth in the future.
Discounted cash flow measures of performance
Discounted cash flow is used to assess the value of proposed capital expenditure projects. (It can also be
used to assess the value of companies and their shares.) In theory, if a company uses an appropriate cost
of capital as the discount rate, projects that are expected to have a positive net present value (NPV) should
add to the value of the company and its shares. Similarly, projects will add to the company’s value if they
are expected to have an internal rate of return (IRR) or modified internal return (MIRR) in excess of the
company’s cost of capital.
Management accounting systems are not designed to identify specific cash flows arising from capital
projects, and some relevant cash flows in DCF analysis, such as opportunity costs, would also be difficult
to measure.
Financial measures of historical performance
(i) Return on capital employed (ROCE) is a useful measure of performance, because it relates
the amount of profit earned to the amount of capital employed in the business. However, the
measurement of ROCE depends on accounting conventions for the measurement of profit and
capital employed.
(ii) Earnings per share growth is also commonly used to assess performance. On the
assumption that in the long term, the ratio of the share price to EPS (the price/earnings ratio or
P/E ratio) remains fairly constant, growth in EPS should result in a higher share price.
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(iii)
EBITDA (Earnings before interest tax depreciation and amortisation): EBITDA is a useful
measure of performance only if it is assumed that management have no control over interest
costs or depreciation and amortisation charges. This may be true for profit centre
management, but is unlikely to be the case when managers have control over investment and
financing decisions. EBITDA is a useful approximation of cash flow from operations before
interest and tax, and can be a useful measurement of financial performance for this reason.
Measuring financial security: liquidity and gearing
(i) Liquidity means having cash or access to cash to make payments when these are due.
Liquidity risk, measured by ratios such as the current ratio or quick ratio, or by cash flow
analysis
(ii) Gearing or debt/equity ratios, which measure the potential risk to a company from its
funding structure.
Gearing and debt levels can also be important. Highly-geared companies are exposed to the
risk of a big fall in earnings per share whenever there is a fall in their operating profits. When
they borrow at variable rates of interest, an increase in interest rates will also reduce
profitability.
Historical profits and expected future profits
The main objective of a commercial company might be to maximise the wealth of shareholders. Wealth is
increased by paying dividends and through increases in the share price. A common assumption in financial
management is that the share price of a company depends on expectations of future profits and dividends.
it is important to convince investors that the company will be profitable in the future. Historical returns and
profits, and trends in profitability, might provide some guide to what profits might be in the future.
1.5 Other financial measures of performance
Financial measures are used to set targets for performance and monitor actual performance throughout the
management hierarchy.
(i) Gross profit margin (iv) Growth in sales
(ii) Net profit margin (v) Cost variances.
(iii) Cost/sales ratios
Another way of measuring the management of costs is to measure costs as a percentage of total sales
revenue, and monitoring changes in this percentage figure over time. Cost ratios might include:
(i) Production costs as a percentage of sales
(ii) Distribution and marketing costs as a percentage of sales
(iii) Administrative costs as a percentage of sales
(iv) Material costs as a percentage of total cost
(v) Labour costs as a percentage of total costs.
Costs can also be monitored in terms of:
(i) Cost per unit
(ii) Cost per machine hour
(iii) Cost per activity e.g, cost to rectify a defective product.
(iv) Comparison with a target cost.
1.6 Short-run and long-run financial performance
DCF is not suitable for measuring historical performance.
A problem with other financial measures of performance is that they are mainly short-term in perspective,
and focus in the current financial year.
The need to find a balance between short-term and long-term financial success has led to the development
of differing views of performance measurement, such as the balanced scorecard.
1.7 Setting financial targets: methods
There are several different ways of setting targets, such as financial targets, or making financial forecasts:
(i) Engineering-based targets: Engineering targets may be used when there is a stable and
predictable relationship between inputs to the forecasting model and outputs. e.g, Standard
Costing.
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(ii) Historical-based targets: When it is not possible to identify stable and predictable
relationships between inputs and outputs, it may be appropriate to establish targets on the
basis of either:
(a) historical performance, and what has been accomplished in the past, or
(b) historical targets that have been used in the past, on the assumption that they
are still based on valid assumptions
(iii)
Negotiated targets: Financial targets may also be agreed as the outcome of negotiations
between superiors and subordinates. Senior managers may try to impose financial targets on
their subordinates, and the subordinates may argue that the targets are unrealistic and unfair.
Advocates of negotiated financial targets argue that the negotiation process between
superiors and subordinates helps to bridge the information gap between:
(a) Senior managers, who can see the ‘big picture’ and what the entity should be
trying to achieve
(b) Subordinate managers, who understand operational matters at a level of detail
that their seniors do not.
1.8 Making comparisons of financial performance
When making comparisons of performance between two divisions of the business, it is important to be
aware of the reasons why their performance might be different. There could be very good reasons why one
division has performed better than the other in the short-term. When there are good reasons for differences
in performance, the comparison should take these reasons into consideration.
2 Non-financial performance indicators (NFPIs)

2.1 The nature of non-financial measures of performance
Non-financial measures of performance should focus on critical success factors of a non-financial nature.
These will vary from one type of business entity to another, and they will also vary according to the ‘level’ of
performance reporting – strategic or operational.
(i) Quality (v) Reliability
(ii) Speed (vi) Efficiency
(iii) Achieving a specific non-financial target
(iv) Meeting customer needs/customer satisfaction
2.2 Strategic NFPIs
Non-financial performance measures are needed because success in achieving some strategic objectives
cannot be measured in money terms alone, and in terms of financial performance measurements.
Non-financial targets should be compatible with financial targets.
(i) Market share (as a target for competitive strategy and sales strategy)
(ii) Development of new product lines (as a target for innovation strategy)
(iii) Quality measures
2.3 Operational NFPIs
Many operational targets are set and operational performance measured by NFPIs.
(i) Customer service measures
(ii) Customer satisfaction reports
(iii) Measures of repeat business obtained or customer loyalty.
Measures of performance in relation to the management of employees would include:
(i) Staff turnover rates
(ii) Absenteeism and sickness rates
(iii) Productivity ratios or similar productivity measurements.
2.4 Capacity utilisation and resource utilisation
Measures of performance in relation to the utilisation of resources include capacity utilisation ratios. e.g,
Machine utilisation Rate, Proportions of seat filled.
Capacity utilisation is an important aspect of performance, because successful performance often depends
on the extent to which available key resources are used.
Capacity utilisation ratios can be used to measure performance (change from the previous year, or
comparison with the budget or with another entity’s capacity utilisation).
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2.5 Multiple measures of performance

Performance can be assessed using several different measures or indicators.
(i) A combination of financial measures, quantified non-financial measures and (possibly) non-
quantified (qualitative) non-financial measures;
(ii) A balanced scorecard approach, with four different perspectives on performance targets
(iii) Measures related to short-term financial and operating targets and measures related to longer-
term strategic objectives.
2.6 Measurements of quality
Quality targets may be a major element in strategic planning. Quality is associated with meeting customer
needs and expectations.
Quality performance can be measured and evaluated in relation to the key performance objectives of
quality, speed, dependability (reliability), flexibility and cost.
Examples:
Quality
(i) Percentage of items rejected or scrapped
(ii) Average number of defects per unit produced
(iii) Average time between machine breakdowns
(iv) Number of customer complaints
(v) Number or cost of warranty claims
Speed
(i) Average time between receiving an order and completing the work
(ii) Transport times
Dependability
(i) Percentage of customer orders met from inventory
(ii) Percentage of orders or items delivered late
(iii) Average delays
Flexibility
(i) Average set-up time
(ii) New product development time
(iii) Range of products
Cost
(i) Variances
(ii) Cost per operating hour/per machine hour
(iii) Labour productivity
(iv) Throughput, contribution
Another approach to quality performance measurement is to use a combination of operational measures,
financial measures and customer measures. For example:
Operational measures
(i) Percentage of items rejected
(ii) Time lost in production
Financial measures
(i) The cost per unit produced
(ii) Quality costs
Customer measures
(i) Number of customer complaints
(ii) Number of claims under warranty
(iii) Change in total market share
2.7 Relationship between qualitative targets and quantitative targets
Qualitative performance is performance that is not measured and expressed in quantitative terms.
Qualitative performance targets may be expressed in general terms, such as:
(i) Being the ‘best’ or ‘better than competitors’
(ii) ‘Meeting customer needs’
(iii) ‘High quality’.
In many cases, it is possible to convert qualitative targets into quantitative targets. For example, an
objective of achieving high quality can be expressed in quantitative quality targets.
It may be difficult to set quantitative targets for:
(i) Brand recognition and awareness
(ii) Reputation.
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These can, however, be critical success factors.

(i) The commercial success of many companies is reinforced by a strong brand that the company
reinforces through advertising and maintains through quality.
(ii) The commercial success of a company may be put at risk by a ‘bad’ reputation.
3 The balanced scorecard approach

3.1 The concept of the balanced scorecard
The concept of the balanced scorecard is that there are several aspects of performance (‘perspectives on
performance’) and targets should be set for each of them. The different perspectives’ may sometimes
appear to be in conflict with each other, because achieving an objective for one aspect of performance
could mean having to make a compromise with other aspects of performance. The aim should be to
achieve a satisfactory balance between the targets for each of the different perspectives on performance.
These targets, taken together, provide a balanced scorecard, and actual performance should be measured
against all the targets in the scorecard.
Although a balanced scorecard approach takes a longer-term view of performance, it is possible to set
shorter-term targets for each item on the scorecard. In this way it is possible to combine a balanced
scorecard approach to measuring performance with the annual budget cycle, and any annual incentive
scheme that the entity may operate.
3.2 The balanced scorecard: four perspectives of performance
In a balanced scorecard, critical success factors are identified for four aspects of performance, or four
‘perspectives’. Of these four perspectives, three are non-financial in nature.
(i) Customer perspective: What do Customer value?
By recognising what customers value most, the entity can focus its performance targets on
satisfying the customer more effectively. Targets might be developed for several aspects of
performance such as cost (value for money), quality or place of delivery.
(ii) Internal perspective: To achieve its financial and customer objectives, what processes must
the organisation perform with excellence?
Management should identify the key aspects of operational performance and seek to achieve
or maintain excellence in this area. For example, an entity may consider that customers value
the quality of its service, and that a key aspect of providing a quality service is the
effectiveness of its operational controls in preventing errors from happening.
(iii) Innovation and learning perspective: How can the organisation continue to improve and
create value?
The focus here is on the ability of the organisation to maintain its competitive position, through
the skills and knowledge of its work force and through developing new products and services,
or making use of new technology as it develops.
(iv) Financial perspective: How does the organisation create value for its owners?
Financial measures of performance in a balanced scorecard system might include share price
growth, profitability and return on investment.
Several measures of performance may be selected for each perspective, or just one. Using a large number
of different measures for each perspective adds to the complexity of the performance measurement
system.
3.3 Using the balanced scorecard
With the balanced scorecard approach the focus should be on strategic objectives and the critical success
factors necessary for achieving them. The main focus is on what needs to be done now to ensure
continued success in the future. The main performance report for management each month is a balanced
scorecard report, not budgetary control reports and variance reports.
Examples of measures of performance for each of the four perspectives are as follows.
Critical financial measures:
(i) Return on investment
(ii) Profitability and profitability growth
(iii) Revenue growth
(iv) Productivity and cost control
(v) Cash flow and adequate liquidity
(vi) Avoiding financial risk: limits to borrowing
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Critical customer measures:

(i) Market share and market share growth
(ii) Customer profitability: profit targets for each category of customer
(iii) Attracting new customers: number of new customers or percentage of total annual revenue
obtained from new customers during the year
(iv) Retaining existing customers
(v) Customer satisfaction, although measurements of customer satisfaction may be difficult to
obtain
(vi) On-time delivery for customer orders
Critical internal measures:
(i) Success rate in winning contract orders
(ii) Effectiveness of operational controls, measured by the number of control failures identified
during the period
(iii) Production cycle time/throughput time
(iv) Amount of re-working of defective units
Critical innovation and learning measures
(i) Revenue per employee
(ii) Employee productivity
(iii) Employee satisfaction
(iv) Employee retention or turnover rates
(v) Percentage of total revenue earned from sales of new products
(vi) Time to develop new products from design to completion of development and introduction to
the market
3.4 Conflicting targets for the four perspectives
A criticism that has been made against the balanced scorecard approach is that the targets for each of the
four perspectives might often conflict with each other. When this happens, there might be disagreement
about what the priorities should be.
This problem should not be serious, however, if it is remembered that the financial is the most important of
the four perspectives for a commercial business entity. The term ‘balanced’ scorecard indicates that some
compromises have to be made between the different perspectives.
Targets for four perspectives are useful in helping management to judge progress towards the company’s
objectives, but ultimately, success in achieving those objectives is measured in financial terms. The
financial objective is the most important.
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Business Management and Strategy (BMS): Chapter Summary Chapter No. 15: Project Management
CHAPTER NO. 15
PROJECT MANAGEMENT
1 Project planning: phases and tasks
1.1 Splitting a project into phases
A task of the project manager is to plan the work for the project, obtain the resources (staff, equipment and
so on) to carry out the work and schedule the work so that the project is completed on schedule, or at the
earliest possible time.
In order to plan and schedule the work for the project, it is necessary to identify all the tasks that have to be
completed.
A first step in the identification of tasks is to identify the main stages of the project.
1.2 Breakdown of work into lower-level tasks
When the project has been divided into stages, each with its own identifiable beginning and end (milestone
for achievement), the next step is to break down each stage into more detailed tasks, or ‘lower level tasks.
A large number of lower-level tasks may be identified, although the number of tasks should be restricted.
For each task, the project manager needs to:
(i) Estimate how much time will be needed to complete the task
(ii) Allocate each task to specific individuals or small groups.
Work breakdown structure : A work breakdown structure (WBS) is a tool or technique for breaking the total
work on a project into smaller and smaller parts.
Such as:
(i) the main stages of a project stages
(ii) the lower-level tasks within each stage, and
(iii) work packages, which are items of work within each lower-level task.
Work for each small part of the project can then be allocated to an individual or team. This helps managers
to plan the work for the project and allocate each item of work to individual members of the project team.
In the UK, a WBS system in common use for project planning is Prince 2. Prince stands for ‘Projects in
Controlled Environments’.
1.3 Dependencies between lower-level tasks
Many tasks in a project are inter-dependent. This means that some tasks cannot be started until other
tasks have been completed. Some tasks can be carried out at the same time, in parallel with each other.
In order to schedule a project efficiently, so that it is completed in the shortest time possible (or by a target
completion date), the project manager needs to identify the inter-dependencies between certain tasks.
Having specified the tasks to be completed, the resources required for each task, the estimated time to
complete each task and the inter-dependencies between them, the project manager can prepare a
schedule for the project. The most common planning tools are:
(i) Network analysis (also called critical path analysis); and
(ii) Gantt charts.
2 Network analysis
2.1 Introduction
A network is a schedule of the work for a project, showing all the tasks that have to be completed, the inter-
dependencies between them and the time-scale for completing them. A network is shown as a diagram or
chart.
The network chart will also indicate the tasks that must be started and completed at the earliest time
possible, in order for the project to be completed in the earliest possible time.
There is a chain of ‘critical’ activities, one following immediately after the other, that must all be started and
finished at the earliest possible time in order to complete the total project within the minimum time. This
chain of time-critical activities is the critical path.
In order to prepare a network chart, or critical path analysis (CPA) chart, the following information is
required:
(i) The individual tasks to be completed
(ii) The estimated time to complete each task
(iii) The inter-dependencies between tasks: in other words, which activities must be completed
before another activity can begin?
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2.2 Constructing a CPA chart

(i) In an ‘activity on arrow’ CPA chart, each activity is represented by a line with an arrow.
(ii) Each activity starts at an ‘event’ and finishes at another event.
(iii) An event is represented by a circle.
(iv) Events in an activity on arrow CPA chart are used to:
(a) indicate the earliest time that the previous activity (or activities) can finish, and
so the earliest time that any subsequent activity can begin; and
(b) indicate the latest time by which the previous activity (or activities) must finish
if the entire project is to be completed in the minimum possible time.
(v) For convenience, each event in the diagram is given a label, usually an identification number.
(vi) The latest event time cannot be earlier than the earliest event time.
(vii) When the earliest event time is the same as the latest event time, the event is on the critical path.
(viii) When the latest event time is later than the earliest event time, this indicates that completion
of the previous activity or the start of the next activity can be delayed (by up to the amount of
the difference between the two times) without affecting the completion time for the project as a
whole.
Rules for drawing an activity on arrow network chart
(i) if Activity B cannot begin until Activity A has been
completed, this will be shown as:
(ii) Activity F and Activity E can both start after Activity
D has been completed.
(iii) Activity K cannot start until both Activity C and
Activity J have been completed.
(iv) Two activities cannot both start at the same event
and finish at the same event. (To prevent this from
happening, it might be necessary to draw an extra
event, and then add a ‘dummy activity’, which is a
non-existent activity with a duration of 0 days or
weeks.)
(v) The network chart must finish at a single event.
The final event at the right hand side of the diagram
is the completion of the project.
(vi)
When you have drafted a network chart, check the
logic of the sequence of activities and events, to
make sure that you have drawn the chart correctly.
Minimum completion time for the project: activity durations
When you have drawn the correct logical structure for the activities, the next step is to calculate the
minimum completion time for the project, and identify which activities are on the critical path.
Minimum completion time for the project: earliest event times
The next step is to calculate the earliest finishing time at each event, and enter this time into the segment
at the top right hand side of each event circle.
(i) The earliest times are found by starting at the left-hand side of the diagram (event 0 and
earliest time 0) and working across to the right-hand side.
(ii) Add the required time for each activity to the earliest event time for the event where the
activity starts. Enter this total into the earliest event time where the activity ends.
(iii) If two activities end at the same event, enter the later of the two times (the higher of the two
numbers) as the earliest time for the event. (This is logical. It is the earliest time at which the
event can occur, and the earliest time at which any subsequent activity can begin).
Minimum completion time for the project: latest event times
The next step is to calculate the latest times for each event.
(i) Start by entering the latest event time for the final event (completion of the project) in the
bottom right segment of the final event. This is the same number as the earliest event time for
this final event.
(ii) Now work back across the diagram from right to left, entering the latest time for each event.
This is calculated by subtracting the time for the preceding activity from the latest time for the
later event and entering the result in the latest time for the earlier event.
(iii) When two activities start at the same event, enter the lower of the two numbers.
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(iv) Two events connected by a dummy activity should both have the same latest start time,
because a dummy activity has a duration of 0 days or 0 weeks.
(v) If your calculations are correct, you should find that the latest starting time at event 0 is time 0.
The critical path
The critical path consists of the sequence of activities that must begin at the earliest possible time (and so
must be completed at the earliest possible time) so that the project as a whole will be completed in the
minimum possible time. These activities go through events where the earliest and the latest event times
are the same.
It is usual to indicate the critical path by drawing two lines (//) across each activity on the critical path.
Float is the spare time on activities.
It can be calculated as follows, for each activity:
Latest completion time (latest time at the event where the activity ends) A
Minus: Earliest start time (earliest time at the event where the activity begins) B
Total time available for the activity (A-B)
Minus: Time required for the activity C
Float for the activity (A-B-C)
If a delay occurs which is not greater than the float, the overall project duration will not be affected. There
will be no spare time (float) on critical path activities.
3 GANTT CHARTS
3.1 The nature of a Gantt chart
A Gantt chart is another way of scheduling the activities in a project, and identifying the critical path and
float times. It is an alternative to network charts.
A Gantt chart is a horizontal bar chart. Each activity is shown as a bar, and the length of the bar represents
the duration of an activity (as shown in the chart below). They are usually drawn with each activity starting
at its earliest starting time and ending at its earliest finishing time. Float time is shown as a dotted line.
Gantt charts can be used to show
(i) the starting times and completion times for activities
(ii) the number of employees required during each day or each week of the project.
You are unlikely to be asked in your examination to draw a Gantt chart, but you may be required to explain
what it is and how it is used.
Actual performance can also be recorded on the chart, making it very useful for project control purposes.
Actual completion times can be shown as a different bar in a different colour.
3.2 Advantages and limitations of Gantt charts
Advantages of Gantt charts
(i) They are simple to construct.
(ii) They are easy to interpret.
(iii) They give a useful overview of the project, both completion times and employee numbers.
Limitation
They do not show the interrelationships between different activities as clearly as a CPA chart.
CPA charts are therefore probably used much moreoften for project planning and control.
4 Project monitoring and control

4.1 Introduction
The project manager has the primary responsibility for monitoring and control of projects during their
development stage. The project steering committee might appoint a Project Assurance team, to carry out
an independent monitoring role.
4.2 Quality, time and cost
The main aspects of a project that should be monitored and controlled are quality, completion times and cost.
(i)
The quality of the work carried out for the project development can be monitored by comparing
actual achievements against the requirements that are set out in the project quality plan.
(ii) The completion time for the project can be monitored by comparing the planned completion
times for the critical path activities with the actual completion times.
(iii) Costs can be monitored by comparing actual expenditure with budgeted expenditure, on a
regular basis
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4.3 Monitoring completion times: slippage

A CPA chart can be used by the project manager to:
(i) Check whether the time-critical activities are being completed on schedule
(ii) Recognise by how much non-critical activities can be delayed without risking the completion
time for the project as a whole.
(iii) Recognise when the completion time for an activity has over-run the schedule, and analyse
what the consequences of the slippage will be for the completion time for the entire project.
(iv) Allocate extra resources to time-critical activities if there is a risk of delay, or if the expected
slippage is unacceptable.
4.4 Amending a CPA chart
A CPA chart will be amended in the following situations:
(i) If the chart gets out of date because
(a) critical dates are missed
(b) new estimates are prepared for the expected time to complete individual activities
(ii) If it ceases to provide realistic information
4.5 Project management software
The software enables project managers to use project management techniques with the assistance of a PC
or laptop computer.
Features of project management software
Typically, project management software helps project managers to:
(i) Create a list of tasks for the project and their expected duration
(ii) Construct a CPA chart or a Gantt chart
(iii) Assign resources to each task
(iv) Prepare a budget for the project
(v) Track the progress of tasks
(vi) Record and monitor actual costs
(vii) Manage the documents for the project
(viii) Prepare progress reports
Other features are:
(i) Software helps the project managers to amend plans more quickly, and prepare revised CPA
charts and Gantt charts, and revised budgets.
(ii) It also helps managers to prepare better and more comprehensive project documentation.
The main functions/benefits of project management software
(i) To produce and edit CPA charts or Gantt charts easily.
(ii) To provide an accounting function for the project
(iii) To plan and monitor the use of resources on the project
(iv) Where the resources required exceeds the resources available, the project manager can then
use the software to look for ways of reducing staff requirements at peak times without
affecting the overall project completion time, by:
(a) delaying the start of non-critical activities, or
(b) reducing the number of staff assigned to non-critical activities
4.6 Managing the team
Responsibilities of team manager may include some or all of the below:
(i) Selecting personnel and building the team;
(ii) Delegating roles and responsibilities;
(iii) Motivating team members;
(iv) Communicating information amongst the team;
(v) Rewarding the team;
(vi) Disciplining team members.
4.7 Role of the accountant
The numeracy and business skills of accountants are highly valued in project management. Project
managers need to:
(i) Understand the economics of different options and decisions:
(ii) Be able to forecast costs and profit;
(iii) Generate accurate network analyses and Gantt charts;
(iv) Use spreadsheets effectively;
(v) Consider the impact of external factors as well as internal factors relevant to the project.
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Business Management and Strategy (BMS): Chapter Summary Chapter No. 16: Identifying and Assessing Risks
CHAPTER NO. 16
IDENTIFYING AND ASSESSING RISK
1 Risk and risk management
1.1 The nature of risk
Risks can be divided into two categories:
(i) Pure risk (Downside Risk): is a risk where there is a possibility that an adverse event might
occur. Events might turn out to be worse than expected, but they cannot be better than
expected.
Pure risks are risks that can often be controlled either by means of internal controls or by
insurance. These risks might be called internal control risks or operational risks.
(ii) Speculative risk: (two-way risk) exists when the actual future event or outcome might be
either better or worse than expected.
Speculative risks cannot be avoided because risks must be taken in order to make profits.
Speculative risks are usually called business risk, and might also be called strategic risk or
enterprise risk.
Companies face both pure risks and speculative risks.
1.2 The nature of risk management
Risk management is the process of managing both downside risks and business risks. It can be defined as
the culture, structures and processes that are focused on achieving possible opportunities yet at the same
time control unwanted results.
This definition identifies the connection between risk and returns.
(i) All business activity involves some risk.
(ii) Business decisions should be directed towards achieving the objectives of the company.
(iii) Strategies are devised for achieving this objective and performance targets are set.
(iv) The strategies are implemented, and management should try to achieve the stated objectives
and performance targets, but at the same time should manage the downside risks and try to
limit the business risks.
1.3 Responsibilities for risk management
The board of directors have a responsibility to safeguard the assets of the company and to protect the
investment of the shareholders from loss of value.
The Board is responsible for defining the company’s risk policy, risk appetite and risk limits as well as
ensuring that these are integrated into the day-to-day operations of the company’s business.
ICGN Corporate Risk Oversight Guidelines
(i) The board is responsible for deciding the company’s risk strategy and business model
(ii) Management has the responsibility for developing and implementing the company’s strategic
and routine operational risk management system, within the strategy set by the board and
subject to board oversight.
(iii) Shareholders have responsibility for assessing the effectiveness of the board in overseeing risk.
The ICGN Guidelines provide guidance on processes for the oversight of corporate risk by the board and
within the company, for investor responsibility and for disclosures by a company on its risk management
oversight processes.
Risk management and internal control
Turnbull Guidance states that in deciding the company’s policies with regard to internal control, the board
should consider:
(i) the nature and extent of the risks facing the company
(ii) the extent and categories of risk which it considers as acceptable for the company to bear
(iii) the likelihood that the risks will materialise (and events will turn out worse than expected)
(iv) the company’s ability to reduce the probability of an adverse event occurring, or reducing the
impact of an adverse event when it does occur.
(v) the cost of operating the controls relative to the benefits that the company expects to obtain
from the control.
1.4 Elements of a risk management system
The elements of a risk management system should be similar to the elements of an internal control system:
(i) There should be a culture of risk awareness within the company.
(ii) There should be a system and processes for identifying, assessing and measuring risks.
(iii) There should be an efficient system of communicating information about risk and risk
management to managers and the board of directors.
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(iv) Strategies and risks should be monitored, to ensure that strategic objectives are being
achieved within acceptable levels of risk.
Organising for risk management
(i) The board of directors of large public companies may be expected to review the risk
management system within their company
(ii) Codes of corporate governance typically suggest that the Board of Directors establish a Risk
Management Committee.
(iii) A company may decide that it needs a senior management committee to monitor risks. The
function of this executive committee would be to co-ordinate risk management throughout the
organisation.
Risk management should therefore happen at both board level (with the involvement of independent
NEDs) and at operational level (with the involvement of senior executives and risk managers).
2 Categories of risk
2.1 The need to categorise business/strategic risks
The reason for categorising risks is to give some structure to the risk management process.
2.2 Categories of risk common to many types of business
(i) Market risk is the risk from changes in the market price of key items, such as the price of key
commodities
(ii) Credit risk is the risk of losses from bad debts or delays by customers in the settlement of
their debts.
(iii) Liquidity risk is the risk that the company will be unable to make payments to settle liabilities
when payment is due.
(iv) Technological risk is the risk that could arise from changes in technology (or inadequacy of
technological systems in use).
(a) If they adopt the new technology too soon
(b) If they delay adopting the new technology
(v) Legal risk, which includes regulatory risk, is the risk of losses arising from failure to comply
with laws and regulations, and also the risk of losses from legal actions and lawsuits.
(vi) Health and safety risks are risks to the health and safety of employees, customers and the
general public. Environment risks are risks of losses arising, in the short term or long term,
from damage to the environment - such as pollution or the destruction of non-renewable raw
materials.
(vii)
Reputation risk is difficult to measure (quantify). It is the risk that a company’s reputation with
the general public (and customers), or the reputation of its product ‘brand’, will suffer damage.
(viii) Business probity risk is the risk of losses from a failure to act in an honest way. e.g,
smuggled products, bribery etc
(ix) Derivatives risk is another type of risk include commodity derivatives and financial derivatives.
(a) Commodity derivatives are contracts on the price of certain commodities, such
as oil, wheat, metals (gold, tin, copper etc.) and coffee.
(b) Financial derivatives are contracts on the price of certain financial instruments
or market rates, such as foreign exchange rates, interest rates, bond prices
and share prices.
Derivative instruments include options, futures and swaps. They can be used to control risks
by ‘hedging’ exposures to price risks (market risks).
2.3 Nature and importance of business and financial risks
The board of directors should consider business risk when it makes strategic decisions.
Business risks are strategic risks that threaten the health and survival of a business. They vary between
companies and over time.
(i) The failure rate is greater for those businesses in cyclical industries like tourism.
(ii) The failure rate among new start-up businesses is greater than that amongst more mature
businesses.
2.4 Business risks in different business sectors
Risks differ between companies in different industries or markets.
(i) Companies in different industries might face the same risks, but in some industries the risk
might be much greater than in other industries.
(ii) Risks vary in significance over time, as the business environment changes.
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3 Concepts in risk management

3.1 Exposure to risk
When a company is exposed to risk, this means that it will suffer a loss if there are unfavourable changes
in conditions in the future or unfavourable events occur.
Companies need to assess the significance of their exposures to risk. If possible, exposures should be
measured and quantified.
Some risk exposures cannot be measured, because they are ‘qualitative risks’. Qualitative risks must
also be assessed, but since the amount of the exposure and the possible losses that might occur cannot be
quantified, an assessment of these risks depends on management judgement and opinion.
The remaining exposure to a risk after control measures have been taken is called residual risk .
If a residual risk is too high for a company to accept, it should implement additional control measures to
reduce the residual risk to an acceptable level.
3.2 The dynamic nature of risk assessment
Organisations differ in how exposed they are to changes in internal and external risks.
In some situations, environmental factors change relatively little, but in other environments, risk factors can
change a great deal. These are sometimes called ‘turbulent’ environments.
(i) At one end of the scale there is never any change in the external or internal environment of an
organisation.
(ii) At the other extreme the external or internal environment of an organisation changes
constantly with the results that all risks are changing all the time.
some organisations face very changeable risks whilst those faced by other companies are relatively stable.
It is important to note that even static environments might change unexpectedly.
3.3 Risk appetite
Risk appetite is concerned with how much risk management are willing to take.
The risk appetite of a Board or management in any particular situation will depend on:
(i) the importance of the decision and the nature of the decision
(ii) the amount and nature of the potential gains or losses, and
(iii) the reliability of the information available to help the Board or management to make their
decision.
Managers should not be allowed to take whatever decisions they consider to be suitable, regardless of risk.
At the other extreme, a risk averse culture is undesirable, in which managers are discouraged from taking
any risky decisions, so that business opportunities are not exploited.
3.4 A risk-based approach
The risk-based approach takes the view that some risk must be accepted, but risk exposures should be
kept within acceptable limits.
Decisions should therefore be based on a consideration of both expected benefit and the risk.
4 Identification, assessment and measurement of risk

4.1 Risk identification
Risk identification is the initial stage in a system of risk management.
(i) In a large company, it might be appropriate to identify risks at different levels in the
organisation. Many large companies set up risk committees to identify risks.
(ii) internal auditors or external auditors might be more efficient at identifying operational risks
Risks identified by a company will vary in importance. It is therefore necessary to assess the importance of
each risk, in order to:
(i) rank the risks in order of significance (order of priority), and
(ii) identify the risks that are the most significant, and
(iii) identify the significant risks where control measures are urgently needed.
4.2 The impact of risk on stakeholders
The impact of a company’s risks on risks for stakeholders varies and depends on circumstances.
(i) Employees are exposed to several risks in their job.
(a) Jobs may be threatened by the strategic choices taken by a company.
(b) Safety risks for a company might be measured in terms of the risk of serious
injuries and minor injuries to employees over a given period of time.
The risk appetite of some employees might differ from the risk appetite of the company and
the board’s policy on risk.
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(ii) Investors: When investors buy the shares of a company, they have some expectation of the
sort of company it is and the returns they might expect from their investment. A company
should not expose itself to strategic risks that expose the investors to a risk to their investment
that the shareholders would consider excessive.
(iii) Creditors: The main risks to a company’s creditors and suppliers from the company’s own
risks are that:
(a) the company will not pay what they owe, and
(b) the company will stop buying goods and services from them.
A high-risk company is a high credit risk. The liquidity risk and insolvency risk facing a
company has an impact on the credit risk for a supplier or lender.
(iv) Communities and the general public: are exposed to risks from the actions of companies,
and the failure by companies to control their risks. Risks to the general public include:
(a) the consequences for the country of a decline in the business activities and
profits of a company due to recession, especially when the company is a major
employer
(b) health and safety risks from failures by a company to supply goods that meet
with health and safety standards
(c) risks to the quality of life from environmental pollution
(d) Risks to a local community also arise from economic risks faced by the company.
(v) Governments: A risk for government is that major companies will decide to invest in a
different country, or move its operations from one country to another.
(vi) Customers: Some risks facing companies also have an impact on their customers.
(a) Errors and delays in providing goods and services have an impact on business
customers.
(b) Product safety risks for a company are also a risk for customers who use them.
(vii) Business partners: There are risks in joint ventures for all the joint venture partners. A
company in a joint venture might try to dominate decision-making in order to reduce the risk.
However, by reducing its exposures to risk in a joint venture, a company will affect the risks for
the other joint venture partners.
4.3 Assessing risks: impact and probability
The assessment of risk is sometimes called ‘risk profiling’ or ‘risk mapping’.
To assess each risk, it is necessary to consider the likelihood that losses will occur as a consequence of
the risk, and the size or amount of the loss when this happens.
A simple approach to risk mapping involves taking each risk that has been identified and placing it on a
map. The map is a 2 × 2 matrix, with:
(i) one side representing the frequency of adverse events or the probability that the risk will
materialise and an adverse outcome will occur, and
(ii) the other side representing the impact (loss) if an adverse event occurs or adverse
circumstances arise.
Probability or frequency of the risk materialising

LOW HIGH
HIGH High Impact
High Impact
Low Probability
High Probability
Impact/ Consider the need for control

Take immediate action to control the risk
Size of measures such as Insurance
potential
loss Low Impact Low Impact
Low Probability High Probability
Review Periodically Consider the need for control action

LOW
A risk map can help management to identify risks where immediate control measures are required, and
where the need for control measures should be considered or reviewed periodically.
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Risk assessment as an ongoing process

It is important to appreciate that organisations differ in their exposure to changes in internal and external
risks. Companies operate in a dynamic risk environment should assess the risks faced on an ongoing basis
so that they might respond to changes immediately.
4.4 Measuring risks
Measuring risk means quantifying the risk. When risks are quantified, the risk can be managed through
setting targets for maximum risk tolerance and measuring actual performance against the target.
4.5 Prioritising risks
Within a system or risk management, companies need to establish a process for deciding which risks are
tolerable and which might need more control measures to reduce the risk.
Some companies and non-business entities use formal techniques to help the with the prioritisation of risk.
One such technique is a risk dashboard.
Risk dashboard
A risk dashboard can be used to identify which risks need further control measures.
On a simple dashboard, each risk that has been identified is represented by a ‘coloured light’.
When a risk has a red light, this indicates that further risk measures are needed. A green light indicates
that the risk is under control. An amber light indicates that the risk needs to be kept under review.
A more complex risk dashboard can be used, for each risk, to show:
(i) the total amount of risk, assuming that no control measures are in place to contain the risk
(ii) the residual risk, which is the remaining exposure to risk after allowing for the control
measures that are in place
(iii) the risk appetite of the company for that particular risk, which is the exposure to risk that the
company is willing to accept in order to obtain the expected benefits from its activities.
The company’s risk appetite for a particular risk might be low, in which case it can be recorded in the
‘green’ section of the dashboard. If the risk appetite is higher, this can be shown in the green-amber or red-
amber sections. It is unlikely that a company will have an appetite for a very high risk, so risk appetite is
unlikely to be shown in the red section.
Residual risk can also be recorded, in the green, green-amber, red-amber or red sections of the dashboard.
(i) When risk appetite and residual risk are in the same section of the dashboard, this means that
current risk management/risk control measures are appropriate for the risk.
(ii) When the risk appetite is in a lower-risk section of the dashboard than the residual risk, this
indicates that further control action is needed to reduce the residual risk to an acceptable level.
4.6 Role of the board of directors in identifying and assessing risks
Risk management is largely a responsibility for management. Management:
(i) is normally responsible for identifying key risks
(ii) is responsible for assessing risks and for designing and implementing risk controls
(iii) is responsible for monitoring the effectiveness of risk controls, and keeping risks under review
(iv) should report regularly to the board of directors on risks and risk management.
4.7 ALARP (as low as reasonably practicable) principle
Low risk is more acceptable than high risks. This does not mean that all risk should be avoided. It suggests
rather that there is an acceptable level of risk in a given circumstance to achieve a given objective.
The ALARP principle is that it is usually impossible (or if it is possible it is grossly expensive) to eliminate
all risk but that any residual risk should be as low as reasonably practicable.
ALARP should not be thought of a simple quantitative measure of cost against benefit because any safety
improvement would not be worthwhile only if the costs were disproportionately more than the benefit
achieved. This is a matter of judgement and might vary from country to country.
4.8 Objective and subjective risk perception
In many cases it is difficult to assign a value to either likelihood or impact with any degree of accuracy. In
such cases subjective judgements must be used.
Example:
Objective likelihood measurement
Quality failure in a batch of components (based on previous manufacturing experience)
Subjective likelihood measurement
An oil well disaster occurring this year in Siberia
Objective impact measurement
The change in interest payments as a result of a 1% increase in interest rates.
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Subjective impact measurement

Change in revenue due to change in consumer taste.
Assessment of a risk based on objective measurement of likelihood and impact is more robust than if
based on subjective judgement. This will affect the risk management strategy.
4.9 Related and correlated risk factors
Related risks are those that are often present at the same time.
Risks might also be correlated. This means that they vary together. Risks might be positively correlated
(both go up or down together) or negatively correlated (one falls as the other increases).
Correlation might be
(i) due to the risks having a common cause
(ii) because one type of risk might give rise to the other.
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Business Management and Strategy (BMS): Chapter Summary Chapter No. 17: Controlling Risk
CHAPTER NO. 17
CONTROLLING RISK
1 Monitoring risk
There is no widely-accepted approach to the management of risk. Each business and non-business entity
develops its own risk management structure according to its own needs and perceptions.
1.1 Role of the risk manager
A risk manager might be given responsibility for all aspects of risk.
Alternatively, risk managers might be appointed to help with the management of specific risks, such as:
(i) Insurance
(ii) Health and safety
(iii) Information systems and information technology
(iv) Human resources
(v) Financial risk or treasury risk
(vi) Compliance
A risk manager is not a ‘line’ manager and is not directly responsible for risk management. His role is to
provide information, assistance and advice, and to improve risk awareness within the entity and encourage
the adoption of sound risk management practice.
The role of a risk manager might therefore include:
(i) Helping with the identification of risks
(ii) Establishing ‘tools’ to help with the identification of risks
(iii) Establishing modelling methods for the assessment and measurement of risks
(iv) Collecting risk incident reports
(v) Assisting heads of departments and other line managers in the review of reports by the
internal auditors
(vi) Preparing regular risk management reports for senior managers or risk committees
(vii) Monitoring ‘best practice’ in risk management and encouraging the adoption of best practice
within the entity.
How effective are risk managers?
The effectiveness of risk managers depends partly on the role of the risk manager and partly on the
support that the risk manager receives from the board and senior management.
1.2 The role of risk committees
Some entities establish one or more risk committees.
(i) A risk committee might be a committee of the board of directors. This committee should be
responsible for fulfilling the corporate governance obligations of the board to review the
effectiveness of the system of risk management.
(ii) A risk committee might be an inter-departmental committee responsible for identifying and
monitoring specific aspects of risk, such as:
(a) strategic risks/business risks
(b) operational risk
(c) financial risk
(d) compliance risk
(e) environmental risk.
Functions of risk committee is to identify risks, monitor risks and report on the effectiveness of risk
management to the board or senior management.
1.3 The role of risk auditing
Risks should be monitored. The purpose of risk monitoring is to ensure that:
(i) there are processes and procedures for identifying risk, and that these are effective.
(ii) there are internal controls and other risk management processes in place for managing the risks.
(iii) risk management systems appear to be effective
(iv) the level of risk faced by the entity is consistent with the policies on risk that are set by the
board of directors.
(v) failures in the control of risk are identified and investigated
(vi) weaknesses in risk management processes are identified and corrected.
Risks can be monitored through auditing. Risk auditing involves the systematic investigation by an
independent person (the auditor) of an area of risk management to understand and assess the risks that an
organisation faces. Risk audit is often a complex process due to the broad range and type of risks an
organisation faces.
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1.4 Performing a risk audit

If risk audit is performed by an individual, who is familiar with the company and its systems, procedures
and culture. then
its advantages are as follows:
(i) he is capable of performing highly context-specific risk audits, at a level of detail that an
external auditor may not be able to achieve.
(ii) The audit report is likely to be written in a language and using terms that the company’s
management understand
its disadvantages are as follows:
(i) may fail to identify weaknesses in the system because of 'familiarity threat'.
There are four stages in a risk audit.
(i) Identification: The first step in a risk audit should be to identify what the risks are in a
particular situation, strategy, procedure or system.
(ii) Assessment: When the risks have been identified, the next step should be to assess them. A
risk can be assessed by its expected loss. The expected loss = Probability x Impact.
(iii) Review: The auditor should look at the controls that are in place to manage the risk in the
event that an adverse outcome happens.
(iv) Report: The risk audit should lead to a report to the board of directors or to management,
depending on who commissioned the audit.
2 Embedding risk
2.1 The importance of risk awareness throughout an organisation
Managers take decisions that expose the entity to risk. They need to understand the possible
consequences of their decision-making, and should be satisfied that the risks they have ‘created’ are
justified by the expected benefits.
Every employee needs to be aware of the need to contain operational risks. For example:
(i) All employees must be aware of health and safety regulations, and should comply with them.
(ii) Report incidents where there have been excessive exposures to risk, and control measures
have failed or have not worked properly.
(iii) In some entities, there could be serious consequences of failure to comply with regulations
and procedures.
2.2 Embedding risk awareness in the culture of an organisation
Creating a culture of risk awareness should be a responsibility of the board of directors and senior
management, who should show their own commitment to the management of risk in the things that they
say and do.
(i) There should be reporting systems in place for disclosing issues relating to risk.
(ii) Managers and other employees should recognise the need to disclose information about risks
and about failures in risk control.
(iii) There should be a general recognition that problems should not be kept hidden. ‘Bad news’
should be reported as soon as it is identified.
(iv) To create a culture in which problems are disclosed, there must be openness and transparency.
(v) Individuals should not be criticised for making mistakes, provided that they own up to them
promptly.
(vi) The attitude should be that problems with risks will always occur. When they do happen, the
objective should be to take measures to deal with the problem.
2.3 Embedding risk awareness in systems and procedures
‘Embedding’ risk in systems and procedures means that risk management should be an integral part of
management practice. Risk management must be a core function which managers and other employees
consider every day in the normal course of their activities.
2.4 The role of risk professionals and the need for embedded risk management
The risk management team of an organisation can assist in the development of the risk management
framework and policies.
However, there are two things that this risk management team cannot do:
(i) They cannot put a corporate culture in place that establishes risk awareness and
transparency. The culture needs to be set and then passed on to all members of staff by the
board of directors or the senior management team.
(ii) They also cannot be the only risk managers. The people who created the risks originally – the
business managers – need to be responsible.
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3 Methods of controlling risk

3.1 Different approaches to controlling risk
Risk management methods are much more sophisticated in some industries (and in some countries) than
in others.
Approaches to the management of business risks are:
(i) diversification of risks
(ii) risk transfer
(iii) risk sharing
(iv) hedging risks
3.2 Diversification
The purpose of diversification in business is to invest in a range of different business activities, and build
up a portfolio of different business activities.
Taking the entire portfolio of different businesses, the good performers will offset the bad performers, and
the portfolio as a whole might provide, on average, the expected returns.
When is diversification appropriate?
(i) When management have the skills and experience to manage the portfolio of different
business activities.
(ii) A diversification strategy by a company is much more risky (and less appropriate) when it
takes the company into unrelated business activities.
(iii) Risks are not reduced significantly by diversifying into different activities where the risks are
similar
3.3 Risk transfer
Risk transfer involves passing some or all of a risk on to someone else, so that the other person has the
exposure to the risk. e.g, Insurance
3.4 Risk sharing
Risk sharing involves collaborating with another person and sharing the risks jointly.
Common methods of risk sharing in business are partnerships and joint ventures. In a joint venture, all the
joint venture partners share in the investment, the management, the cost of the investment, the risks and
the rewards.
3.5 Hedging risks
Hedging risk means creating a position (making a transaction) that offsets an exposure to another risk.
Risks can be hedged with a variety of derivative instruments, such as futures, options and swaps.
3.6 Risk avoidance and risk retention
Risk avoidance means not having any exposure to a risk. A business risk can only be avoided by not
investing in the business. Risk avoidance therefore means staying out of a business, or leaving a business
and pulling out of the market.
Risk retention means accepting the risk, in the expectation of making a return. When risks are retained,
they should be managed, to ensure that unnecessary risks are not taken and that the total exposure to the
risk is contained within acceptable limits.
Risk appetite and risk retention
The choice between avoiding risks and accepting risk depends on risk appetite. Risk appetite is the
amount of risk that an entity is willing to accept by investing in business activities, in order to obtain the
expected returns from the business.
A key aspect of risk management is therefore managing the level of risk and:
(i) deciding which risks are acceptable and which are not: setting risk limits
(ii) communicating the policy on risk, and
(iii) monitoring risks, and taking appropriate measures to prevent the risks from becoming excessive.
Variations in risk appetite between different companies
(i) The leaders of small businesses might consider that they can take risks because:
(a) The directors of the company are also its owners; therefore they are not
accountable to other investors for the risks that they take.
(b) the risk of loss is limited by the size of the company.
(c) In large companies with a high value, large risks will often be avoided if they
threaten to reduce value significantly.
(ii) Large companies can afford to take bigger risks than small companies when they are well-
diversified.
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(iii) Because of the hierarchical nature of the management structure it might be difficult to promote
a culture of risk awareness and embed risk within the management processes.
(iv) Business risk is often higher in markets where conditions are volatile and subject to continual
and unpredictable change.
3.7 The TARA framework for risk management
These four approaches are known as the TARA framework for risk management. TARA stands for:
(i) Transferring risk
(ii) Avoiding risk
(iii) Reducing risk
(iv) Accepting risk
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Business Management and Strategy (BMS): Chapter Summary Chapter No. 18: Bsuiness and Professional Ethics
CHAPTER NO. 18
BUSINESS AND PROFESSIONAL ETHICS
1 Professions and the public interest
1.1 The nature of a profession
The word ‘professional’ is associated with a highly-qualified group of individuals who carry out a particular
type of highly-skilled work.
The prime objective of regulating the profession of accountancy rests with the Institute of Chartered
Accountants of Pakistan (ICAP) which is governed through the Chartered Accountants Ordinance 1961.)
The professional body has the power to:
(i) admit new members to the profession
(ii) award qualifications to individuals who achieve a required standard of skill or competence
(iii) expel members from the profession, for unprofessional conduct.
Professionals and their clients
(i) There is a relationship of trust. The client can trust the professional to act in a proper way, in
accordance with a professional code of conduct.
(ii) There is an assurance that the professional has attained a minimum level of expertise and
competence.
(iii) The professional puts the client before himself.
1.2 Acting professionally
Professional behaviour means complying with relevant laws and obligations, including compliance with the
code of conduct
Professional behaviour is commonly associated with:
(i) acting with integrity, and being honest and straight-forward
(ii) providing objective opinions and advice
(iii) using specialist knowledge and skill at an appropriate level for the work
(iv) confidentiality: respecting the confidentiality of information provided by clients
(v) avoiding any action that brings the reputation of the profession into disrepute
(vi) compliance with all relevant laws and regulations.
1.3 Acting in the public interest
It is a responsibility of the accountancy profession ‘not to act exclusively to satisfy the needs of a particular
client or employer’.
Professional codes of ethics do not provide a clear definition, but it is usual to associate the public interest
with matters such as:
(i) detecting and reporting any serious misdemeanour or crime
(ii) protecting health and public safety
(iii) preventing the public from being misled by a statement
(iv) exposing the misuse of public funds and corruption in government
(v) revealing the existence of any conflict of interests of those individuals who are in a position of
power or influence
1.4 Influence of the accounting profession in business and government
Information about business and other organisations comes largely from accountants. Arguably,
accountancy has an influence on business and government that is both:
(i) continuous and
(ii) more extensive than any other profession.
Some of these professions are:
(i) Financial reporting
(ii) Auditing
(iii) Management accounting
(iv) Tax
(v) Consultancy
(vi) Public sector accounting
1.5 Public expectations of the accountancy profession
The general public has high expectations of the accountancy profession.
(i)
rely on accountants to ensure that financial reporting is reliable and ‘fair’, and that management
is not ‘cheating’ by presenting misleading and inaccurate figures in their accounts.
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(ii) Auditors are also seen, by many members of the public (rightly or wrongly), as a safeguard
against fraud.
(iii) The public continues to believe that the accountancy profession is an ethical profession that
offers some protection to society against the ‘excesses’ of capitalism.
1.6 Accountants and acting against the public interest
A function of the professional accountancy bodies is to provide rules of conduct and ethical behaviour, with
the expectation that all members should follow the rules.
Employees come into a company bringing a notion of fairness and justice with them, which they expect to
see within the company.
Fairness and justice are abstract concepts and values that mean different things to different employees and
in different work situations. This is how different cultures (and different sets of rules) arise.
2 Corporate codes of ethics

Companies that acknowledge their ethical responsibilities and corporate social responsibility need to demonstrate
their genuine commitment to these ideals. To do this, they need to consider the implications of ethics and CSR for
their strategic planning and objectives.
2.1 Business ethics
The ethics of business conduct by individual companies depends largely on the ethical stance of the
company and its leaders.
Ethical issues: Ethics in business is generally associated with the following aspects of behaviour:
(i) Acting within the law.
(ii) Fair and honest dealing with suppliers and customers.
(iii) Acting fairly towards employees
(iv) Showing respect and concern for the communities in which the business entity operates.
(v) Showing respect for human rights, and refusing to deal with any entities that do not show
concern for human rights.
(vi) Showing concern for the environment and the need for sustainable businesses.
Ethical stance: An ethical stance is the extent to which an entity will exceed its minimum legal and ethical
obligations to stakeholders and society in general.
(i) Position 1: The company takes the view that its only interests should be the short-term
interests of its shareholders. Business decisions should be taken with satisfying shareholder
interests as the only objective.
(ii) Position 2: The company takes the view that the interests of its shareholders are the most
important concern
(iii) Position 3: The company recognises an obligation not only to its shareholders, but to other
stakeholder groups.
(iv) Position 4: The company has an ethical obligation towards society as a whole, and should be
a ‘shaper of society’, creating a fair and just society for everyone. Financial objectives should
be of secondary importance.
‘Ethical behaviour’ by companies is generally associated with an ethical stance around position 2 or position
3.
2.2 Consequences of unethical behaviour in business
Acting ethically reduces risk. There are several possible consequences of unethical behaviour.
(i) there is a risk of being ‘found out’.
(ii) When businesses act legally but in a way that the general public considers ‘immoral’, there is a
risk of action by the government to makes such action illegal.
(iii) Businesses that act in an unethical way are also exposed to reputation risk.
Reputation risk: Companies with a good reputation find it easier to win and keep loyal customers, and also
loyal employees. When a business reputation is damaged, there is a risk of losing customers to rival
companies. Companies that have been exposed to reputation risk include:
(i) companies accused of buying from suppliers in developing countries that use child labour or
slave labour
(ii) companies accused of polluting the environment
(iii) companies in the food and drugs industries accused of selling dangerous food products or
dangerous drugs.
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2.3 The nature and purpose of a corporate code of ethics

A corporate code of ethics is a code of ethical behaviour, issued by the board of directors of a company. It is
a formal written statement, and should be distributed or easily available to all employees. The decisions and
actions of all employees in the company must be guided by the code.
If ethical codes are to be effective then:
(i) They must be strongly endorsed from the top of the company.
(ii) Training must be given.
(iii) The code must be kept up-to-date.
(iv) The code must be available to all
Reasons why companies might develop a code of ethics are progressive in nature.
Adherence to the code should be part of employees’ contracts and departure from the code should be a
disciplinary offence.
(i) Managing for compliance: The company wants to ensure that all its employees comply with
relevant laws and regulations, and conduct themselves in a way that the public expects.
(ii) Managing stakeholder relations: A code of ethics can help to improve and develop the
relations between the company and its stakeholders, by improving the trust that stakeholders
have in the company.
(iii) Creating a value-based organisation: A company might recognise the long-term benefits of
creating an ethical culture, and encouraging employees to act and think in a way that is
consistent with the values in its code of ethics.
Note on global organisations: A criticism of codes of ethics of global companies is that they often focus on
the company’s relationships with stakeholders in their ‘home country’ and do not give enough thought to
their operations in other countries.
2.4 The content of a corporate code of ethics
There is no standard format or content for a code of ethics, but a typical code contains:
(i) general statements about ethical conduct by employees
(ii) specific reference to the company’s dealings with each stakeholder group
General statements about ethical conduct
A code of conduct should specify that compliance with local laws is essential. In addition, employees
should comply with the policies and procedures of the company. The code might also include an
overview of business conduct.
It might also contain statements about the values of the company, such as:
(i) acting at all times with integrity
(ii) protecting the environment
(iii) the ‘pursuit of excellence’
(iv) respect for the individual
Dealings with stakeholder groups
(i) Employees: A code of ethics might include statements about:
(a) human rights
(b) equal opportunities for all employees
(c) refusal to tolerate harassment of employees
(d) concern for the health and safety of employees
(e) respect for the privacy of confidential information
(f) company policy on giving or receiving entertainment or bribes.
(ii) Customers: A code of ethics might include statements about
(a) fair dealing with customers
(b) product safety and/or product quality
(c) the truthfulness of advertisements
(d) respect for the privacy of confidential information about each customer.
(iii) Competitors: A code of ethics might include statements about:
(a) fair dealing with competitors
(b) the use of techniques for obtaining information about competitors
(iv) Shareholders: The key issue with shareholders is to maintain and develop trust and
confidence, which might be achieved through disclosure of information (openness and
transparency).
Breaching a corporate code of ethics
Breaching a company’s code of ethical conduct would be a disciplinary offence. An initial breach might
result in a verbal warning with subsequent breaches being addressed with written warnings and ultimately
suspension or redundancy. A problem arises however when:
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(i) an employee’s supervisor or manager is involved in the illegal or unethical activity, or

(ii) the supervisor or manager has taken no action and has ignored the matter
In these situations, the employee would have to report his or her concerns through a different reporting
channel. In practice, this could mean reporting the matter to a director or a committee of the board of
directors. Some companies have established procedures that allow employees to report their concerns.
These are called ‘whistleblowing’ procedures, or ‘blowing the whistle’.
2.5 Whistleblowing
‘Whistleblowing’ means reporting suspicions of illegal or improper behaviour to a person in authority.
Practical considerations
An employee considering ‘blowing the whistle’ should think about the following before deciding to actually
blow the whistle:
(i) Are all the facts correct?
(ii) Is there sufficient evidence to justify blowing the whistle?
(iii) double-check they have thought about the situation objectively and with neutral emotion
(iv) Consider discussing events in confidence with an independent confidential third party
(v) impact that blowing the whistle may have on the whistleblower’s career.
(vi) Double-check company policy and whistleblowing procedures in the staff handbook.
(vii) whether there is scope to discuss events confidentially with the human resources department.
(viii) Is there an internal audit department
(ix) Consider if there is a legal obligation to report
Problems with whistleblowing
There are several problems with whistleblowing.
(i) At work, colleagues and managers might treat the individual with hostility, making it difficult for
the individual to continue in the job.
(ii) The allegations might be made for reasons of malice and dislike, or because there has been an
argument at work.
A problem facing companies is therefore:
(i) how to encourage reports of illegal or unethical behaviour, by protecting honest whistleblowers,
(ii) how to discourage malicious and unfounded allegations
3 Codes of ethics for accountants

3.1 The need for a professional code of ethics for accountants
Every professional accountancy body has issued a code of conduct and code of ethics for its members and
student members. Even when an individual works for a company or a firm of accountants that has its own
code of ethics, there is a need for a professional code of conduct. This is because accountants have a
professional duty to act in the public interest, and this aspect of professional behaviour is not covered by
corporate ethical codes.
3.2 The IESBA (IFAC) Code of Ethics for Professional Accountants and ICAP Code
The IESBA Code establishes a minimum world-wide code of ethical conduct for accountants. The IESBA
Code is divided into three parts:
(i) general principles and application of the code
(ii) guidelines for accountants in public practice
(iii) guidelines for accountants in business.
Accountants in practice have to deal in an ethical way with issues arising from the client relationship.
Accountants in business have to deal with ethical issues where they are employees of the organisation in
which the ethical problem has occurred.
Principles-based ethics codes and rules-based ethics codes
It would be possible for a regulatory body to issue a code of ethics for accountants that contains specific
rules about how they should act in specific situations. This would be a rules-based code of ethics. Rules-
based codes have several weaknesses:
(i) it is impossible to plan for every type of ethical problem that will arise, and make a rule in
advance of what course of action the accountant must take.
(ii) Over time, the type of situations (ethical dilemmas) that an accountant might face could
change, as the business environment changes.
(iii) Ethical views differ between countries and cultures.
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ICAP’s Code of Ethics for Chartered Accountants

ICAP’s ‘Code of Ethics for Chartered Accountants’ (‘the Code’) is the code of ethics applicable to members
and students of ICAP. The Code contains similar provisions to the IESBA Code of Ethics for Professional
Accountants (which you would expect because ICAP has adopted the IESBA Code).
3.3 Fundamental principles
Professional accountants are required to comply with the following fundamental principles:
(i) Integrity
An accountant must be honest and straightforward in his professional and business dealings. This includes
a requirement for ‘fair dealing’ and a requirement to be truthful. A very important aspect of integrity is that
an accountant should not be associated with reports or any other provision of information where he or she
believes that:
(a) the information contains a materially false or misleading statement
(b) the information contains a statement that has been prepared and provided recklessly
(c) there are omissions or the information is presented in a way that makes the relevant
information difficult to see, with the effect that the information could be seriously misleading.
(ii) Objectivity
An accountant must not allow his professional or business judgement to be affected by:
(a) bias (personal prejudice)
(b) conflicts of interest
(c) undue influence from others
(iii) Professional competence and due care
An accountant has a duty to maintain his professional knowledge and skills at a level that enables him to
provide a competent professional service to his clients or employer. This includes a requirement to keep up
to date with developments in areas of accounting that are relevant to the work that he does. Accountants
should also act diligently in accordance with relevant technical and professional standards when doing their
work for clients or employer.
(iv) Confidentiality
Accountants must respect the confidentiality of information obtained in the course of their work. The
requirement to keep information confidential applies:
(a) in a social environment as well as at work
(b) after the accountant has moved to another job
There are some circumstances when the disclosure of confidential information is permitted or even required
by law.
(a) if the client (or employee) has given permission.
(b) Confidential information must be disclosed to the authorities in certain circumstances.
(c) The law might also require the disclosure of confidential information to the appropriate authorities.
(d) when the accountant has a professional right or duty, and disclosure is not prohibited by law.
(v) Professional behaviour
Accountants are required to observe relevant laws and regulations, and to avoid any actions that would
discredit the accountancy profession.
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Business Management and Strategy (BMS): Chapter Summary Chapter No. 19: Conflict of Interest and Ethical Conflict Resoution
CHAPTER NO. 19
CONFLICTS OF INTEREST AND ETHICAL CONFLICT RESOLUTION
1 Ethical threats and safeguards
1.1 Ethical conflicts
An ethical conflict (also known as an ethical dilemma) is when two ethical principles demand opposite
results in the same situation.
In order to resolve the conflict a choice must be made that by definition will leave at least one of the ethical
principles compromised.
A key reason behind many ethical conflicts is a conflict of interest between taking decisions in one’s own
self-interest versus making decisions in the best interest of a client.
Professional codes of ethics are employed in the accountancy profession in order to establish consistent
behaviour and a robust ethical conflict resolution process.
1.2 Rules-based and principles-based approaches to ethical conflicts
When accountants are faced with an ethical conflict they need to know what to do. If there is a threat to their
compliance with the fundamental principles of the ethical code, how should they ensure their compliance
and deal with the threat? There are two possible approaches that the professional accountancy bodies
could take, a rules-based approach and a principles-based approach.
(i) A rules-based approach is to identify each possible ethical problem or ethical dilemma that
could arise in the work of an accountant, and specify what the accountant must do in each
situation.
(ii) A principles-based approach is to specify the principles that should be applied when trying to
resolve an ethical problem, offer some general guidelines, but leave it to the judgement of the
accountant to apply the principles sensibly in each particular situation.
The main reason for taking a principles-based approach is that it is impossible to identify every ethical
dilemma that accountants might face, with differing circumstances in each case.
The nature of a principles-based approach
(i) Identify threats to compliance with the fundamental principles.
(ii) Evaluate the threat: Qualitative factors as well as quantitative factors
(iii) Respond to the threat: If it is ‘not insignificant’, the accountant should apply appropriate
safeguards, if he can, to eliminate the threat or reduce the threat to an insignificant level.
(iv) If suitable safeguards cannot be applied, more drastic action will be needed, such as refusing
to carry out a professional service, ending the relationship with a client or resigning from the
job.
1.3 Nature of ethical threats
Threats to compliance with the fundamental ethical principles are grouped into five broad categories:
(i) Self-interest threats, or conflicts of interest.
These occur when the personal interests of the professional accountant, or a close family member, are (or
could be) affected by the accountant’s decisions or actions.
(ii) Self-review threats
This type of threat occurs when a professional accountant is responsible for reviewing some work or a
judgement that he was responsible for originally.
(iii) Advocacy threats
This type of threat can occur when an accountant promotes the point of view of a client
(iv) Familiarity threats.
A familiarity threat arises from knowing someone very well, possibly through a long association in business.
The risk is that an accountant might become too familiar with a client and therefore becomes more
sympathetic to the client and more willing to accept the client’s point of view.
(v) Intimidation threats
A professional accountant might find that his objectivity and independence is threatened by intimidation,
either real or imagined.
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1.4 Nature of ethical safeguards

When there are threats to compliance with the fundamental ethical principles, the accountant should assess
the safeguards against the threat.
(i) There might already be safeguards in place that eliminate the possibility that the risk will ever
materialise, or that reduce the risk to an acceptable level.
(ii) If the safeguards that exist are not sufficient, the accountant should try to introduce new
safeguards to eliminate or reduce the risk to an insignificant level.
Ethical safeguards can be grouped into two broad categories:
(i) Safeguards created by legislation, regulation or the accountancy profession
(ii) Safeguards in the work environment
Safeguards created by legislation, regulation or the accountancy profession
Safeguards that are created externally, by legislation, regulation or the profession, include the following.
(i) The requirements for individuals to have education and training and work experience
(ii) The continuing professional development (CPD) requirements for qualified members
(iii) Corporate governance regulations
(iv) Professional standards
(v) Monitoring procedures and disciplinary procedures.
(vi) External review by a legally-empowered third party.
Safeguards in the work environment
A variety of safeguards can be applied within the work environment. These can be categorised into:
(i) safeguards that apply across the entire firm or company, and
(a) a code of ethics for the company or firm
(b) sound system of internal control
(c) the application of appropriate policies and procedures
(d) policies that limit the reliance of the firm on the fee income from a single client
(e) procedures for identifying personal interests and family relationships
(f) whistle blowing procedures
(ii) safeguards that are specific to a particular item of work.
(a) keeping individuals away from work where there might be a threat to their
compliance with the fundamental principles
(b) in the case of audit firms, rotating the audit partner
(c) the application of strong internal controls
(d) using another accountant to review the work that has been done by a colleague
(e) discussing ethical issues with authority
1.5 Ethical threats to accountants in business
Accountants who work in business can be placed under serious pressure by an employer to act in an
unethical way. Accountants might therefore be asked to:
(i) break a law or regulation: illegal activity is always unethical
(ii) ignore technical standards, such as financial reporting standards or auditing standards
(iii) lie to the external auditors or regulators
(iv) issue a report that is misleading and misrepresents the facts.
When an accountant is put under pressure to act in this way, the threat comes from:
(i) self-interest threats
(ii) intimidation threats
(iii) familiarity threats
There is a threat to the accountant’s compliance with the fundamental principles of:
(i) integrity
(ii) objectivity
(iii) professional competence and due care
(iv) professional behaviour
2 A model for resolving ethical conflicts

2.1 A model based on threats and safeguards
ICAP’s Code of Ethics sets out a model for dealing with ethical conflicts, and using judgement to decide
how the conflict should be resolved is set out below.
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Stage 1 Recognise and define the ethical issues.

Stage 2 Identify the threats to compliance.
Stage 3 Assess the significance of the threats.
Stage 4 If the threats are ‘not insignificant’, consider the additional safeguards that could be used.
Stage 5 Re-assess the threats to compliance after additional safeguards. Do the additional safeguards
eliminate the risk or reduce it to an insignificant level?
Stage 6 Make the decision about what to do.
2.2 The mirror test
To carry out a mirror test, you have to answer a basic question about the ethics of a course of action.
Can you justify the decision you have taken from an ethical perspective?
Three questions that you can ask when carrying out the mirror test are as follows.
(i) Is it legal? If it is not legal, you should not be doing it.
(ii) What will other people think? Think about the opinion of people whose views matter to you,
such as close family members (a parent, spouse, or close friend) or the media.
(iii) Even if the action is legal, it is ethically correct?
2.3 Applying the model in practice
The aim should be to find a sensible solution to each ethical problem. The solution can often be reached
through agreement with other people, and through discussions. It is not always necessary to opt for an
extreme solution, such as reporting a problem to an external authority, resigning from a job or declining to
work for a client.
3 Bribery and corruption

3.1 Bribery and corruption
Corruption involves behaviour on the part of officials in the public and private sectors, in which they
improperly and unlawfully enrich themselves and/or those close to them, or induce others to do so, by
misusing the position in which they are placed.
3.2 Bribery and corporate governance
Bribery and corruption result in conflict of interest between a person’s selfinterest and that person’s duty to
perform a task. A bribe that secures a course of action that a person would not necessarily have taken is
against the interests of those on behalf of whom a person should be acting.
3.3 Societal impact of bribery
(i) Political costs
(ii) Economic costs
(iii) Social costs
(iv) Environmental costs
3.4 Measures to reduce and combat bribery
There is no single way to combat bribery. The fight against bribery is built on a wide foundation. Bribery will
fail to distort the fair running of business and society when there is:
(i) a strong sense of fairness in participants in transactions;
(ii) fair reward for job performance;
(iii) transparency of decision making;
(iv) strong leadership;
(v) clear policies and procedures;
(vi) strong candidate selection procedures with good education and training processes;
(vii) strong and enforceable laws
3.5 Anti-bribery legislation
OECD Anti-Bribery convention
Many countries around the world have introduced specific anti-bribery legislation. For example:
(i) UK: the UK Bribery Act 2011
(ii) USA: the Foreign Corrupt Practices Act
(iii) Canada: Corruption of Foreign Public Officials Act
Pakistani law relating to bribery and corruption
There arestill a number of relevant laws that address bribery and corruption in Pakistan including:
(i) The prevention of corruption act 1947
(ii) The national accountability bureau ordinance 1999
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Business Management and Strategy (BMS): Chapter Summary Chapter No. 20: Corprate Social Resposibility and Sustainability
CHAPTER NO. 20
CORPORATE SOCIAL RESPONSIBILITY AND SUSTAINABILITY
1 Corporate social responsibility
1.1 Definition of corporate social responsibility (CSR)
Corporate social responsibility refers to the responsibilities that a company has towards society.
CSR can be described as decision-making by a business that is linked to ethical values and respect for
individuals, society and the environment, as well as compliance with legal requirements.
There are two key areas of responsibility:
(i) general responsibilities that are a key part of the board’s duties which need to be completed in
order to succeed in their industry and/or are regulatory/legal requirements that are imposed on
them.
(ii) duties that some people feel go beyond these general responsibilities.
1.2 Principles of CSR
Corporate social responsibility has five main aspects.
(i) A company should operate in an ethical way, and with integrity.
(ii) A company should treat its employees fairly and with respect.
(iii) A company should demonstrate respect for basic human rights.
(iv) A company should be a responsible citizen in its community.
(v) A company should do what it can to sustain the environment for future generations. This could
take the form of:
(a) reducing pollution of the air, land or rivers and seas
(b) developing a sustainable business
(c) cutting down the use of non-renewable (and polluting) energy resources
(d) re-cycling of waste materials.
1.3 CSR and stakeholders in the company
A company has responsibilities not only to its shareholders, but also to its employees, all its customers and
suppliers, and to society as a whole. In developing strategies for the future, a company should recognise
these responsibilities. The objective of profit maximisation without regard for social and environmental
responsibilities should not be acceptable.
1.4 The effect of CSR on company strategy
If companies fail to respond to growing public concern about social and environmental issues, they will
suffer a damage to their reputation and the possible loss (long term) of sales and profits. This is the problem
for companies of reputation risk.
Many large public companies have adopted formal environmental policies, with objectives for creating a
sustainable business and being environment-friendly.
If a company has a formal policy of providing secure employment, fair wages and salaries, and good
working conditions to its employees, this policy might affect strategic decisions about re-locating business
and making staff redundant.
CSR and competitive advantage
Michael Porter suggested that companies should not merely be taking corporate social responsibility
seriously as an idea. They should also be ‘embedding’ CSR into their corporate and business strategy, in
order to build a competitive advantage.
Formulating a CSR policy
The following steps might be taken by a company to implement a CSR policy:
(i) It should decide its code of ethical values, and possibly publish these as a Code of Ethics.
(ii) The gap between the current position and the target position provides a basis for developing
CSR strategies.
(iii) The company should develop realistic targets and strategies for its CSR policies. These
strategies should be implemented
(iv) Key stakeholders in the company should be identified, whose views the company wishes to
influence
(v) The company’s CSR achievements should be communicated to the key stakeholders. This is
the main purpose of CSR reporting.
(vi) The company’s CSR achievements should be monitored, and actual achievements compared
with (1) the targets and (2) the CSR achievements of similar companies
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1.5 CSR reporting

CSR reports are also called social and environmental reports, and CSR reporting is sometimes called
sustainability reporting, when its main focus is on environmental issues.
The purpose of CSR reports is to inform key stakeholders about the CSR policy objectives of the company
and how successful it has been in achieving them.
Global Reporting Initiative (GRI)
The Global Reporting Initiative is a US-based initiative that encourages companies world-wide to publish
sustainability reports that are prepared using a common reporting framework.
Sustainability reporting within the GRI guidelines is based on measuring three areas of performance,
sometimes called the ‘triple bottom line’. These are:
(i) financial performance
(ii) impacts on the environment and natural resources
(iii) social benefits and costs.
Mandatory reporting on CSR issues
In some countries, such as the countries of the European Union, some reporting on CSR issues is required
by companies in their annual business review.
1.6 CSR and institutional investors
Pressure on companies to show greater CSR awareness has come from institutional investors, as well as
the general public and consumers. There are some ‘ethical investors’, including some investment
institutions, that choose to invest only in companies that meet certain minimum standards of social and
environmental behaviour.
2 Social and environmental footprints

2.1 Introduction
An organisation is said to create an ‘environmental footprint’ and a ‘social footprint’ - a visible mark on the
environment and on society. The social footprint may be either beneficial or damaging. The environmental
footprint is almost inevitably damaging.
2.2 Environmental footprint (ecological footprint)
An environmental footprint, also called an ecological footprint, is a term that means the impact that an entity
has on the environment, in terms of:
(i) the amount of raw materials that it uses to make its products or services
(ii) non-renewable resources that it uses to make its products or services
(iii) the quantity of wastes and emissions that it creates in the process.
Reducing an environmental footprint involves the development and implementation of policies for:
(i) better (more efficient) resource management, and using different resources
(ii) ‘green’ procurement policies
(iii) waste minimisation and waste management
The measurement of environmental footprint
An environmental footprint for any economic activity or any company can be measured in terms of hectares
of productive land or aquatic ecosystems.
One widely-used method of footprint analysis for the economic activity of nation states is to identify four
methods of environmental consumption:
(i) energy use
(ii) the built environment
(iii) food products
(iv) forestry products
2.3 Carbon neutrality
The effect on the environment of economic activities by individual companies may be measured in terms of
emissions of carbon-based pollutants, such as the release of carbon dioxide into the atmosphere.
Carbon neutrality exists when a company is able to counterbalance its use of carbon products, and
particularly its carbon dioxide emissions, with activities that reduce the amount of carbon dioxide in the
atmosphere such as growing trees or plants.
2.4 Social footprint
A social footprint is the effect of economic activity on society and people. In general, economic activity is
seen as providing benefits for society. Companies might seek to measure the contribution of their activities
towards society in terms of:
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(i) Total numbers employed or increase in the total number of employees

(ii) The proportion of the total work force employed in different parts of the world
(iii) The proportion of the total work force that is female or from different ethnic groups
(iv) Health and safety at work
2.5 Social ecology
Social ecologists argue that the environmental crisis has been caused by companies seeking growth, profits
and economic self-interest. They argue that the environmental crisis cannot be averted without a radical
change in human society.
2.6 Towards the measurement of social and environmental effects
Environmental and social effects should be quantified, because managers find it easier to plan and control
using numbers than using more general qualitative assessments. Some accountancy bodies are
contributing towards efforts to establish measurement and reporting systems for social and environmental
issues, to complement traditional financial reporting.
3 Sustainability and accounting for sustainability

3.1 Accounting, the economic model and sustainability reporting
Financial reporting measures the consequences of a company’s activities in terms of the use of the assets
that it owns and the liabilities for which it has the direct responsibility for payment.
Investment decisions by large companies are made using accounting techniques such as discounted cash
flow analysis, which focuses exclusively on economic consequences of investment, and does not measure
or evaluate the environmental and social impact.
As companies have become increasingly aware of environmental issues, and begin to accept that economic
growth might not be sustainable, they have become more interested in measuring sustainability and
environmental impact.
It seems quite possible that as systems for reporting sustainability are developed, the accountancy
profession will be closely involved, because of its long experience with measurement and performance
reporting systems.
3.2 Sustainable development
Definition 1:
“development that meets the needs of the present without compromising the ability of future generations to
meet their own needs.”
Definition 2:
“A dynamic process which enables all people to realise their potential and improve their quality of life in
ways which simultaneously protect and enhance the Earth’s life support system”
3.3 Reporting by companies on sustainable development
Several techniques have been used by companies to plan and report their sustainable development, or the
impact of their activities on society and the environment. These include:
(i) measures of the ‘environmental footprint’ for individual companies
(ii) triple bottom line reporting
(iii) the balanced scorecard and sustainability balanced scorecard
(iv) the sustainability assessment model (SAM) and full-cost accounting (FCA).
3.4 ‘Environmental footprint’ for individual companies
A company can measure its environmental footprint through a series of measurements. The measurements
appropriate for each individual company might vary according to the nature of its operations, but should
relate to the following environmental issues:
(i) the company’s consumption of materials subject to depletion and non-renewable resources:
also the company’s use of other key resources such as land
(ii) the pollution created by the company’s activities
(iii) an assessment, in either qualitative or quantitative terms, of the broader effect of the
company’s resource consumption and pollution on the environment.
3.5 Triple bottom line reporting
The ‘triple bottom line’ gets its name because companies report their performance not simple in terms of
profit: they provide key measurements for three aspects of performance:
(i) economic indicators
(ii) environmental indicators, and
(iii) social indicators
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Economic indicators will include measurements relating to:

(i) sales revenue
(ii) profits, earnings and earnings per share
(iii) dividends per share
(iv) global market share (as a % of the total market)
(v) in some industries, such as car production, units of sale worldwide.
Environmental indicators might include measurements relating to:
(i) reducing the ‘intensity’ of materials in products and services
(ii) reducing energy intensity
(iii) minimising the release of toxic materials/pollutants
(iv) improving the ability to recycle materials
(v) maximising the use of renewable resources
(vi) extending the life of a product
Weaknesses in triple bottom line reporting
(i) There are no widely-established standards for triple bottom line reporting, and no standard
methods for measuring social and environmental impacts.
(ii) If the social and environmental measures are not subject to independent audit, there might be
doubts about the reliability of the data presented in a company’s report.
FTSE4Good index
FTSE4Good index includes companies who demonstrate commitment to supply chain labour rights,
countering bribery, environmental management, upholding human and labour rights and climate change
mitigation and adaption.
3.6 Balanced scorecard and sustainable balanced scorecard
Balance Scorecard is a method of setting targets and measuring performance, for both entire companies
and individual managers within a company. The balanced scorecard is a ‘strategy map’ divided into four
elements or perspectives:
(i) a financial perspective
(ii) a customer perspective
(iii) an internal perspective (operations)
(iv) an innovation and learning perspective.
For each perspective, goals, targets and tasks are established, with indicators of performance for
comparing actual results against the target. The purpose of a balanced scorecard is to prevent
management from directing all their attention to short-term financial considerations.
A sustainable balanced scorecard has been developed by Moller and Schaltegger. This adds a ‘non-market’
perspective to the balanced scorecard, for the environmental and social impacts of the company’s
operations or the manager’s activities. This type of scorecard therefore includes an element of accounting
for sustainability.
3.7 Sustainability Assessment Model (SAM) and full-cost accounting (FCA)
The Sustainability Assessment Model (SAM) measures the impacts on sustainability of a product over its
full life cycle, from raw material extraction through the production process to its final consumption. These
impacts:
(i) the direct economic cost of the product, but also
(ii) the direct impact of the company’s operations on society and the environment, and also
(iii) the broader social costs and benefits.
The total impacts are measured as a cost, known as full cost, and the measurement system supporting the
Sustainability Assessment Model is called full-cost accounting or FCA, because it includes environmental
and social costs as well as economic costs.
The SAM and FCA approach
The SAM is a four-step approach to measuring the impacts of a project or product over its entire life cycle.
(i) Step 1. A SAM exercise is established. The object of the exercise is identified, that which will
be subjected to evaluation. This might be a product, a process, a part of an entity’s operations
or the whole of its operations.
(ii) Step 2. The boundaries of the SAM evaluation are defined. All the costs and benefits to be
included, including environmental and social costs or benefits, are identified over the full life
cycle of the product (or other object of the exercise).
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(iii) Step 3. The impacts of the product are measured under four headings:
(a) economic
(b) resource use
(c) environmental
(d) social.
(iv) Step 4. These non-monetary measures are converted into a common basis of measurement:
money. This total money measurement provides the full cost analysis of the product, process
or operation.
Making use of FCA
Full-cost analysis might show the entire cost of a product or an activity, including its social and
environmental impacts (or ‘externalities’). However, it might have benefits for strategic planning in
companies where it might be expected that in future companies might be required to pay for its
‘externalities’, so that the ‘externalities’ become internal costs.
3.8 Sustainability reporting: concluding remarks
Reasons that seem to be persuading companies to report on sustainability include competition, risk
management, emerging markets, corporate reputation and, in some countries, mandatory minimum
reporting requirements.
4 Integrated reporting
4.1 Introduction to integrated reporting
An integrated report is a concise communication about how an organisation’s strategy, governance,
performance and prospects, in the context of its external environment, lead to the creation of value in the
short, medium and long term.
Financial reports are historical in nature, providing little information on the future potential of a company.
Corporate sustainability reports help to fill this gap, but are not often linked to a company’s strategy or
financial performance, and provide insufficient information on value creation. Businesses need a reporting
environment that allows them to explain how their strategy drives performance and leads to the creation of
value over time.
International Integrated Reporting Council (IIRC)
The aims of the IIRC are as follows:
(i) to improve the quality of information available to providers of financial capital;
(ii) to promote a more cohesive and efficient approach to corporate reporting;
(iii) to enhance accountability and stewardship; and
(iv) to support integrated thinking, decision-making and actions that focus on the creation of value
over the short, medium and long term
4.2 The IIRC Framework
The international framework (like IFRS) contains principles based requirements
Using the framework
An integrated report should be a designated, identifiable communication. Any communication claiming to be
an integrated report and referencing the Framework should apply all the requirements identified in bold
unless:
(i) the unavailability of reliable information or specific legal prohibitions results in an inability to
disclose material information; or
(ii) disclosure of material information would cause significant competitive harm.
In the case of the unavailability of reliable information or specific legal prohibitions, an integrated report
should:
(i) indicate the nature of the information that has been omitted
(ii) explain the reason why it has been omitted; and
(iii) in the case of the unavailability of data, identify the steps being taken to obtain the information
and the expected time frame for doing so.
An integrated report should include a statement from those charged with governance that includes:
(i) an acknowledgement of their responsibility to ensure the integrity of the integrated report;
(ii) an acknowledgement that they have applied their collective mind to the preparation and
presentation of the integrated report;
(iii) their opinion or conclusion about whether the integrated report is presented in accordance with
this Framework;
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An integrated report that does not include such a statement, should explain:
(i) the role those charged with governance played in its preparation and presentation;
(ii) the steps being taken to include such a statement in future reports; and
(iii) the time frame for doing so, which should be no later than the organisation's third integrated
report that references this Framework.
The capitals
The capitals (resources and relationships) on which an organisation depends are highly relevant to
integrated reporting. Integrated reporting should provide transparency to what the capitals are for an
organisation, how an organisation uses them and its impact on them. The capitals include the following:
(i) Financial: Cash available for use in the business. Might be generated from operations and/or
raised through equity or debt.
FM SHIN (ii) Manufactured: Buildings, infrastructure and equipment used in producing goods and
delivering services.
(iii) Intellectual Knowledge-based intangibles such as protocols, copyright and software that
provide a competitive advantage.
(iv) Human: The skills, experience and motivation needed to innovate.
(v) Social and relationship: Relationships and institutions within each stakeholder group and
network that underpin wellbeing.
(vi) Natural Inputs to goods and services such as land, water, minerals and forests. Activities also
impact natural capitals.
Guiding principles
(i) Strategic focus and future orientation
(ii) Connectivity of information
(iii) Stakeholder relationships
(iv) Materiality
(v) Conciseness
(vi) Reliability and completeness
(vii) Consistency and comparability
Content elements
An integrated report should answer the following questions:
(i) What does the organisation do and what are the circumstances under which it operates?
(ii) How does the organisation's governance structure support its ability to create value in the
short, medium and long term?
(iii) What is the organisation's business model?
(iv) What are the specific risks and opportunities that affect the organisation's ability to create
value over the short, medium and long-term, and how is the organisation dealing with them?
(v) Where does the organisation want to go and how does it intend to get there?
(vi) To what extent has the organisation achieved its strategic objective for the period and what are
its outcomes in terms of effects on the capitals?
(vii) What challenges and uncertainties is the organisation likely to encounter in pursuing its
strategy, and what are the potential implications for its business model and future
performance?
(viii) How does the organisation determine what matters to include in the integrated report and how
are such matters quantified or evaluated?
4.3 Benefits and challenges of integrated reporting
Benefits of integrated reporting include the following:
(i) Improved reputation through greater transparency leading to better access to capital.
(ii) Better decision-making through improved resource allocation and enhanced risk management.
(iii) Greater trust and engagement with stakeholders due to greater availability of relevant and
useful information.
(iv) Improved governance and stewardship given a focus on longer timeframe and the impact on
common resources.
Challenges facing integrated reporting include the following:
(i) Lack of clarity and consistency regarding directors’ liabilities with respect to their reporting on
the future and evolving issues.
(ii) Balancing the risk of disclosing valuable competitive information with the benefits of embracing
integrated reporting.
(iii) May not be successful in changing the focus towards long-term rather than short-term.
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CFAP-03

Business Management &

1.2 Levels of strategy

2 Elements of strategic management and business analysis

(i) The environment - (Threats and opportunities)

3 Organisational purpose and strategy

4 Stakeholders and stakeholder expectations

Very Low Interest of the stakeholder Very High

Minimum Effort Keep Informed

4.5 Stakeholder influence: the cultural context

5 Intended and emergent strategies

6.4 Reality check

3.3 Favourable factor conditions

4 World Trade Organisation

2 Industry competition: Five Forces model

2.9 Using the Five Forces model

3 Life cycle model

Benefits of Life cycle costing

4 Strategic groups and market segmentation

4.4 Market segmentation

5 Boston Consulting Group matrix (BCG matrix)

The four categories of product (or business unit) are:

6 Opportunities and threats

3 Critical success factors for products and services

(a) annual sales (by business segment or geographical segment)

5 Resources and competences

6 Capabilities and competitive advantage

7 Analysing strengths and weaknesses

(vi) Financial Resources

2 The strategic clock

Low price strategy: Position 2

3 Cost leadership, differentiation and lock-in strategies

3.6 Target markets

1.4 Product-based strategies and strategic direction

2 Strategic direction: Ansoff’s growth matrix

Existing MARKET PENETRATION PRODUCT DEVELOPMENT

2.2 Market penetration strategy

2.7 Withdrawal strategy

3 Methods of strategic development

Phase 2: Period of growth through direction

Arguments against vertical integration

4 Methods of business forecasting

Comment on the high-low method

Analysing a time series

5 Assessment of business strategies

5.4 Suitability: assess resources and competencies

In a functional organisation structure,

1.6 Matrix organisation structure

The tall-narrow structure often has the following characteristics.

2 Internal and external relationships

2.3 External relationships

3 The most appropriate organisation structure

Mechanistic Structure Organic Structure

(iv) Divisionalised form

4.3 Achieving planned benefits

5 Managing strategic change

Skills for managing change

A consultant is often used because:

6.5 Methodology of business process redesign

2 Research and Development Strategy