p3 Acca Workbook Q & A PDF

ACCA P3 Workbook Questions & Solutions!
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ACCA P3 - Business
Analysis
Workbook
Lecture 1 - Strategy
Formation
Illustration 1
F is a leading manufacturer of plastics. Its major products are beer crates and small
containers for food sold in supermarkets. Together these two product ranges constitute
90% of Fs business, the remainder coming from selling more technologically sophisticated
products.
The company is faced with a number of difficulties and may have to issue a profits warning
in the coming year. Although the profit levels have been uneven for the past five years, this
is the first time that F will have to report significantly reduced profits.
F has been adversely affected by the aggressive marketing of foreign companies importing
beer crates into the market, such that Fs market share has fallen from 80% to 60% in the
past three years. Consolidation in the brewery industry has meant that profit margins for
crate manufacturers have been squeezed.
The company is heavily dependent upon the home market, which accounts for 75% of its
total sales. Exports have been mainly of food containers for supermarkets in neighbouring
countries.
F has invested heavily in research and development (R&D) and, although there is one
exciting proposition in electro-plastics, most expenditure has been on projects selected by
R&D managers who have little commercial awareness. There is the possibility that some
new products may be developed from the electro-plastics research.
F is highly centralised, with many decisions taken by the 20 members of the board of
directors. The workforce is highly unionised, with a number of different unions represented.
Each factory has several negotiating committees set up to agree pay and conditions.
Negotiations are often time consuming and confrontational. This has resulted in very
precise job definitions, which are strictly adhered to. This has further resulted in
considerable inflexibility, together with a complicated system of labour grades.
The directors have had little communication with stock market analysts and investors, who
have little knowledge of the company other than what is shown in the published accounts.
An informal group of institutional shareholders has asked for a strategic review and has
suggested that F should withdraw from the beer crate market.
Required:
(i) Discuss the main difficulties faced by F.
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(5 marks)
(ii) Identify and evaluate alternative strategies that F could adopt to address its difficulties
and recommend those that are most appropriate
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(12 marks)
Solution
(i)
F is faced by a number of difficulties at the present time.
The company's turnover and profits are being affected by the loss of home market share
which, if not remedied, will lead to foreign companies dominating the market.
The price "war" that is occurring in the market for beer crates is also affecting turnover and
profits. This is a very damaging state of affairs for F since the sale of beer crates
constitutes a large part of its business.
The company has problems with labour relations and working practices which will be
affecting efficiency in production processes and hence profitability. Unless this is resolved
it will not be possible to remedy some of the other difficulties faced by F.
The R&D department in F is dysfunctional and developments are not achieving
commercial success. This represents a high cost with little positive impact on the
profitability of the company. Although there are exciting prospects, past performance
suggests that these will not come to market unless changes are made.
F has problems with its institutional shareholders who it has failed to keep sufficiently
informed of its operations. Although this does not have an immediate effect on profitability
it will make it harder for F to make, or where necessary fund, changes to remedy its other
difficulties.
(ii)
Home market price war
An immediate priority must therefore be to stabilise, and if possible improve, profits in the
company's existing markets. If price is a key factor in the marketing mix for beer crates, as
it would appear, the company should:
keep its prices competitive as long as the price war lasts, in order to retain market share,
and
try to reduce costs, in order to increase profitability.
Despite the suggestion from the institutional shareholders, F should not withdraw from its
home beer crate market. The company is still the dominant manufacturer in its home
market. Although the long term prospects for crates do not appear to be good, withdrawing
from the home market would leave a gap in supply that a rival producer would inevitably
fill.
The company should be wary of "inviting" a rival producer to take over a share of the
market, and a strategic evaluation of beer crates as a product should be carried out first.
The company should consider producing beer crates for other markets in the world. By
exporting, F could achieve larger volumes and economies of scale, allowing it to compete
more aggressively in the home market. This would be even more effective if F was to
establish a manufacturing base in other countries. The fact that foreign companies are
able to compete by importing crates to Fs market suggests that there are cost issues in
Fs manufacturing process.
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The company appears to be heavily dependent on its home markets, and a strategy for
developing other foreign markets should be considered. One way of doing this, which may
be possible, is the acquisition of plastics manufacturers which already have a good market
share in the target countries. Acquisition targets should either be crate manufacturers, to
provide economies of scale, or companies operating in related product areas that can
provide economies of scope. However, acquisitions will be difficult without the support of
shareholders.
The issues with labour relations and working practices
An initiative ought to be made by the board to rationalise working practices within the
company as a whole, and make them more flexible. The company is currently faced with
rigid work practices, too many labour grades, rigid job demarcation and a cumbersome
negotiating system.
This may well account for the cost structure that is impeding Fs performance in the
market. The support of the workforce and unions should be sought, for agreement in
principle to change and simplify these practices. Rationalising work practices and making
them more flexible should:
help reduce operating costs; and
create some redundancies.
The matter will require careful negotiations with the workforce at individual factory level. In
the short term, the costs of redundancies will probably off-set the labour cost savings but
the long term benefits should be worth pursuing.
The issues with the R&D department
The market for beer crates would appear to be price sensitive, but there seem to be new
product possibilities in the field of electro-plastics, where the market is presumably only
just being created. Other elements in the marketing mix (particularly the product design
itself) could be critically important. The company should develop a strategy of making R&D
investments more "commercially aware". This could be done by
putting greater emphasis on marketing in the group, especially in the factories responsible
for the new electro-plastic technology;
encouraging factory managers to find out what sort of products customers want;
requiring R & D to invest the bulk of its funds into projects selected by the operating
factories and
ensuring that the R & D is adequate to keep the company at the forefront of the new
technological developments.
Recommendation
In summary, the company's strategy should be
to protect existing markets and market shares by cutting and controlling costs, helped by a
decentralisation policy and a reorganisation of work practices;
to widen its markets and not rely so heavily on the home market; and
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to try to exploit new technological developments by having a market driven R & D

department. If the plastics price war ends and prices go up, or if sterling were to fall in
value, making UK plastics relatively cheaper compared with foreign products, the company
should be in a position to obtain better profits from either a bigger profit margin or a bigger
market share.
Lecture 2 - External
Factors
Illustration 1
D is an international logging company, which cuts down timber and supplies sawmills
where the timber is seasoned and then cut to appropriate sizes for use in a range of
industries. D will work with any timber, ranging from softwoods used in construction or
paper manufacture to exotic hardwoods used in expensive furniture. Its usual approach is
to secure the rights from a landowner, or in some cases a national government, to cut
timber. This can often involve the payment of large initial cash deposits to these suppliers,
money which D usually borrows. A logging team then cuts down the trees as quickly as
possible and hauls the timber to a convenient river where it is floated to a sawmill. Moving
on rapidly to the next site, the loggers usually leave considerable surface damage behind
them.
Since an increasing proportion of the companys work has been in the tropical rainforest, it
has recently come under pressure from environmental groups that have protested that it is
not socially responsible to act in this way. Whilst the softwood forests can be regenerated
in a couple of decades by replanting, hardwoods in tropical forests take far longer to
mature.
The Chief Executive of the company has argued that he is not concerned about these
protests since, as far as he is concerned, the company always acts ethically, as it has the
agreement of the national government in any country in which the company operates.
A recent development in the timber industry has been the harvesting of timber from the
bottom of reservoirs which have been created by flooding valleys. Although the capital
equipment required for this approach is significantly more expensive than that used in
conventional logging, the operating costs are lower. Waterlogged trees in reservoirs have
balloons attached, are cut, float to the surface and are towed to a sawmill. The underwater
process is quieter and less disruptive to wildlife and the environment.
It has been estimated that there are over half a billion trees, or 20 years supply,
submerged in reservoirs across the world, but it can take considerable research and
expense to find them. As long as the timber has remained submerged deeply enough, it is
of the same quality as timber harvested from the land. There is currently only one
company conducting underwater logging, although a number of other companies are also
considering this development.
Some of the board of directors feel that D should pursue this underwater approach and
abandon land based logging. The Chief Executive and one other director feel that the
underwater approach carries too high a risk.
Required:
(i) Briefly explain the differences between business ethics and corporate social
responsibility (CSR).
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(5 marks)
(ii) Discuss the CSR issues relating to Ds business and how the company might
improve its CSR position.
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(8 marks)
Solution
(i)
Although the two terms, business ethics (BE) and corporate social responsibility (CSR)
are often used interchangeably it is wrong to do so.
BE can be defined as behaviour judged to be good, just, right, and honourable, based on
principles or guides from a specific ethical theory.
CSR is defined much more broadly as The continuing commitment for business to behave
ethically and to contribute to economic development while improving the quality of life of
the workforce and their families as well as of the local community and society at large.
Therefore BE is only a component part of CSR. An alternative definition of CSR states that
society can:
I.
require business to discharge its economic and legal duties.
II.
expect business to fulfil its ethical duties.
III. desire business to meet its philanthropic responsibilities.

It has been argued that philanthropy is not the best approach for CSR unless it is guided
by principles which will develop the local population economically, and educationally.
(ii)
In the context of Ds logging business the chief executive argues that the company always
acts ethically since it has the agreement of the national government... This presupposes
that the government itself is acting in the best interests of society. This is not always the
case and much of the focus of both the OECD and WTO is on the unethical behaviour of
governments as well as businesses. With a logging business, which has the potential to
create considerable environmental damage in remote areas of a country, the possibility of
unethical behaviour is high.
From a CSR perspective, D needs to think carefully about its business practices if it is to
continue with land based logging. The ecological damage must be minimised and, once
logging has finished, as much as practicable should be done to restore the habitat to its
previous condition. In the event that the areas in which it operates have a population, D
should be looking for ways to minimise the damage to the livelihoods and wellbeing of
those people that live there. This could be done by providing education facilities, offering
training for those who previously lived off the forest. If possible, it should consider
replanting the area which has been harvested with appropriate trees to provide an element
of sustainability.
Taking a more global perspective, D should work with the environmental groups that have
criticised them. The company should be seeking to conduct its logging in sustainable
forests and take advice to ensure that it minimises its environmental impact.
Having said this, it must not be forgotten that D is a commercial organisation and must
continue to make the best, sustainable, profit for its shareholders.
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Illustration 2
E is a multinational organisation and is one of the largest global producers of chocolate,
coffee and other foodstuffs. E categorises the countries in which it operates as follows:
Less developed countries, from which E sources raw materials, but where there is no
established local market for the finished products.
Fully developed countries, into which E imports raw materials, manufactures, and serves
the local and export markets.
In every country in which E operates, it follows the OECD (Organisation for Economic
Cooperation and Development) guidelines for multinationals.
In the particular case of country F, a less developed country, E has helped the local
farmers to organise themselves into cooperatives to produce their crops. E has also
funded schooling for the children of both the farmers and their workers, built and staffed a
hospital and has provided other welfare benefits. E considers itself to be a good corporate
citizen and is used as an example of good practice on the OECD website.
Although the farmers cooperatives are free to sell to Es two main competitors, they tend
not to do so because of the close and friendly working relationship that they have with E.
Both of Es main competitors are multinationals, but both are smaller than E.
E has recently been receiving some bad publicity in country F. The management of E feels
that this is being organised by the government and the national labour union of country F.
The government of F is reasonably supportive of business, but won the last election with a
narrow majority. The government is now under pressure to raise the standard of living of
the population. An election is due within the next fifteen months. The national labour union,
which is increasingly being supported by the main opposition party in country F, is
extremely anti- business. It would like to see all foreign companies removed from country
F and all foreign- owned assets, and co-operatives nationalised.
The government of country F has stated that the prices paid for cocoa beans are too low,
and that country F is not gaining sufficient tax revenue from the exports. The government
of country F has threatened to impose an export tariff on cocoa beans, unless prices are
increased, and unless E opens a manufacturing facility in the country F. The management
of E feels that it has been targeted by the government because it is the largest of the three
multinationals operating in the country.
The national labour union of country F has argued that the farm workers are being
victimised by the farmers, who have become too powerful because of the cooperatives. It
states that the government of F should not allow the farmers to operate in this way.
The management of E does not want to build a factory because the transport costs from
such a factory to the nearest market for finished products would force the company to
operate the factory at a loss.
The Chief Executive of E is due to meet with government ministers from country F to
discuss Es future operations and involvement in the country.
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Required
(a) Explain the advantages to E of conducting a stakeholder analysis of its
operations in country F.
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(b) Produce a stakeholder analysis for Es operations in country F.
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Solution
(a)
Although it appears that E has a relatively small group of stakeholders it would be in the
interests of the board of directors to determine both the power and interest of each group
and the relationships between them.
Any strategy that E tries to pursue in the negotiations with the government must ideally
have the agreement and, preferably, the active support of the more powerful stakeholders.
In the event that there is insufficient support amongst the stakeholders the strategy
proposed by E will fail.
It is likely that this will happen since, on first consideration, the stakeholders seem to have
vastly differing views on multinationals in general. With that in mind E should determine
which stakeholder group will have the greater capability to disrupt the plans made by the
organisation.
E will need to establish the power and interests of the various groups so that it can decide
whether to accommodate, negotiate, manipulate or resist the claims of the various groups.
(b)
The principal stakeholders of E can be classified using a Mendelow framework by
reference to their power and interest in the situation.
Powerful and interested
1. The government of the country F is powerful and could impose more stringent operating
conditions on E. It would also most likely have the support of the opposition party in
parliament to do so. Although business friendly, it must be seen to be taking a strong stand
in its negotiations with E since there is an election soon and its position is relatively weak.
2. The opposition party in parliament is a powerful stakeholder since the party in power
has a relatively small majority. It also has the cooperation of the national labour union. Its
interest will be strong and can be considered hostile, since it may see this as an
opportunity to become the government by taking a strong stance against F.
3. The national labour union is also powerful because of its close relationship with the
opposition party and the relative weakness of the government in power. Its interest should
be described as hostile since its stated intention is the removal of all multinationals from F.
4. The other multinationals operating within country F are powerful in that some of them
are competitors to E and, if the relationship between E and the farmers deteriorates, they
will capitalise on the situation. They will temper this with ensuring that all multinationals are
not legislated against.
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Powerful and with low interest

1. The shareholders of E will be relatively powerful but their interest will be relatively low
unless the impact of the loss of this source of supply will have a significant effect on the
profits of E. Other than those shareholders who have a particular interest in ethical issues,
this local event is unlikely to have much impact on their thoughts.
Low power but high interest
1. The farmers have relatively little power in this situation since they are dependent upon E
or one of the other multinationals to buy their crops. They are obviously extremely
interested in the outcome since they currently enjoy a good working relationship with E
from whom they receive considerable support.
2. The farm workers also have high interest but limited power to influence the situation.
They are dependent on the farmers for their wages and therefore dependent upon the
success of the farmers in dealing with E. Similarly to the farmers, were E to leave and the
cooperatives be disbanded, they would probably have a reduced standard of living.
3. The OECD will be interested in the outcome of the negotiations as it has recognised that
E, which is a global player, is an example of good practice. It would want to see E continue
to operate in the way in which it currently does so that it could continue to use E as an
example. In the event that the company starts to make concessions, the OECD is not likely
to be happy with the situation.
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Lecture 3 - Environmental
Analysis
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Environment I
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Illustration 1
B is a media company, publishing lifestyle magazines for the consumer market. These
lifestyle magazines contain articles and advertisements about fashion, health and beauty
products, homes, furniture, and hobbies and are bought by people aspiring to a high
standard of living.
Increasingly, consumers are turning to other media for the information and entertainment
traditionally provided by this type of magazine.
Traditionally, 60% of Bs revenue has been derived from selling advertising, the balance
being provided by the cover price of each magazine. Over the last four years both the
revenue and profits have declined as there has been a steady reduction in the sale of both
advertising space and the number of magazines sold.
The industry is very dependent upon the level of discretionary disposable income. If this
income is at a low level, fewer luxury goods are advertised. However, people still buy the
magazines to read about these goods.
The company has tried to expand abroad but has failed, expensively, to achieve this.
Similarly, attempts to enter other segments of the home market, particularly teenage
magazines, have failed. Both of these failures have come as a surprise to the Board of
Directors who thought that they understood the respective markets well enough to make
the appropriate decisions.
New technology, in the form of digital media, has also affected the magazines industry.
These changes have been felt in both production methods, such as broadband distribution
of proof copies, and the choice of media, such as the Internet, available to consumers. To
a large extent, the speed of these developments was a surprise to the directors of B.
Required:
Evaluate the benefits to B of implementing a process of systematic environmental
analysis.
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Solution
B has suffered from a number of failures in the recent past that could have been avoided,
or at least minimised, had it been more aware of the environment in which it was
operating.
The fact that its customers are using alternative products, and that it has been surprised
by the speed of development of new technology would suggest that it is too internally
focussed and is not looking outside the organisation sufficiently.
Its knowledge of other similar markets, notably teenage magazines, is not as good as it
has believed it to be. It would benefit from a more formal, and systematic, approach to the
gathering and analysis of information external to the organisation.
This process, an environmental screening process, would enable it to gather information
under the broad categories of PEST: Political, Economic, Societal and Technological.
Alternatively it could use the categories described by one of the many other acronyms
which exist for environmental factors.
Broadly speaking the benefits it would reap are:
Help the firm identify and capitalise upon opportunities rather than lose out to competitors.
It would hopefully be aware of the increasing importance of other media to its customers.
This is potentially a very significant benefit, as the organisation could otherwise find that its
products became obsolete.
Acquire a base of objective qualitative information. It would then have a deeper
understanding of the other market segments that it has attempted to enter. This could
avoid significant cost as a result of the failure of future strategies.
Have the capacity to be more sensitive to the changing needs of its customers. Again, this
should raise the companys awareness of the other media to which its customers seem to
be turning. It could also lead to a significant improvement in profitability, if B can satisfy its
customers to a greater extent. It might also lead to competitive advantage through
differentiation and/or focus.
Have information available for the strategy making process. Some of the decisions that B
has made about market entry and diversification have been ill-informed. This should
improve the quality of strategy formulation and, as a consequence, reduce risk.
Be provided with a good, broad based, education and awareness of the industry in which it
operates and the related industries. If B had been doing this then the rate of technological
change might not have been such a surprise.
The primary purpose of environmental analysis is, therefore, to improve the quality of
planning and decision making.
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Illustration 2
Based in a European country, BBB is a charity which raises funds to provide portable
equipment to remove the poison arsenic from drinking water in villages, in less developed
countries. Run by a Board of Trustees, the organisation operates on laissez faire
management principles. There are few full-time paid employees and BBB is heavily
dependent upon the work of volunteers. Although these volunteers are dedicated, many
have said that they do not feel the organisation knows where it is going and have said that
they are not confident about the future of BBB.
Funding comes from appeals to the general population, which are made through
newspaper advertisements. BBB does not use the Internet to promote or raise donations
and, generally, does not use available technology to any extent in its organisation.
Additionally, BBB receives corporate donations, most of which come from old school
friends of the trustees. There is no government funding.
Recently BBB has had difficulty in attracting donations and is at risk of not being able to
carry on its work. The charity industry has become more competitive and many other
organisations within it have become more aggressive in their marketing and promotion.
None of the Board of Trustees has a commercial background. The Chairman of Trustees
has recently been to a number of conferences where the value of foresight and the need
to conduct a frequent and thorough environmental analysis have been discussed.
The Chairman has accepted that there is a serious gap in the knowledge that the trustees
have about the environment in which BBB operates. Recognising that BBB needs a more
proactive approach to the environment in which it operates, your help as a management
accountant has been sought.
Required
Using appropriate models, discuss how conducting a frequent and thorough
environmental analysis would help the Board of Trustees of BBB.
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Solution
There are two main models of environmental analysis that BBB would need to apply to the
environment in which it operates.
Firstly, Porters five forces model which considers
rivalry amongst existing firms;
bargaining power of buyers;
bargaining power of suppliers;
threat of new entrants;
threat of substitute products or services.
This model is primarily used for commercial organisations but there is relevance for BBB in
that there are clearly rivals, its buyers can be conceived of as the donors who get personal
satisfaction, there will be threats from new entrants and there are many substitutes for
making donations to charities.
Thinking of the environment in these terms should help BBB to more rigorously identify
changes which will impact upon it.
Rivalry
There will be other existing charities which are providing similar aid to disadvantaged
groups in the less developed world BBB should be more aware of those groups. It can
monitor their fund raising campaigns to better time its own advertisements and possibly
learn from the approaches used by its competitors.
Buyers
A closer look at its existing donors, particularly the corporate ones, to discover their values
and why they give (and to who else they give) will help BBB better tailor its appeals.
New entrants
Monitoring the charity literature and the media in general for news of new charities starting
to address the kind of issues that BBB tries to aid will make BBB better able to retain its
donors.
Substitutes
Clearly donors, both individual and corporate, have other things they could do with their
funds. A better understanding of those alternative uses will help BBB appeal to donors to
continue giving. This will be particularly true of corporate donors where corporate social
responsibility considerations will come into play. Those donors may well be convinced to
give to BBB rather than to enter more directly into the area of philanthropy.
Secondly, PEST analysis looks at the various influences on the environment in which the
organisation operates:
Political/legal influences
Economic influences
Social and demographic patterns and values
Technological forces.
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It has been suggested that PEST is an insufficiently detailed acronym to describe the
macroeconomic environment and that PESTEL, where the two additional letters describe
Ecological and Legal factors, adds more depth.
Practically this is irrelevant as long as the organisation is aware of the need to monitor
any important themes in the macro environment and changes to those themes.
Political
BBB currently receives no funding from governments and this may be because it has
never attempted to or because of past government policy. Carefully monitoring this policy
at both national and E.U. level may identify opportunities for BBB to start receiving
government funding.
Economic
Economic influences will have an influence on BBB in that most charitable giving comes
from discretionary disposable income and monitoring this will give a better idea when to
launch appeals for funds. Monitoring bonus payments to those in the financial services
industry and the profitability of individual firms might help target funding requests.
Societal
BBB would also benefit from considering the demographics of the groups from which it
seeks donations. Particular segments of the community, for instance school children, may
be more persuadable in terms of donations. Similarly, if there are large groups of
Diasporas from the affected countries it may well be able to target them for donations.
Technological
In terms of technological factors BBB should be monitoring to see if there are more cost
effective methods available to address the problem of arsenic in well water. Additionally, it
should be looking for other ways to make its appeals for donations at present it
advertises in newspapers the internet is well established now and may well provide a
better way to attract donors. This would be particularly appropriate if it could persuade one
of the corporate donors it was monitoring to fund a website for it.
In summary, BBB needs to formalise the process of information gathering and processing
within the company so that it is better able to react to the environment in which it operates.
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Illustration 3
D is a printing company that was founded by three people 20 years ago. At that time, the
company used a new technology which had been developed by one of the founders.
Another founder member was a finance professional. The third person is Mr Z, who has a
strong, dynamic, personality. Mr Z has been the driving force behind the development and
growth of the business to its present size of 350 employees. With a charismatic leadership
style, Mr Z was very proud of the fact that he knew all employees by their first names and
considered everyone to be part of one big team. Everyone understood exactly what the
company stood for and how things should be done.
As the company has grown, Mr Z feels he is not in touch with newer members of staff and
that they do not understand his, and the companys, values.
In addition, the technology used by D is no longer considered innovative and there are a
number of other competitors operating in exactly the same way. D is still market leader
within the industry, but only by a few percentage points. Mr Z feels that the industry has
reached the maturity stage of its lifecycle.
An acquaintance of Mr Z, a management consultant, has suggested that the company
should have a published mission statement and a clear set of strategic objectives.
Required
Explain the characteristics of the maturity stage of the industry lifecycle.
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Solution
The industry lifecycle can be considered to have four stages. These are introduction,
growth, maturity and decline.
The third stage, maturity, is characterised by:
Superior quality products with an increased degree of standardisation amongst product
offerings from different competitors. In the case of D, the technology which was developed
20 years ago, is now in common usage.
Buyers are quite widespread and, as the product offering has become more
commonplace, many more buyers are using the product. D, and its competitors, will have
a wide range of customers and, since the product has become standardised, there will be
relatively low switching costs for those buyers.
The nature of the competition will have intensified and there will start to be those
competitors who leave the industry as the competition becomes fiercer. From its position of
market leadership, D may decide that this is a time of opportunity and seek to acquire
some of the companies that struggle, or at least gain the market share of those that leave
the industry.
Margins will fall as buyers demand lower prices in exchange for their loyalty and as they
come to understand the product better. Margins will also be impacted by increased
advertising and marketing costs. For D, the challenge will be to maintain its market share
and find some way, other than the technology, to demonstrate a sustainable competitive
advantage.
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Illustration 4
B is an established publisher of training manuals and other training material for members
of professional bodies and for personal development. The products are sold all over the
world by major bookshops and online book vendors. Although the company has a website,
it does not sell directly to colleges or private individuals.
Currently, all stages of the production and distribution processes are conducted within
mainland Europe. All stages of these processes are conducted in-house by B.
Over the past five years, sales of Bs training manuals have declined and the company is
expecting to make little, if any, profit in the coming year.
Bs manuals are of the traditional style, that is, an extensive amount of printed material
bound in a single volume. An initial market study has shown that Bs training manuals do
not appeal to readers, because they are under heavy time pressure and are unable to
devote sufficient time to reading these manuals. The manuals, because of their bulk, are
also considered to be difficult to work with.
There are three other direct competitors in the market, which is highly competitive. In this
market the products are difficult to differentiate and profit margins are low. Although B has
no firm evidence, the directors believe that all three of their competitors are more profitable
than B. However, the directors are not aware that any of the competitors are operating in a
different way to B, and their training manuals are virtually identical to those offered by B.
The directors of B believe that there are product development and market development
opportunities that could be pursued. They also believe that the cost structure of the
products could be improved. However, they are prepared to consider any reasonable
alternative strategy that will improve the competitive position of the company.
Required
Explain how more detailed knowledge about Bs competitors would help the
directors of B.
23
Solution
Successful business strategy is about the allocation of an organisations resources to
actions which will improve the long term financial performance by providing a competitive
advantage. Without a good knowledge of the relative strengths and weaknesses of B and
its competitors, or potential competitors, it is unlikely that those resources will be allocated
in the most appropriate manner.
A more detailed knowledge of Bs competitors should provide the directors of B with:
A better understanding of the competitive advantages of each player in the industry;
An insight into competitors present and proposed strategies;
An informed basis for developing strategies to counteract and even out manoeuvre
competitors strategies;
And, most importantly in the present situation, assistance with forecasting the likely
outcomes of alternative potential strategies that they propose.
At present the directors of B suspect that Bs competitors are more successful than their
own company. It is important that they know whether this is true or not since they may
make decisions which are inappropriate if they do not have a clearer understanding of
what appears to be becoming a more dynamic environment. With market research
indicating that there needs to be changes in the product being offered because it is
deemed to be old fashioned, the directors need to understand how well their competitors
are performing and whether they are suffering the same problems as B.
The directors need to have a clearer understanding of the actions that Bs competitors are
likely to make in the near future. Having determined these strategies, they are more likely
to be able to take actions themselves which will make them more competitive than their
rivals rather than just imitating what has been done by others.
With a clearer understanding of any potential weaknesses in Bs competitors, they should
be better able to capitalise upon those weaknesses and gain an advantage either on the
basis of cost or differentiation although the latter is unlikely if B continues to produce
conventional manuals.
24
Environment II
25
Illustration 1
G supplies electronic components to the automobile industry by exporting from the home
country in which it is currently based. The company has recently set up a research facility
in the home country to develop hydrogen fuel cells. The concept of hydrogen fuel cells has
attracted a great deal of interest from the environmental lobby since it offers the prospect
of very environmentally friendly vehicles. The market for these vehicles is in the
development stage and there have been relatively few sales so far for this new technology.
G hopes that the current pressure from environmental groups and governments will lead to
large volume sales.
Increasingly, electronic component manufacturers are under pressure to manufacture
close to the locations of their customers, the automobile manufacturers.
The research and development (R&D) director has decided that there is a need to open a
research facility abroad, to work in partnership with the facility in the home country and
capitalise on the benefits that a foreign base could offer. If this venture were successful, G
would open a manufacturing facility next to the proposed overseas R&D base.
The board of directors recognises that different countries will offer different potential
advantages and disadvantages. It has been decided that the ideal characteristics and
factors for the chosen country should be determined, so that potential choices can be
screened effectively before a final decision is made.
Required
Advise what ideal characteristics and factors should be present in the chosen
country.
26
Solution
The ideal characteristics of potential countries can be explained by using Porters
Diamond:
Firm strategy, structure and rivalry.
There would need to be established national firms in the country competing for a strong
home market for technologically advanced products. There should be an established
automobile market with a number of national manufacturers who will be likely to buy the
fuel cells once they are successfully developed.
Ideally, those manufacturers should be exporting to adjacent countries to increase the
potential market for Gs products. An established capital market and long term planning
horizons amongst the existing businesses are also important.
Demand conditions.
Since G will be enjoying derived demand, the consumer market needs to be
environmentally aware and sufficiently affluent to pay the premiums that these types of car
command. This degree of sophistication is important since:
Substantial demand will allow economies of scale and once the initial product
development is completed, process development will become more important.
Once process development becomes more important there will be a greater emphasis on
the export market by the automobile manufacturers which will allow G to enjoy even
greater economies of scale.
Supplying a strong and varied demand will facilitate the innovation process by the
information gained from purchasers who are critical and discerning.
Related and supporting industries.
The country in which G chooses to open its R&D base should, ideally, have a number of
other technologically innovative manufacturers based there. If there are world class
suppliers of technology and components there will be a cluster effect on education and
skill profiles of the work force. This should make initial recruitment of staff easier. There will
also be the prospect of better commercial relationships with suppliers, and an easier
transfer of expertise between G, automobile manufacturers, university research
departments and suppliers.
Factor conditions.
These can be considered as
Basic factor conditions which will include natural resources, raw materials, skilled and
unskilled labour, and a pleasant environment. Since it is likely that G will want to transfer
some staff to the research facility from its home market the attractiveness of the country
will be important.
Advanced factor conditions are largely brought about by government decisions and policy.
These would include infrastructure including an internet backbone, quality of university
level education and research, high speed transport particularly connections with
potential export markets and the reputation of the civil society.
27
The role of government. The majority of the factors above are dependent upon the nature
and quality of the government. Policy decisions on business support, tariffs and trade,
education, welfare, taxation and monetary policy will all have an impact upon the factors
above and the attractiveness of the country to inward investment. Political and economic
stability will be an issue that G will wish to consider.
Whilst the current government in a country may be doing all of the right things there is no
guarantee that it will continue in power. The current government will need to be assessed
as well as the strength, and views, of any credible political party opposition. Similarly there
will be a need to consider the strength and views of any lobby groups and Non
Governmental Organisations (NGOs) in the country and internationally who may not favour
foreign direct investment.
28
Lecture 6 - Internal
Environment
29
Illustration 1
C is a manufacturer of test equipment for electronic circuits. In the past, C was a dominant
player in the international market. However, over the past three years, the company has
found that its profits have declined as it has lost market share to other companies in the
market.
Cs business model consists of the following stages:
1.Cs highly skilled engineers first visit client sites and, after discussions with the clients
engineers, identify and design the appropriate testing equipment to meet the clients
requirements. Cs engineers are still recognised as the best in the industry, and customers
agree that they produce the most effective solutions to the increasingly complex problems
presented by Cs clients. This stage of the process is seen as a very collaborative process
between the engineers employed by C and the engineers employed by its clients.
2.In the laboratories at C, the equipment design goes through a fairly complicated process.
Prototypes are developed, based on the discussions in stage. These prototypes are then
tested. Once a final design is agreed, the plans are passed to the manufacturing
department for production.
3.The manufacturing department of C then produces the appropriate equipment to the
desired specification and installs it at the clients site.
4.After the equipment has been installed, C conducts maintenance on an annual basis.
It is standard practice within the industry for clients to pay a total price for design,
manufacture and initial installation of the equipment and an annual maintenance charge
after that. Total prices are quoted before design work commences. It is unusual for
companies in the industry to maintain other manufacturers equipment.
Although clients recognise the high quality of the solutions provided, they are increasingly
complaining that the overall prices are too high. Clients have said that although other
suppliers do not solve their problems as well as C, they do charge less. As a result, C has
reduced its prices to compete with other companies. There is a suspicion that the
manufacturing and installation stages of the business are not contributing sufficiently to the
business because the costs may be too high.
Some of the Board of Directors of C have recognised that this situation cannot continue
and have recommended that a value chain analysis be conducted, to identify the way
forward for C. The Board feels that it is important that it identifies which activities in the
current business model actually add value and whether all of them should be continued.
One of the directors has suggested that C should actually be a solutions provider and not
a manufacturer.
Although most directors are in agreement with the proposed value chain analysis, the
managing director has argued that value chain analysis is a bad idea. He says that he has
heard a number of criticisms of the value chain model.
Explain the benefits that C might gain from conducting a value chain analysis.
30
Solution
Benefits of Value Chain analysis:
The model provides a template for the analysis of the processes used to serve customers.
By looking both at functional departments and the linkages between them it is possible to
identify where value is added in the perception of the customers and where costs are
incurred. The analysis will often lead to the elimination of costs that add no value to the
customer experience. For C, this should provide the company with a clearer picture
regarding the value of the manufacturing function as perceived by its customers.
The model also has the potential to provide a clearer framework for the analysis of other
companies operating within the same industry. As C is discovering that other companies in
the industry are perceived to be more cost effective in terms of manufacturing, it can make
use of the value chain framework to investigate why this is so.
The model will provide a common terminology for managers to use when describing the
business model, in the analysis that must be made to decide how to remedy the situation
in which C finds itself.
The model should provide a means by which C can determine the best approach to
developing superior competitive performance. Porter developed the model to assist
companies in finding ways to develop superior performance either by cost leadership or
differentiation. C finds itself in a situation where it is being beaten on price by some of its
competitors but is recognised as the provider of the best solutions to clients problems. A
detailed value chain analysis should determine for C why this is the case, and should
assist managers in the decision they have to make regarding the future focus of the
company.
The use of the model can provide the basis for other, important, management techniques.
Subsequent to a value chain analysis, C may decide that it wishes to continue to
benchmark processes and performance against its rivals, to conduct a business process
re-engineering project, to practice activity based management or to develop an information
systems strategy. Since C may decide to outsource manufacturing, and to focus on design
and service provision, this last technique may be particularly appropriate as it finds itself
increasingly having to manage knowledge.
Conducting a value chain analysis will facilitate the development of performance metrics
for C. Developing such measures will make it easier for C to clearly identify which aspects
of its business model are not contributing to the overall profits of the organisation.
Although C currently suspects that manufacturing and installation are the weakest parts of
its operation, development of clear and appropriate metrics would make it far easier to
recognise where value and profit are being added in the business model.
31
Lecture 7 - Position
Analysis
32
Illustration 1
Briefly explain what is meant by gap analysis in the context of strategic analysis.
Solution
In the context of strategic analysis, a gap is the difference between the organisations
objective and its forecast (or extrapolated) level of attainment. A gap is often calculated for
future sales revenue, profit, ROCE or market share.
Gap analysis is not just the identification or quantification of such a gap, it also includes
explanation of why the gap arose, and possibly the identification and evaluation of
strategies to close the gap. In this way, gap analysis forms a link between strategic
analysis, strategic option identification and strategic choice.
33
Illustration 2
B is a media company, publishing lifestyle magazines for the consumer market. These
lifestyle magazines contain articles and advertisements about fashion, health and beauty
products, homes, furniture, and hobbies and are bought by people aspiring to a high
standard of living.
Increasingly, consumers are turning to other media for the information and entertainment
traditionally provided by this type of magazine.
Traditionally, 60% of Bs revenue has been derived from selling advertising, the balance
being provided by the cover price of each magazine. Over the last four years both the
revenue and profits have declined as there has been a steady reduction in the sale of both
advertising space and the number of magazines sold.
The industry is very dependent upon the level of discretionary disposable income. If this
income is at a low level, fewer luxury goods are advertised. However, people still buy the
magazines to read about these goods.
The company has tried to expand abroad but has failed, expensively, to achieve this.
Similarly, attempts to enter other segments of the home market, particularly teenage
magazines, have failed. Both of these failures have come as a surprise to the Board of
Directors who thought that they understood the respective markets well enough to make
the appropriate decisions.
New technology, in the form of digital media, has also affected the magazines industry.
These changes have been felt in both production methods, such as broadband distribution
of proof copies, and the choice of media, such as the Internet, available to consumers. To
a large extent, the speed of these developments was a surprise to the directors of B.
Describe the essential stages that should be included in a scenario planning
process that could be introduced by B.
34
Solution
Stages of scenario planning
Define the scope of the scenario. B will need to decide what knowledge is most important
to it. Considerations of the most important markets and products and the time frame it
wishes to consider (that is how far into the future) should be paramount. It will need to
decide whether the scenario is to be focussed on a specific issue, such as the impact of
the internet on the advertising side of the business or a more blue sky approach where it
asks a question such as; what is the future of the publishing industry?
Identify the major stakeholders. A consideration of who the main players are in its industry
and how they are likely to drive change over the period under consideration. For B this
would most probably include advertisers, its competitors and other media producers such
as the internet, newspapers and, possibly, commercial radio and television.
Identify the basic trends affecting the industry. Taking the factors that were discovered in
the environmental analysis and considering how they may change in the future, B would
most probably want to look particularly at technological changes in the media such as the
increasing use of the internet by consumers. Since it is very dependent upon the economy
for its advertising revenue it would also consider the trends in the economy which would
affect discretionary disposable income.
Identify the key uncertainties. Of the basic trends that have been identified B needs to
decide which are the key uncertainties. These will be the drivers for change which will
shape the future of the industry. In the case of B this would certainly include the rate of
take up of new media and the decline of print media. There will be some trends which can
be taken as givens such as their direction, and strength, can be fairly accurately forecast
over the timeframe of the scenarios the age profile would be an example.
Construct initial scenario themes, or skeleton outlines. Possible future worlds are created
by crafting the key uncertainties together into coherent themes. Usually two alternative
scenarios are produced. B might develop one scenario where the economy is depressed
and there is not a rapid uptake of new media. This would be internally consistent since it
would be difficult to fund the capital investment necessary to build the infrastructure
necessary for broadband penetration. The alternative might feature a booming economy
with many people turning to new media and online sources of articles and information
about the products and services which B advertises and features.
Check for plausibility and internal consistency. Effective scenarios are both internally
consistent and plausible. This means that the directions that the trends have taken in a
scenario could, logically, happen together and the events described could happen within
the timescale chosen. The examples given in 5 are internally consistent and, if it were to
be suggested that they happened within the next three four years they would be
plausible.
Develop learning scenarios. The next stage would be to flesh out the scenarios so that
they become full descriptions of the industry and conditions that would prevail in the future
timeframe envisioned. This is often done by writing a piece of narrative and B might flesh
out the rapid take up of technology and the booming economy by describing a couple
using the internet to plan the furnishing of their home and other aspects of their lifestyle.
The scenario describing a booming scenario could describe a period of a month in the life
35
of a couple furnishing their new home and giving detail of the methods they used to
identify, and purchase, their furnishings.
Identify research needs. Having written the scenarios B will be better able to decide which
elements of the environment it needs to monitor more closely to be better prepared for the
future. Amongst the factors it might want to consider would be the number of households
signing up for broadband internet connections within its market segment. This would,
hopefully, give more warning of an impending shift to new media.
Identify sources of competitive advantage that might occur under each scenario and make
decisions that would lead to the company being flexible enough to cope with either
outcome. For instance B recognising from the two scenario themes that the Internet might,
or might not, be a threat in the future could establish a website alongside the existing print
magazines and start to train some of its journalists to be able to write for both media.
36
Lecture 8 - Strategic Choice

I
37
Illustration 1
GHK is a restaurant chain consisting of eight restaurants in an attractive part of a
European country which is popular with tourists. GHK has been owned by the same family
for the previous15 years and has always traded at a profit. However, a number of factors
have meant that GHK is now in danger of making a trading loss. There has been a
substantial drop in the number of tourists visiting the region whilst, at the same time, the
prices of many of the foodstuffs and drinks used in its restaurants has increased. Added to
this, the local economy has shrunk with several large employers reducing the size of their
workforce.
The owners of GHK commissioned a restaurant consultant to give them an independent
view of their business. The consultant observed that the eight restaurants were all very
different in appearance. They also served menus that were very different, for example, one
restaurant which was located on a barge in a coastal town specialised in fish dishes,
whereas another restaurant 20 miles away had a good reputation as a steak house. The
prices varied greatly amongst the restaurants; one restaurant in a historic country house
offered fine dining and was extremely expensive; yet another located near a busy railway
station served mainly fast food and claimed that its prices were the cheapest in town.
Three of GHKs restaurants offered a middle of the road dining experience with
conventional menus and average prices. Some of the restaurants had licences which
enabled them to serve alcohol with their meals but three restaurants did not have such
licences. One restaurant had a good trade in childrens birthday parties whereas the
restaurant in the historic country house did not admit diners under the age of 18.
The consultant recommended that GHK should examine these differences but did not
suggest how. The owners responded that the chain had grown organically over a number
of years and that the location, style and pricing decisions made in each restaurant had all
been made at different times and depended on trends current at that time.
Advise the owners of GHK how the application of Porters Three Generic Strategies
Model could assist them in maintaining or improving the profitability of their
restaurants.
38
Solution
Porters Three Generic Strategies Model was developed in 1980 and suggests can come
about by adopting one of the following policies:
Overall cost leadership: the firm is the lowest cost producer relative to its competitors.
Differentiation: the firm can create something which is unique and for which consumers will
pay a premium.
Focus: the firm serves a narrow strategic target more effectively than its competitors who
are competing more broadly.
Porter asserts that each generic strategy requires different attributes and, therefore, it is
unlikely that any firm can pursue more than one generic strategy simultaneously and be
successful. He cautions against firms becoming stuck in the middle.
As well as Porters model being used analytically, it can also be used pro-actively to help a
firm design its competitive strategy. In the case of GHK no coherent strategy has been
followed with respect to its eight restaurants.
A preliminary analysis suggests that the following strategies are being followed:
Overall cost leadership: (the firm is the lowest cost producer relative to its competitors), at
the restaurant near the busy railway station.
Differentiation: (the firm can create something which is unique and for which consumers
will pay a premium) at the fine dining restaurant in the historic country house.
Focus: (the firm serves a narrow strategic target more effectively than its competitors who
are competing more broadly) at the fish restaurant, the steak restaurant, the restaurant
offering childrens birthday parties.
Stuck in the middle: three middle of the road restaurants with conventional menus and
average prices.
The generic strategy which GHK decides to follow will be linked to a marketing strategy. It
is not necessarily the case that GHK is wrong to follow a number of generic strategies
because if each restaurant is taken as a strategic business unit it will have a particular
catchment area from which it draws its customers and looked at in isolation that strategy
might be the optimal one for that restaurant. However, a systematic examination of each
restaurant using the logic of Porters model and examining the basis by which that
restaurant competes and whether this will yield a long-term competitive advantage will be
invaluable.
With respect to the restaurant near the busy railway station, if this is attempting to compete
on the basis of being the lowest cost producer and, therefore, charging its customers the
lowest prices, it is doubtful that this can give a long-term competitive advantage. The
prices of a restaurants inputs, mainly food and labour, are set within their local markets
and available to any competitor. The technology and processes of restaurants are mature
ones and it is unlikely that GHK could innovate in this area to secure competitive
advantage.
39
The three restaurants which are stuck in the middle should be given immediate attention
as Porters model suggests they are unlikely to be successful.
If the owners of GHK use Porters Three Generic Strategies Model it will give them an
appreciation of the basis upon which their various restaurants compete and should prompt
them to make modifications to their strategy and attempt to secure long-term competitive
advantage.
It may be the case that GHK treat each of its restaurants as a strategic business unit and,
therefore, employ a number of different generic competitive strategies. Alternatively, GHK
may wish to trade as a homogenous entity which would imply it would use only one of the
three generic competitive strategies to avoid being stuck in the middle.
40
Illustration 2
XZY, a publicly quoted company has expanded rapidly since its formation in 2005. Its rapid
growth rate, based on a broad range of well-regarded products manufactured and sold
exclusively within Asia, has led to high profits and an ever increasing share price.
However, in the last year, XZY has found its growth rate difficult to sustain. XZYs core
strategy has been described by its CEO as selling what we know to who we know.
However, this view has been criticised by a number of financial analysts and journalists
who have warned that if XZYs growth rate is not maintained its share price will fall and the
value of the company will reduce. XZY has a functional organisational structure and
currently employs around 800 employees. The number of employees has grown by 20%
since 2008.
Evaluate, using Ansoffs product market scope matrix, the alternative strategies
XZY could follow to maintain its growth rate in profits and share price.
Solution
Ansoff has four cells in his matrix which is formulated with axes based on:
!
!
present and new products

present and new markets
The CEO has described XZYs strategy as being based on selling what we know to who
we know. Although this has been a successful strategy in the past in terms of profitability
and share price, XZY is now finding growth difficult to sustain.
This suggests that one of the cells of the matrix, Market Penetration, is approaching the
point where it cannot offer any further growth to XZY.
In the context of Ansoffs matrix the remaining options are:
Product development: this implies the launch of new products to existing markets. XZY
would need to analyse the cause of its reduced growth. If it is because its existing products
are coming to the end of their life-cycles, then launching new products in its existing
markets could be an appropriate way forward.
If the slow-down in growth is due to some structural problem with Asian markets, for
example recession, then offering new products to existing markets may not restore growth.
Market development: this option would mean that XZY would offer its existing products to
new markets, for example Australia and Europe. This would be appropriate if the products
were still vibrant and the reason for the slow-down in growth was that the Asian markets
had become saturated or were suffering from structural problems.
Diversification: according to Ansoffs matrix XZYs remaining option would be to diversify
which would commit XZY to making new products for new markets which could restore
growth; for example, XYZ could offer a business service within Europe.
Each of the options above implies moving into new areas, to a greater or lesser extent,
and so represents increased risk for XZY with diversification being the riskiest.
The CEO, who has a fiduciary duty to act in the best interest of XZYs shareholders,
should examine whether it is necessarily a bad thing if the companys growth rate slows
down. It could be better from the shareholders viewpoint than the endless pursuit of
growth which, in the long-term, is an unrealistic aspiration.
41
Lecture 9 - Strategic Choice

II
42
Illustration 1
JKL is a small European company based in the south of the UK which employs 35 people.
It has an annual revenue of 9 million. One aspect of its recently formulated strategy is an
aspiration to expand into a neighbouring country, France, by means of organic growth.
The reason that JKLs strategy for expansion is based on organic growth is due to JKLs
past experience. Two years ago, the directors of JKL negotiated the purchase of a UK
business, LMN, located in the west of the UK. At the time of this acquisition, LMN was
regarded by JKL as having complementary capabilities and competences. However, within
a short time after the acquisition, JKL judged it to have been a failure and LMN was sold
back to its original owner at a loss for JKL.
JKL employed consultants to analyse the reasons for the failure of the acquisition. The
consultants concluded that the failure had happened because:
1. JKL and LMN had very different accounting and control systems and these had not
been satisfactorily combined;
2. JKL and LMN had very different corporate cultures and this had posed many difficulties
which were not resolved;
3. JKL had used an autocratic management style to manage the acquisition and this had
been resented by the employees of both companies.
The consultants recommended that JKL should consider the use of change agents to
assist in any future acquisitions.
JKL has learnt that a French competitor company, XYZ, may shortly be up for sale at a
price which would be very attractive to JKL. XYZ has a very good reputation in its domestic
market for all aspects of its operations and its acquisition would offer JKL the opportunity
to widen its skill set. None of JKLs staff speaks fluent French or is able to correspond in
French. A small number of XYZs staff speak English fluently but none of its staff are able
to correspond in English.
Discuss how JKL could grow their business by:
(i) Organic Growth
(ii)Acquisition
43
Solution
Organic growth
JKL has chosen in its strategy to grow organically. It has been influenced in this choice
because of its recent experience with an acquisition which resulted in failure. It could be
argued that organic growth is less risky than growth by acquisition.
This is substantiated by the empirical evidence which demonstrates in the majority of
cases when a company is acquired, it is the acquired company that benefits financially to
the detriment of the acquiring company.
Organic growth is usually achieved by reinvestment of profit which is then applied to the
development of the companys strengths. Therefore, organic growth will happen at a pace
commensurate with the organisations ability to absorb and benefit from it.
However, if organic growth is achieved by reinvestment then the speed of growth will be
constrained to an extent by the amount of profits available for reinvestment. Organic
growth will be suitable for a company where the culture is one of gradualism rather than
radicalism.
Acquisition
In many ways, an evaluation of growth by acquisition is the opposite of organic growth.
Growth by acquisition can be fast, radical and transformational. It can offer opportunities to
a company which otherwise would not be available.
Thus, an acquisition target may have unique competences and capabilities, for example, it
may own patents, licences and commercial and brand franchises, which are otherwise
unavailable.
Acquisition gives JKL the possibility of eliminating a competitor. However, the biggest
downside to any acquisition is the empirical evidence which demonstrates that most
acquisitions do not benefit the acquirer.
44
Illustration 2
DDD is a biotechnology company which develops drugs. It was founded seven years ago
by three scientists when they left the university medical school, where they had been
senior researchers. The Company employs 10 other scientists who joined from different
universities. All of these employees are receiving relatively low salaries but participate in a
share option scheme. This means that when DDD is successfully floated on the stock
exchange they will receive shares in the company.
DDD currently has a number of new, innovative drugs in development, but the earliest any
of these drugs might come to market is two years from now. It is expected that there would
be one successful drug launched in most years after that for at least six years. However,
successful drug launches are never guaranteed, due to the speculative nature of
biotechnology and the long period of clinical trials through which any new drug must pass.
DDD has to invest a significant amount of resources into the development of each
potential drug, whether they are successfully launched or not. Currently, it has 12 drugs in
development, a number of which may not be successfully launched. Due to the speculative
nature of the industry, companies such as DDD are unable to obtain bank loans on
commercial terms.
DDD is funded by an exclusive arrangement with a venture capital company. However,
there is only sufficient cash in place to maintain the present level of activity for a further
nine months. The venture capital company owns 15% of the equity of the company. The
rest is owned by the three founders. It has always been the intention of the venture capital
company and the founders that, once the company has a sufficient number of drugs in
production and on the market, the company would be floated on the stock exchange. This
is expected to happen in five years time.
Recently there have been a number of approaches to DDD which might solve its cash flow
problems. The three founders have identified the following options:
1. The venture capital company has suggested that it will guarantee the cash flow until the
first drug is successfully launched in commercial quantities. However, it would expect its
equity holding to rise to 60% once this offer is accepted.
2. A large pharmaceutical company has offered to buy DDD outright and retain the
services of the three founders (in research roles) and a few of the staff.
3. Another biotechnology company has offered to enter into a merger with DDD. This
company has also been established for seven years and has one drug which will be
launched in six months. However, of the four other potential drugs it has in
development, none are likely to be commercially viable for 5 years. This company would
expect the three founders to stay with the newly merged company but feels a
rationalisation of the combined staff would be needed.
Describe the Suitability, Feasibility and Acceptability (SFA) framework as used for
evaluating strategic options. Evaluate the option to take up the venture capital using
the framework.
45
Solution
There are three tests in the Suitability Feasibility Acceptability framework used to evaluate
strategic options. These are:
The suitability test. This should be used to determine whether the option is the most
appropriate given the circumstances in which the organisation currently finds itself. The
primary considerations will relate to the firms particular strengths and weaknesses, any
competitive advantage which it may be enjoying at this point in time, and the environment
in which it is operating. Options should be considered in terms of how well they will
capitalise upon strengths, cure weaknesses, reduce perceived threats and take up
opportunities.
The feasibility test. This test should be used to decide whether the organisation is actually
able to carry out the suggested option successfully in terms of its resource capability and
its previous track record in completing similar strategic options. An assessment should be
made of the quality of the data that has been used to assess the suitability of the option.
The acceptability test. This test should be used to assess the attractiveness of the
particular option to the various stakeholders identified by the organisation. Any strategy
which conflicts with the values and interests of powerful stakeholders is unlikely to be
successful. The evaluation should be based on a thorough evaluation of all stakeholders in
terms of their power, interests and values.
Accept further venture capital
Suitability. This option will allow DDD to carry on with the work it has been doing and
launch at least one drug commercially. It corrects the weakness of limited cash flow but
adds little to the companys strengths. Certainly it will help it take up the opportunity of the
first commercial launch and subsequent launches until the planned float in five years time.
From that perspective this option is suitable.
Acceptability. However, the acceptability of this option is not so clear cut. The founders will
see a large reduction in their shareholding and there will also be a dilution of the rewards
available to the employees once the company floats. Some of the employees may choose
to leave if they feel that continuing to work on a low salary with a reduction in the promised
reward in five years time is not worth it. As yet there are no customers to consider and in
fact the relationship with any outside stakeholders is unlikely to be affected. The venture
capital company must be happy with the option since it has suggested it.
Feasibility. There are no problems with the feasibility of this option.
46
Lecture 12
Pricing Strategy
47
Test Your Knowledge

If you cant answer all of the questions below without
looking at the answer then you need to do some more
work on this area!
1. What are the downsides of full-cost plus pricing?
2. What are the benefits of marginal-cost plus pricing?
3. What are the downsides of marginal-cost plus pricing?
4. When is it appropriate to undertake a strategy of Price Skimming?
5. When is it appropriate to undertake a strategy of Penetration Pricing?
6. What are complementary products?
7. What is price discrimination?
8. What conditions must exist for price discrimination?
If youve successfully answered all of the above

questions then youre ready to do the exam questions
below:
None yet - New syllabus area!
48
Test Your Knowledge Answers

work on this area!
1. What are the downsides of full-cost plus pricing?
It ignores demand in the market which may well set the price.
An absorption rate is needed to absorb fixed costs.
2. What are the benefits of marginal-cost plus pricing?
Its a quick and simple method.
The mark up on products can be varied and set based on the variable cost.
It makes managers aware of the concept of contribution.
3. What are the downsides of marginal-cost plus pricing?
Again, it ignores demand.
The price must be set to ensure that the fixed costs are covered as they are not
included in the marginal cost.
4. When is it appropriate to undertake a strategy of Price Skimming?

When the product is new and innovative.
When there is high demand for the product.
When the price elasticity of demand is unknown.
To ensure that the cash invested in the product is recouped.
When a product has a shortened life cycle.
5. When is it appropriate to undertake a strategy of Penetration Pricing?

When a company wishes to establish barriers to entry.
To shorten the life cycle of the product.
To create economies of scale.
When the price elasticity of demand is elastic.
49
6. What are complementary products?

Products which are bought and used together i.e. the sale of one depends on the
sale of another.
7. What is price discrimination?
Charging a different price to different customers for the same product.
8. What conditions must exist for price discrimination?
There must be identifiable segments to charge.
There must be no chance of a black market.
There should be no potential for a black market to become established.
50
Lecture 13 - Measuring
Performance
51
Illustration 1
DD is a research company operating in the computer hardware industry. It has been
established for three years. The company employs 30 scientists and engineers working in
three research teams. One of those teams has invented an innovative processor which is
significantly faster than any processor that is currently available commercially. It is likely
that the new processor will be usable in computers used for industrial and, possibly,
gaming purposes. The other teams are working in similar areas, developing processors.
Although all of the researchers have done new and innovative work, which has led to a
number of published academic papers, no patents have been filed since the company
started. Therefore, none of DDs innovative products has ever become commercially
available.
The company is privately funded by an entrepreneur (Mr X), who made $350m from the
sale of his previous computer business.
Mr X has, to date, allowed his research staff to conduct research which is focused on
creativity rather than commercial viability. He does not want to lose any of the current
research staff but now wants to encourage them to be more commercially aware.
Mr X has decided that the company must now capitalise upon the innovative computer
processor that one of the DD teams has invented. He intends that some of the focus
should shift to the development of commercially available products rather than purely
research activities.
Mr X recognises that this will be a significant change in strategy and culture for the
company and that the change will require significant planning and management. Mr X
intends to hire marketing staff and five additional engineers to bring the processor, and any
other potential products, to market as soon as possible.
Currently there is no performance measurement system in place within the company. Mr X
believes that the Balanced Scorecard might be the best performance measurement
system for DD.
(i) Explain the components of the Balanced Scorecard model.
(ii)Recommend, with reasons, two measures that DD should use in each of the
components of the Balanced Scorecard model.
52
Solution
(i)
The balanced scorecard combines financial and non-financial measures of performance
and is claimed to be a technique for implementing the mission and objectives of the
business strategy.
There are four perspectives in the model:
1. The financial perspective. This should consist of measures that answer the question to
be financially successful how should we appear to our shareholders? Typical measures
would relate to improved returns, increased sales turnover, increased asset utilisation,
return on capital employed, generation of cash flow or economic value added.
2. The customer perspective. This should consist of measures that answer the question to
achieve our vision, how should we appear to our customers? Typical measures would
relate to customer profitability, capturing new markets, customer satisfaction, customer
retention, new customer acquisition, customer response time and extending the product
range.
3. The internal business process perspective. This should consist of measures that answer
the question To satisfy our shareholders and customers, what business processes must
we excel at? Typical measures would relate to product design, product development,
post sales service, reduced stock levels, improved lead times and other measures of
efficiency.
4. The learning and growth perspective. This should consist of measures that answer the
question, to achieve our vision, how will we sustain our ability to change and improve?
Typical measures would relate to the ability of staff, information systems and knowledge
transfer, the development of new products, the modification of existing products, and
ideas and suggestions from employees.
(ii)
The measures that DD may choose to use for each of the perspectives are as follows:
The financial perspective
1. NPV of R&D accomplishments/ R&D expenditure. This should give an indication of how
successful the development process is. Although there will be a delay in using this
metric it does look to the long term future of the organisation.
2. Cash flow. Since DD currently has no sales the cash flow will be negative, a return to a
positive cash flow will be an indicator of success of the new strategic direction.
3. Time taken for new products to break even. This will measure the effectiveness of the
development process for DD and also the effectiveness of the new marketing
department in identifying opportunities for new products which have significant potential.
4. Return on capital employed. DD is a commercial organisation and, ultimately, the
founder will wish to see a return on his investment.
53
The customer perspective

1. Market share. The market for processors is highly competitive but, if the processor is
truly innovative, then it should capture market share from the firms currently in the
market.
2. Net sales of products developed in the last 12 months compared to total sales. This
would provide an ongoing measure of the continuing effectiveness of both the research
and the development efforts of DD.
3. Feedback from customers. Since DD is a relatively new company, building customer
relationships will be of significant importance. Therefore, measuring its reputation
amongst its customers will be very important.
The internal business process perspective
1. Time spent on development as a percentage of total time. As the intention of DD is to
change the emphasis of the researchers to development rather than blue sky research
this will be a useful control measure to determine the success of the initiative.
2. Number of patents filed. At present the researchers are publishing academic papers
from their research but are not filing patents which would indicate the commercial
viability of their work. This measure would be a good indication of the shift in emphasis.
3. Lead time for development from concept to market. DD is seeking to redirect its
researchers to be better developers and, as such, will want to measure their efficiency
in turning ideas into tangible products.
The learning and growth perspective
1. $ spent per patentable discovery. This would provide a measure of the effectiveness of
the development activity of the researchers in DD.
2. Number of design modifications or re-works. This will measure the efficiency of the
development process which should improve as the researchers become more adept at
commercialising their discoveries.
3. Number of joint authored academic research papers. DD does not want to discourage
blue sky research only to shift the emphasis. Measuring the number of jointly authored
research papers will indicate the relative importance of both blue sky research and
collaborative work.
54
Lecture 14 - Performance I
55
Illustration 1
Background
Aybe, located in Country C, was formed by the merger of two companies in 2001. It is a
listed company which manufactures, markets and distributes a large range of components
throughout Europe and the United States of America. Aybe employs approximately 700
people at its three factories in Eastern Europe and supplies products to over 05 million
customers in 20 countries. Aybe holds stocks of about 100,000 different electronic
components.
Aybe is regarded within its industry as being a well-established business. Company Ay had
operated successfully for nearly 17 years before its merger with Company Be. Company
Ay can therefore trace its history back for 25 years which is a long time in the fast moving
electronic component business.
The company is organised into three divisions, the Domestic Electronic Components
division (DEC), the Industrial Electronic Components division (IEC) and the Specialist
Components division (SC). The Domestic and Industrial Electronic Components divisions
supply standard electronic components for domestic and industrial use whereas the
Specialist Components division supplies components which are often unique and made to
specific customer requirements. Each of the three divisions has its own factory in Country
C.
Organisational structure
Aybe is organised along traditional functional/unitary lines. The Board considers continuity
to be a very important value. The present structure was established by Company Ay in
1990 and continued after the merger with Company Be. Many of Aybes competitors have
carried out structural reorganisations since then.
In 2008, Aybe commissioned a review of its organisational structure from a human
resource consultancy. The consultants suggested alternative structures which they thought
Aybe could employ to its advantage. However, Aybes Board felt that continuity was more
important and no change to the organisational structure took place.
The business environment in Asia
Aybe has taken advice from a number of expert sources about market prospects in Asia.
The research concluded Asian markets have excellent potential for growth and profitability,
because of increasing industrialisation, for one of Aybes divisions, IEC. The markets are
fast- moving and highly adaptive. Some countries in Asia are highly entrepreneurial whilst
in others there is much involvement of the State in business.
In some countries there is a mixed economy. In general, Asia encourages free markets but
this is also allied to a requirement in some countries for local involvement in any business
enterprise. Most Asian countries make extensive use of sophisticated information systems
and information technology. A considerable amount of outsourcing from Western countries
has taken place to Asias benefit.
Although this had originally been in areas of manufacturing, outsourcing has now
developed extensively and many service and administrative functions have also been
outsourced to Asia. All of these influences have led to a variety of organisational structures
in Asian business.
56
Director of Operations
Aybe is organised along traditional functional lines and one of the most important
departments is Operations. The director with responsibility for this department is the
Director of Operations. The Director of Operations had recently joined Aybe and one of the
reasons for his appointment was his experience in managing the electronics division of a
multinational company in China.
He is very energetic and ambitious and had been supported in his appointment at Aybe by
the Non-Executive Director (NED) who chairs the Nominations Committee. This NED
considers that the Director of Operations has the potential to become the Chief Executive
Officer (CEO) of Aybe within the next five years.
Expansion of electronic components business into Asia
Prior to 2010, the IEC division of Aybe had carried out a limited amount of business in
Asia. The results of this business are shown in the column Actual 2009.
Aybes Management Accountant has prepared a forecast for the period 31 December 2010
to 2014 which shows the incremental effects of expansion into Asia of products from the
IEC division.
Aybe has been fortunate in that the Asian government in the country where it intends to
trade has granted a tax holiday for eight years to new overseas businesses. This means
that Aybes operations will not be liable to tax. Country C has a double taxation treaty with
the Asian country.
57
Solution
In order to evaluate the suitability of Aybes current organisational structure for its
proposed expansion into Asian markets, its salient features are described and compared
to the environmental conditions which Aybe is likely to encounter in Asia.
Currently, Aybe has an organisational structure which 'is organised along traditional
functional lines.
This is similar to many companies and is reflected in the composition of the Board of
Directors, for example, there is a Finance Director and an Operations Director. It would be
reasonable to expect that Aybe has departments corresponding to the different functions
carried out within its business; for example, there will probably be a Marketing department
and a Production department.
These departments would have established zones of authority and responsibility and
would benefit from periodic reporting of their results including performance against budget
targets.
However, such a structure has disadvantages. Over time it can become stagnant and
bureaucratic and it may be hard for enterprise to flourish in such a culture. This could be
the situation within Aybe which has not engaged in re-organisation unlike many of its
competitors: this could imply a resistance to change.
There are other disadvantages in Aybes structure. The functional departments do not
necessarily reflect the value-creating processes within Aybe. Thus, the demarcation of the
divisions by their products is necessarily an arbitrary one and, in practice, some products
may overlap more than one division.
The functional structure may also lead to a silo mentality where employees only think and
are concerned about their particular part of Aybe. This tendency could be to the detriment
of Aybes efficiency and profitability and lead to lower customer satisfaction. Aybe had
maintained the same structure since 1990 although many of its competitors had
reorganised since then.
In 2008 consultants had suggested alternative structures for Aybe but it had still not
changed. These factors strongly imply that by 2010 Aybe's organisational structures had
become outdated.
The environment within Asia has some environmental conditions which throw into question
the suitability of Aybes current organisational structure for doing business there. These
are:
The markets are fast-moving and highly adaptive. If Aybes organisational structure has
led to stagnation and bureaucracy, this may make the current structure unsuitable as it will
not be able to respond speedily and flexibly to the business environment.
Some countries in Asia are highly entrepreneurial. If Aybes structure has led to a culture
where enterprise does not flourish, Aybe may encounter difficulties in highly
entrepreneurial countries as entrepreneurs do business in ways that Aybe may not be
accustomed to; for example, entrepreneurs are often very decisive and expect this quality
from others. Aybe may not be able to accommodate this.
58
(In some countries)...there is much involvement of the State in business. This may create
problems for Aybe but they will not necessarily be ones to do with the organisational
structure.
In some countries there is a mixed economy. Aybe has a record of doing business in both
America and Europe and should have experience of doing business where the
Government is also involved in business; for example, in the UK the Government controls
the nuclear power industry and some of the railways.
Asia encourages free markets. This should not create difficulties for Aybe.
(In some countries there is) a requirement ..for a local involvement in any business
enterprise. In such a country, Aybe may be obliged to accommodate a local presence in
ownership and possible local representation on its Board and in its workforce. In order to
satisfy this requirement Aybe would have to change its organisational structure.
As Aybe will face a variety of new environmental conditions in Asia, its current
organisational structure is likely to be unsuitable.
59
Lecture 15 - Performance II
60
Illustration 1
EEE is a divisionalised company, based in F, where it is quoted on the stock exchange.
EEE manufactures and sells small electrical equipment products. As a country, F is more
highly developed than the neighbouring countries. EEE has enjoyed a strong home market
and has exported to the neighbouring countries.
EEE has had a reputation for producing high quality products. Recently, it has come under
increasing competitive pressure from new, privately held, companies based in the
neighbouring countries.
It appears that competitors based in these neighbouring countries have been selling lower
quality products than EEE and have been undercutting it quite significantly in terms of
price. Sales in both EEEs home and export markets have been badly affected by the
actions of these competitors in the neighbouring countries.
EEE has looked at a number of possible solutions to this situation and has decided to
acquire a manufacturing company in one of the neighbouring countries and move all of its
production there, completely closing the manufacturing division in F. This would mean that
EEE would purchase one of the companies that has recently become a competitor. EEE
would maintain its present divisionalised structure within its home country F and treat the
acquired company as a new division.
The Board of Directors recognises the need to carefully select a suitable acquisition target
company. The Board also recognises that careful consideration will need to be given to the
most suitable approach to performance management once the acquisition has been made.
The Board is considering an approach based on either Return On Investment (ROI) or
Residual Income (RI).
(i) Discuss the difficulties that EEE may experience with the performance
measurement of its divisions, post acquisition.
(ii)Discuss the disadvantages that EEE may experience if it chooses to use ROI as
its primary performance measure.
61
Solution
(i)
Once the new subsidiary is established as part of EEE there will be a need to manage a
multinational multidivisional company, an experience which EEE presumably has not had
before.
There are a number of difficulties that may be experienced regardless of the performance
measures that EEE decides to implement.
It will be worth remembering that there may well be different economic conditions in the
different countries together with different legal frameworks.
Additionally, there may be different trading conditions and cultures, although this may not
be the case bearing in mind that the countries are adjacent.
This may present problems to EEE in its choice of a performance measurement and
management system, since the management of the new subsidiary may not be used to
control of this kind. This may be exacerbated by the fact that the acquired company has
previously been a private company.
With this in mind, it is likely that EEE will decide to use a relatively straightforward
technique initially.
While EEE could adopt a simple profit based measure, ROI and RI are both superior
techniques since they will both take into account the capital base employed in the division.
However, there are a number of difficulties which both ROI and RI may cause since both
are still essentially profit based measures.
Managers may choose not to invest in the future since such lack of investment would
reduce their capital assets and therefore improve their performance indicators.
The figures presented by different divisions may not be comparable because of
differences in accounting conventions concerning the valuation of assets and the
classification of various categories of expenditure.
The geographical location of the business may affect the cost of both investment assets
and the returns recorded. This may well depend on the availability and cost of plant and
equipment.
Although EEE will have a common depreciation policy across the divisions the age of the
assets used will affect the results and may distort comparisons.
The use of financial control measures does not make it easy for the corporate centre to
shape the future of the whole organisation. This will be particularly true if EEE decides to
base the reward system of the divisions on these measures.
By their nature these measures are historical and therefore not appropriate for guiding
strategy making for EEE.
62
Additionally there are differences between ROI and RI which may help EEE decide which
is the most appropriate.
(ii)
Should EEE choose to use ROI as the primary performance measure, there are a number
of disadvantages of which it needs to be aware.
The use of ROI may lead managers to ignore profitable opportunities because their ROI
is less than the target or current ROI. This would not be the case with RI as long as the
imputed cost of capital for the division was less than the return achieved by the
opportunity.
Managers may be encouraged to start a project that has a high ROI and which, therefore,
increases the average ROI for the division even if the project does not cover the cost of
capital. This would not happen with RI where the project would show a negative return.
In general RI is more flexible than ROI since different imputed rates of interest can be
used to reflect the different inherent risk of projects in different areas.
On balance, if EEE intends to use either ROI or RI rather than a more forward looking
method, then RI will offer more flexibility but may need more explanation to the divisional
managers.
63
Lecture 16 - IT & Strategy
64
Illustration 1
GHK is a restaurant chain consisting of eight restaurants in an attractive part of a
European country which is popular with tourists. GHK has been owned by the same family
for the previous15 years and has always traded at a profit. However, a number of factors
have meant that GHK is now in danger of making a trading loss. There has been a
substantial drop in the number of tourists visiting the region whilst, at the same time, the
prices of many of the foodstuffs and drinks used in its restaurants has increased. Added to
this, the local economy has shrunk with several large employers reducing the size of their
workforce.
The owners of GHK commissioned a restaurant consultant to give them an independent
view of their business. The consultant observed that the eight restaurants were all very
different in appearance. They also served menus that were very different, for example, one
restaurant which was located on a barge in a coastal town specialised in fish dishes,
whereas another restaurant 20 miles away had a good reputation as a steak house. The
prices varied greatly amongst the restaurants; one restaurant in a historic country house
offered fine dining and was extremely expensive; yet another located near a busy railway
station served mainly fast food and claimed that its prices were the cheapest in town.
Three of GHKs restaurants offered a middle of the road dining experience with
conventional menus and average prices. Some of the restaurants had licences which
enabled them to serve alcohol with their meals but three restaurants did not have such
licences. One restaurant had a good trade in childrens birthday parties whereas the
restaurant in the historic country house did not admit diners under the age of 18.
The consultant recommended that GHK should examine these differences but did not
suggest how. The owners responded that the chain had grown organically over a number
of years and that the location, style and pricing decisions made in each restaurant had all
been made at different times and depended on trends current at that time.
(i) Advise the owners of GHK how the application of Porters Three Generic
Strategies Model could assist them in maintaining or improving the profitability of
their restaurants.
(ii)Advise how GHK could employ a range of organisational information systems to
support whichever generic strategy it chooses to adopt.
65
Solution
(i)
Porters Three Generic Strategies Model was developed in 1980 and since then has
gained international dissemination. The model analyses how firms can achieve competitive
advantage which Porter suggests can come about by adopting one of the following
policies:
Overall cost leadership: the firm is the lowest cost producer relative to its competitors.
Differentiation: the firm can create something which is unique and for which consumers will
pay a premium.
Focus: the firm serves a narrow strategic target more effectively than its competitors who
are competing more broadly.
Porter asserts that each generic strategy requires different attributes and, therefore, it is
unlikely that any firm can pursue more than one generic strategy simultaneously and be
successful. He cautions against firms becoming stuck in the middle.
As well as Porters model being used analytically, it can also be used pro-actively to help a
firm design its competitive strategy. In the case of GHK no coherent strategy has been
followed with respect to its eight restaurants. A preliminary analysis suggests that the
following strategies are being followed:
Overall cost leadership: (the firm is the lowest cost producer relative to its competitors), at
the restaurant near the busy railway station.
Differentiation: (the firm can create something which is unique and for which consumers
will pay a premium) at the fine dining restaurant in the historic country house.
Focus: (the firm serves a narrow strategic target more effectively than its competitors who
are competing more broadly) at the fish restaurant, the steak restaurant, the restaurant
offering childrens birthday parties.
Stuck in the middle: three middle of the road restaurants with conventional menus and
average prices.
The generic strategy which GHK decides to follow will be linked to a marketing strategy. It
is not necessarily the case that GHK is wrong to follow a number of generic strategies
because if each restaurant is taken as a strategic business unit it will have a particular
catchment area from which it draws its customers and looked at in isolation that strategy
might be the optimal one for that restaurant. However, a systematic examination of each
restaurant using the logic of Porters model and examining the basis by which that
restaurant competes and whether this will yield a long-term competitive advantage will be
invaluable.
With respect to the restaurant near the busy railway station, if this is attempting to compete
on the basis of being the lowest cost producer and, therefore, charging its customers the
lowest prices, it is doubtful that this can give a long-term competitive advantage. The
66
prices of a restaurants inputs, mainly food and labour, are set within their local markets
and available to any competitor. The technology and processes of restaurants are mature
ones and it is unlikely that GHK could innovate in this area to secure competitive
advantage.
The three restaurants which are stuck in the middle should be given immediate attention
as Porters model suggests they are unlikely to be successful.
If the owners of GHK use Porters Three Generic Strategies Model it will give them an
appreciation of the basis upon which their various restaurants compete and should prompt
them to make modifications to their strategy and attempt to secure long-term competitive
advantage.
It may be the case that GHK treat each of its restaurants as a strategic business unit and,
therefore, employ a number of different generic competitive strategies. Alternatively, GHK
may wish to trade as a homogenous entity which would imply it would use only one of the
three generic competitive strategies to avoid being stuck in the middle.
(ii)
Strategic
In order to decide which of the generic strategies would be appropriate, GHK will require
information to construct a PEST analysis. It will need detailed market and demographic
information, for example, to decide whether a particular restaurant has access to a
hinterland of customers who are willing to pay a premium price.
This would then indicate the suitability of a differentiation strategy. Marketing research
could then indicate the type of differentiation for which these customers are willing to pay a
premium. It could be the case that the differentiation strategy would be suitable not only for
the restaurant in the historic country house but also for the fish and the steak restaurants.
Statistics of market share would demonstrate GHK comparative position. The degree of
success of the strategy it was following would be monitored by periodic reporting of market
share.
GHK owners could utilise an executive information system to help them in their decisionmaking. Inputs to this system would include both their own researches and data and also
data from specialist external databases.
If GHK wanted to pursue a strategy of overall cost leadership (although the answer in (a)
suggests that this is unlikely to be successful) an information system which tracked market
prices for restaurant supplies would be required.
GHK could use information systems to help it determine the most appropriate generic
competitive strategy for its business. However, it should also recognise that the information
systems which it chooses to deploy can, of itself, be a source of competitive advantage for
its business.
An example of this could be that GHK, through its PEST and market research, may identify
profitable groups of customers whose needs are not being met at present, such as
vegans.
67
GHK may be able to construct a website offering a booking service for restaurants in its
regions and link this with an affinity or loyalty card. This would then generate valuable
current data about the restaurant which GHK could incorporate in its strategic review
processes.
Operational
At the operational level there is much that good information systems and management
accountancy can contribute to a successful generic strategy for GHK. Porters Three
Generic strategies model is essentially about achieving and maintaining competitive
advantage: that is out-performing its rivals.
For its basic requirements GHK would require a comprehensive database, allied to a
system for capturing real-time operational data, and a reporting package.
Given these requirements, GHK could address such important parameters as its capacity
utilisation. The management accountant using real-time information could provide timely
information about the number of customers served each day.
This information could be further analysed to reveal variations in demand by both day and
time: Which day are we busiest? What time of day is the quietest? Such analysis could be
presented in management accounting reports and would assist in decisions such as: At
what times should the restaurants be open? Is it worth opening every day of the week?
The restaurants could also equip its waiters with PDAs (Personal Digital Assistants)to
record orders and Smart-tills to record and analyse its sales receipts. At the operational
level GHK could use proprietary industry software to cost and plan its menus. These
functions could be integrated to order ingredients and monitor stock levels.
This information allied to the real- time information about orders and sales would enable
real-time profitability information to be generated by the management accountant.
The results emanating from the operational level would indicate the degree of success of
the generic strategy. It would also indicate either the continuance of that strategy or could
suggest that it was time for a strategic review and a possible change of strategy.
68
Lecture 17 - E-Business
69
Illustration 1
Introduction
AAA is a small manufacturer of replacement machine components for machinery used in
the mining and oil exploration industries. It is based in an African country. It was formed in
1952, as a partnership between two engineers, and incorporated in 1977. AAA now
employs 120 staff, and has an annual turnover equivalent to one million US dollars. AAA is
proud to offer the very highest levels of customer service. Much of the machinery used by
AAAs customers is quite old and, as a result, components are no longer available from the
original equipment manufacturers (OEMs), most of which are large multinational
companies. AAA mostly supplies parts directly to the end-users but also receives a small
but significant proportion of its business from OEMs, who then supply the components to
their customers.
The current business model
AAA has always run its business in a very traditional way. The sales manager receives
most orders by telephone or fax. The order specifies the OEM part number that the
component is to replace. If AAA has previously supplied that component, the sales
manager checks the price list and tells the customer the price. AAA holds very low levels of
finished goods inventory, and then only of the most commonly ordered components.
Where AAA needs to make a component for the first time, an AAA estimator (a qualified
engineer, responsible for producing an estimate of the material and labour involved in
manufacturing the item) obtains the original drawings of the component, either from AAAs
extensive archives or from the OEM.
The estimator then produces detailed engineering drawings, a list of materials and parts
required, and an estimate of the labour hours likely to be used at each stage of the
manufacturing process. The estimate is passed to a costing clerk in the accounts
department who calculates the likely product cost (labour, materials and overheads), adds
a mark-up of 50%, and advises the sales manager of the price. If the customer accepts
the price, an order is passed to the production department, which schedules and
completes the work. If the actual cost of production is significantly different from that
estimated, the price list is amended to reflect the actual manufacturing cost.
Very occasionally, a customer sends (or brings in) an old component, which cannot be
traced back to an OEM. The sales manager gives the component to an estimator, who
dismantles the component and produces the necessary engineering drawings and
estimate. This process is called reverse engineering, and is common in the component
manufacturing industry. Reverse engineering currently accounts for about 5% of AAAs
business.
When an order is fulfilled, the component is delivered to the customer, together with an
invoice. Most customers pay within 30 days, by cash or cheque. AAA does not have a
problem with bad debts. An increasing proportion of AAAs business is now transacted in
US dollars, as African currencies tend to be unstable.
AAA prides itself on the personal service it provides. The close contact it has with its
customers means that AAA receives a significant amount of repeat business. AAA has
never advertised its services, but grew significantly until 2005 as a result of word of
mouth recommendations by satisfied customers. AAA, however, has not experienced
growth for the last two years, although turnover and profit have remained stable.
70
AAA uses only very basic Information Systems (IS), and reports its performance using a
simple comparison between budget and actual, which is produced using a spreadsheet
package. AAAs accounting system is not automated, and transactions are recorded in
traditional ledgers.
Project E: Computerised accounting and e-commerce systems
The sales manager of AAA has noticed that customers are increasingly mentioning that
they would like to be able to order online. He knows that there has been a significant
growth in business-to-business (B2B) e-commerce in recent years. The sales manager
has recognised that in order to grow and to make a move into e-commerce possible, AAAs
accounting system will have to be updated to a computerised one.
Having spoken to a number of potential suppliers, the sales manager has now received a
proposal from SSS, a local company, to supply tailored off-the-shelf systems for both
accounting and e-commerce. SSS has provided a detailed breakdown of its proposal, to
be known as Project E, which is summarised below.
The sales manager believes that, following implementation of the new systems (likely to be
12 months from contract agreement) e-commerce should lead to an increase in the
companys turnover of 10% in its first year of operation. Thereafter, the turnover resulting
from e- commerce should grow at a rate of 10% each year for the foreseeable future.
The sales manager also thinks that any increase in indirect costs as a result of this higher
volume of business will be fully offset by a reduction in administration workload as a result
of the new computerised accounting system. The gross margin earned from e-commerce
business can therefore be used as the effective cash inflow for evaluation purposes. The
current turnover of AAA is, as stated earlier, $1 million a year. The mark-up on products
sold by e-commerce will be the same as at present (that is, 50%).
However, the sales manager thinks that a cautious approach should be taken to the
evaluation of the proposal, and that any benefits after 5 years from implementation should
be ignored. AAA has a weighted average cost of capital (WACC) of 15%.
Briefly explain how e-business has impacted on the way business is conducted.
Briefly discuss how a new Information Systems (IS) strategy might impact upon
corporate, business and functional strategies.
Evaluate the strategic and competitive benefits to AAA of the proposed ecommerce system.
Discuss how AAA might use its e-commerce system to increase the volume of
business from reverse engineering projects.
71
(i)
E-business and business
Electronic business (e-business) represents a fairly new method of conducting business
transactions. In addition to buying and selling or exchanging products, it also facilitates the
provision of services and information, usually through communication systems such as the
Internet, intranets and extranets.
The key drivers of e-business are that it has the potential to:
Provide a range and quality of services, meet customer demands, assist in retaining
customers and gain competitive advantage by maximising revenue.
Improve the effectiveness, and reduce the cost, of supply chains.
Improve knowledge management, cost reduction, differentiation and focus.
E-business has now impacted to such an extent that, in some cases, it is the only viable
business model.
(ii)
IS strategy and other strategies
In theory, the IS strategy of an organisation is an example of functional strategy. As such,
the IS strategy should be a tool to ensure implementation and achievement of the
corporate and business strategies. For example, a business strategy of cost reduction
might lead to an IS strategy of automation of core processes.
However, it is increasingly common for IS strategy to drive the organisations strategies in
a way that most other functional strategies could not. As such, the IS strategy can become
the change trigger that requires a significant change in both the corporate strategy of the
organisation, and other business and functional strategies. For example, the decision to
adopt e-commerce as an IS strategy would have repercussions throughout the
organisation:
At the corporate level, use of the Internet necessarily leads to a market development
strategy of going global.
E-commerce might require a shift in business strategy from cost leadership to

differentiation-focus.
At the functional level, the logistics, accounting and/or production systems might
have to change to meet the demands of e-commerce.
There is, therefore, a complex relationship between IS strategy and corporate strategy. IS
strategy can either be an implementation tool or a change trigger.
(iii)
Strategic and competitive benefits of e-commerce
The main strategic and competitive benefits to AAA are likely to be the following:
72
To expand the marketplace to national and international. This is a potentially

significant strategic benefit. The development of an e-commerce system will
immediately mean that AAA becomes a global company. As mining and oil
exploration are also global businesses, this should lead to the growth that AAA
seeks. However, AAA must ensure that it has the capacity and operational systems to
be able to respond to any increase in demand, as failure to meet customer
expectations could lead to a loss of reputation. AAA must also recognise that an ecommerce system that prices products in US dollars might be unattractive to
customers in Africa, and could lead to a reduction of local business.
To decrease the cost of creating, distributing, storing and retrieving paper-based

information. This is a potentially significant competitive benefit (assuming rivals do
not offer the same services). It should be possible for AAA to archive all of its order,
delivery, and specification data, and also (possibly) its engineering drawings. This
should save time and cost in the sales and estimating functions, as storage costs
would be vastly reduced and retrieval times speeded up. However, AAA would not be
able to do this for any reverse engineering services, as each job is unique and there
would be no drawings.
To improve image, service and access to information. This is a potentially significant

strategic and competitive benefit. E-commerce should improve response times and
customer service levels, in addition to allowing most customers to pick components
from the website by OEM name and part number. Products requiring reverse
engineering could not, of course, be ordered and purchased online. Improved
response times would directly support the organisations strategy of personal
service, but AAA must ensure that the e-commerce system is adequately supported
by human customer service systems.
To reduce the time between delivery and payment, and other administrative drag.
Again, this benefit might be significant to AAA as it might find that customers are
willing to pay with order rather than 30 days after delivery. However, trade
customers might prefer to have credit accounts, so any benefits might be reduced. If
payment was taken with order, AAA would have to make it clear that delivery would
not be, in most cases, from stock.
To increase productivity and flexibility, and to reduce transport costs. Although this is
a theoretical benefit of e-commerce, AAA currently appears to perform well in these
areas. Any benefit might, therefore, be minimal.
To allow the reduction of inventory and the development of pull supply chain
management. This is already the way AAA organises its business so, once again, any
benefits might be marginal.
(iv)
Reverse engineering
The development of e-commerce might allow AAA to increase the amount of reverse
engineering it carries out, despite the fact that such business could not be transacted
online. AAA might consider the following:
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Any new e-commerce system could be used to advertise and promote the full range
of services provided by AAA. Customers who purchase off the shelf components
might not be aware of the reverse engineering services provided by AAA.
AAA might use an online chatroom or forum system to allow customers to share
information between themselves, and with AAA technical staff. This would bring
further opportunities to promote reverse engineering services.
74
Lecture 18 - Knowledge
Management
75
Illustration 1
Distinguish between data mining and data warehousing.
Solution
Data mining is a process to discover new, meaningful information from data collected by
organisations so that decision makers can learn as much as possible from valuable data
assets. Usually, using advanced information technologies, knowledge can be discovered in
databases that can lead to useful insights into customer behaviour and lead to increased
sales through superior performance.
Data mining uses a broad set of tools to automatically analyse data and answer user
defined questions. Many companies already use computers to capture details of business
transactions such as credit and debit card purchases, retail sales and warranty claims.
Data mining techniques help those companies to identify useful patterns of behaviour and
relationships between the data that might otherwise have gone undetected.
By contrast, data warehousing relates to the effective storage of data. The concept has
been described as a single, complete and consistent store of data obtained from a variety
of sources and made available to users. The emphasis is on the data being available in an
understandable fashion that can be used in a business context.
As such, a data warehouse is a database that:
is organised to serve as a neutral storage area;
is used by data mining and other applications;
meets a specified set of requirements;
uses data that meet a predefined set of business criteria.
In summary, data warehousing relates to the storage of data and data mining to the
analysis of that data.
76
Illustration 2
Introduction
AAA is a small management consultancy practice, based in the capital city of an African
country. Since 2004, AAA has grown significantly. In 2008 AAA earned a fee income of US
$ 2.8 million (2004: US$ 1.6 million), and profit after tax of US$ 0.6 million (2004: US$ 0.4
million).
AAA now employs a total of 14 consultants (including the partners) and 11 support staff.
The support staff mainly work in administration, finance, research and marketing roles.
AAAs accounts for 2008 showed net assets of US$ 1.1 million (2004: US$ 1.0 million).
The business of AAA
AAA has a number of clients in financial services, manufacturing, construction, retail and
logistics. Most of AAAs clients can still be regarded as Small and Medium Enterprises
(SMEs), but a few of them have now grown to become large and successful organisations.
Indeed, AAA now has three clients in the top ten of the country, ranked by turnover.
In all projects, AAA ensures that the staff of the client organisation are fully involved in the
consultancy process. Client staff are normally included as members of the project team,
thus ensuring that the project has greater acceptance from the client organisation. As a
result of this approach, AAA has a reputation for successful projects and has achieved
some client referral and repeat business.
The staff retention problem
Until 2007, AAA had never lost a key employee. The partnership was, and still is, viewed
as a caring and loyal employer, at least matching the market rate in terms of salaries and
benefits. The partners were confident that staff loyalty would continue, as AAA was still
growing and provided both interesting and challenging projects and opportunities for
career progression.
The partners were shocked when, in 2007, two consultants resigned to join rival
consultancy firms. In 2008, another consultant left, this time to join a client organisation as
director of finance. So far this year, a consultant resigned to set up his own business, and
another chose not to return to the partnership at the end of an interim management
assignment with a client. Although AAA has recruited suitably qualified replacements for
the staff who have left, the cumulative effect of all these losses is that about a third of all
AAA consultants have been with the firm for less than five years.
Mr Amit
Mr Amit is the partner of AAA responsible for administration, marketing and IT. He is keen
to use AAA itself as a pilot study, with a view to offering knowledge management
consultancy services to AAAs clients. Mr Amit has found some information about
knowledge management on the internet, part of which is reproduced below.
Definition: Knowledge Management (KM) is the use of an organisations Intranet to allow staff to record their knowledge
so it can be accessed by others. It is a modern IT solution to improve communication and facilitate organisational
learning.
Project resourcing
When AAA begins a new consultancy project, the designated project manager recruits the
consultancy team from those consultants who are not engaged in another project. Staff are
allocated to projects on a first come, first served basis, so it is common for project
77
managers to find that some of the consultants with the greatest experience in the required
specialist areas are already engaged on another project and are thus unavailable.
Discuss the definition of Knowledge Management that Mr Amit obtained from the
Internet.
Discuss the three main potential benefits of Knowledge Management to AAA.
Solution
(i)
The information provided suggests that Knowledge Management (KM) is the use of an
organisations Intranet to allow staff to record their knowledge so it can be accessed by
others. It is a modern IT solution to improve communication and facilitate organisational
learning.
I have a number of concerns with this definition:
Knowledge Management (KM) is the use of an organisations Intranet... implies that KM
requires an Intranet to work. This is not necessarily the case. Whilst the use of an Intranet
will normally increase the effectiveness of any KM introduction, it is by no means a prerequisite. KM is about sharing knowledge an Intranet is just a tool to facilitate this.
...to allow staff to record their knowledge so it can be accessed by others. Whilst this may
be true for explicit knowledge, much of the higher level knowledge within organisations is
tacit that is, incapable of being recorded. There are ways that tacit knowledge can be
shared, without being recorded, such as mentoring and coaching.
It is a modern IT solution... KM is definitely not an IT solution. It is an organisation- wide,
cultural change programme. Viewing it as an IT solution runs the risk of investing in
expensive hardware and software for relatively little benefit.
...to improve communication and facilitate organisational learning. Whilst these are likely
effects of a KM programme, there is a much greater purpose. KM should fundamentally
change the way the organisation operates, and impact on every aspect of its business.
(ii)
The three main benefits of KM to AAA are likely to be as follows:
1.
The development of a significant and sustainable competitive advantage.

Consultancy is a knowledge-based business and a KM programme will allow AAA to
provide its clients with better solutions more quickly. If the consultants are unwilling to
share knowledge with one another, how can they share knowledge effectively with
AAAs clients? KM will also allow less experienced consultants to have access to the
knowledge stock of experienced staff, thus allowing AAA to place better project teams
with clients.
78
2.
The reduction of knowledge loss. If a KM implementation is successful, staff will

share knowledge with each other and record the explicit aspects of that knowledge
for use by others. The knowledge stock becomes an asset of AAA rather than
remaining in the heads of individual staff. If a consultant leaves, the vast majority of
their knowledge will be retained.
3.
Reduced staff turnover. Staff in KM organisations are generally more satisfied, more
highly motivated, and therefore less likely to leave. Consultancy staff often enjoy
learning as much as they do advising clients. KM allows staff to learn continuously
from their colleagues.
79
Lecture 19 - Managing
Supply Chain
80
Illustration 1
B is a public company that operates 100 supermarkets in a European country. There are a
number of other supermarkets operating in the country and the market is fiercely
competitive. All of the supermarkets find it difficult to generate any customer loyalty and
have found that customers are very price sensitive.
Like all other supermarkets in the country, B suffers a higher staff turnover than other retail
outlets and this is recognised as one of the reasons for relatively low customer satisfaction
and retention.
The marketing director has suggested that the company would benefit from introducing a
credit card that its customers could use in its supermarkets and in other retail outlets within
the country. At present, although all supermarkets in the country accept credit cards for
payment for goods, no other supermarket offers its own credit card.
The marketing director claims that, in addition to the appeal to the customers, the credit
card would allow B to gather large quantities of data about its customers. He feels this
would offer advantages in terms of data mining, data warehousing and relationship
marketing.
You are the management accountant for B. The finance director has said that she is
unfamiliar with these techniques and has asked you to provide some explanations and
advice in the context of Bs business.
(i) Describe relationship marketing in the context of Bs business applying the six
markets model.
(ii)Recommend, with reasons, strategies that B can use to develop relationship
marketing and improve customer loyalty.
81
Solution
The six markets model suggests that relationship marketing should extend beyond the
customer and consider a broader picture. The six markets are described as follows:
Customer markets. These are the buyers of the final product and remain the
objective of a firms marketing efforts. In the case of B, this would be the customers
who shop at the supermarket and purchase the goods from the shelves.
Referral markets. These are institutions and individuals who refer, and hopefully,
recommend the customer to us. This might simply be a neighbour of a customer who
says how good the store is or may be a newspaper which writes a good review of the
experience in the store.
Supplier markets. This relates to the partnerships with suppliers that are,
increasingly, replacing the adversarial relationships that have traditionally existed
between suppliers and supermarkets. As B attempts to build customer loyalty, it will
need to be sure of supplies and the development of new products based on the
information that it gathers from its data mining exercise.
Recruitment markets. As B tries to build better relationships with its customers, it will
need the right staff to do so. If B has built a strong relationship with all of the sources
of staff which can range from recruitment agencies to schools, it is likely to find it
easier to recruit the most appropriate staff for its needs.
Influence markets. There are organisations which will be able to influence customers
in their choice of both products and the places where they buy them. These are often
watchdog groups, or consumer associations whose role is to protect customers
interests. If they hold a favourable view of B, it will be to the benefit of the company.
Internal markets. Within an organisation there are a number of departments and

those departments will deal with each other on a regular and frequent basis. If they
operate in the spirit of cooperation and collaboration, it is likely that they will work
more efficiently and effectively and provide the customer with a better experience. In
the case of B, the closer the buying department, the market analysis department and
the departments that are actually customer facing work together, the better the
customers are likely to be served.
(ii)
There are a number of strategies that are used to develop relationship marketing within an
organisation. Those that are specifically relevant to B are:
Develop incentive schemes for the staff that encourage customer retention. For
example, staff could be rewarded based on the outcomes of customer satisfaction
surveys. Similarly, all bonuses should be group based, emphasising that customer
retention is a key task for everyone. This could be measured by the frequency with
which customers returned to shop in B.
Reduce staff turnover to maintain customer loyalty and ensure consistent service
standards in the supermarket branches. As customers see the same, welcoming
82
faces in their branch of the supermarket, they will be more inclined to return to that
store rather than to that of a competitor.
Adopt quality procedures which monitor and influence all aspects of the customer
relationship. This would involve introducing total quality management programmes
and a significant investment in the training of staff.
Have regular contact with customers to assess satisfaction and take appropriate
action, ensuring that the customer is aware that the action has been taken. This
could be done by focus groups with particular segments of the customer base, those
families with new babies for instance.
Use data mining techniques to develop detailed information on customers buying

tastes and habits and make this available to those staff responsible for development
of new products.
Use the same information to target promotions and offers to specific customers
tastes and needs. Those families with school age children could be targeted with
appropriate promotions in the month prior to the school year starting.
Develop affinity devices such as credit cards, magazines and user clubs to build
loyalty.
Develop benefits programmes linked to customer loyalty such as discounts for repeat
purchases.
83
Lecture 20 - Marketing
84
Illustration 1
Introduction
The Accounting Education Consortium (AEC) offers professional accountancy education
and training courses. It currently runs classroom-based training courses preparing
candidates for professional examinations in eight worldwide centres. Three of these
centres are also used for delivering continuing professional development (CPD) courses to
qualified accountants. However, only about 30% of the advertised CPD courses and
seminars actually run. The rest are cancelled through not having enough participants to
make them economically viable.
AEC has developed a comprehensive set of course manuals to support the preparation of
its candidates for professional examinations. There is a course manual for every
examination paper in the professional examination scheme. As well as being used on its
classroom-based courses, these course manuals are also available for purchase over the
Internet. The complete set of manuals for a professional examinations scheme costs
$18000 and the web site has a secure payment facility which allows this to be paid by
credit card.
Once purchased, the manuals may be downloaded or they may be sent on a CD to the
home address of the purchaser. It is only possible to purchase the complete set of
manuals for the scheme, not individual manuals for particular examinations. To help the
student decide if he or she wishes to buy the complete manual set, the web site has
extracts from a sample course manual. This sample may be accessed, viewed and printed
once a student has registered their email address, name and address on the web site.
AEC has recently won a contract to supply professional accountancy training to a global
accounting company. All students working for this company will now be trained by AEC at
one of its worldwide centres.
Web site
The AEC web site has the following functionality: Who we are: A short description of the
company and its products and services. Professional education courses: Course dates,
locations and standard fees for professional examination courses. This schedule of
courses is printable. Continuing professional development: Course dates, locations and
standard fees for CPD courses and seminars. This schedule is also printable. CPD
catalogue: Detailed course and seminar descriptions for CPD courses and seminars.
Downloadable study material: Extracts from a sample course manual.
Visitors to the site wishing to access this material must register their email address, name
and address. 5,500 people registered last year to download study material. Purchase
study material: Secure purchase of a complete manual set for the professional scheme.
Payment is by credit card. On completion of successful payment, the visitor is able to
download the manuals or to request them to be shipped to a certain address on a CD. At
present, 10% of the people who view downloadable study material proceed to purchase.
Who to contact: Who to contact for booking professional training courses or CPD courses
and seminars. It provides the name, email address, fax number, telephone number and
address of a contact at each of the eight worldwide centres.
Marketing strategy
The marketing manager of AEC has traditionally used magazines, newspapers and direct
mail to promote its courses and products. Direct mail is primarily used for sending printed
course catalogues to potential customers for CPD courses and seminars. However, she is
85
now keen to develop the potential of the Internet and to increase investment in this
medium at the expense of the traditional marketing media. Table 1 shows the percentage
allocation of her budget for 2008, compared with 2007. The actual budget has only been
increased by 3% in 2008.
Percentage allocation of marketing budget (20072008)
!
!
!
Advertising ! !
Direct mail ! !
Sponsorship !
Internet!
!
2007"
30%
10%!
10%!
50%!
"
!
!
!
2008
40%
30%
10%
20%
Explain, in the context of AEC, how the marketing characteristics of electronic

media (such as the Internet) differ from those of traditional marketing media such as
advertising and direct mail.
Solution
A key characteristic of traditional marketing media such as advertising and direct mail is
that it is predominantly a push technology where the media is distributed to customers
and potential customers. There is limited interaction with the customer and indeed, in the
case of advertising and to a lesser degree direct mail, there is no certainty that the
intended recipient actually received the message. In contrast, the new media, particularly
the Internet, is predominantly a pull technology the customer having initiated the visit to
the web site. This may lead to subsequent push activities, such as sending e-mails to
people who have registered their interest on the site, but the initial communication is a pull
event. The marketing manager must be careful that, by switching so much of her budget to
pull technologies, she does not forego opportunities to find new customers or reinforce
her message through established push technologies. She must ensure that the
companys web site is established in such a way that sufficient people find it, and that
when they do, they are prepared to record enough details to allow subsequent push
activities.
Dave Chaffey examines the difference between traditional and new marketing media in the
context of six Is; interactivity, intelligence, individualisation, integration, industry
restructuring and independence of location. Four of these are used in this answer.
Interactivity is a significant feature of the new media, allowing a long-term dialogue to
develop between the customer and the supplier. In the context of the web site, this is likely
to be through e-mails, providing the customer with information and special offers for their
areas of specific interest. To initiate this dialogue the web site must capture information
such as e-mail address, name, age, gender and areas of interest. The AEC site only
collects such information for people who wish to view downloadable study material. This is
too restrictive and it will probably exclude all the potential CPD customers. AEC needs to
consider ways of making it easier and worthwhile for visitors to the site to register their
details. There is no evidence of AEC contemplating the potential use of interactive digital
TV or mobile phones to establish long-term dialogues with their customers.
86
Intelligence has also been a key feature of the new media allowing the relatively cheap
collection of marketing research data about customers requirements. This is routinely
available from web logs and these logs need to be viewed and analysed using appropriate
software. This type of analysis is rarely available in the traditional media. For example,
AEC does not know how often their training course catalogue is accessed and which
pages are looked at. It only knows which training courses are eventually bought. With the
new media the company is able to see which services and products are accessed and also
to measure how many of these are turned into actual sales. This conversion rate may be
an important source of information for example, why are certain web pages often visited
but few sales result is it a problem with the web page? is it a problem with the product?
An understanding of visit patterns allows the organisation to focus on particular products
and services. This analysis should already be available to AEC but there is no evidence
that it uses it or is even aware of it.
The new media also permit the marketing to be individualised, geared to a particular
market segment, company or individual person. In the context of AEC this individualisation
could be achieved in at least two ways to reflect clear market segmentation. AEC has
recently won a contract to supply professional accountancy training to a global accounting
company. All students working for this company will now be trained by AEC in one of its
worldwide centres. At present this company and its students will be served through a
generic web site. However, the flexibility of the new media means that a site could be
developed specifically for this requirement. The whole site would be geared, and branded,
towards the requirements of the global accounting company. Information that is irrelevant
to that customer, such as CPD, would not appear on the site. This individualised approach
should strengthen the relationship with the customer. Similarly, individuals may have their
own access customised as a result of the profile that they have entered. So, for example, if
they have already stated that they are currently sitting the professional stage of an
examination scheme then only information relevant to that stage will be presented to them
when they log in. This is an example of the principle of mass customisation that was only
available in a limited form in the traditional media. AEC does not exploit this at present, but
uses a generic web site that looks and feels the same, whoever the user is.
Finally, the new media provide independence of location allowing the company to move
into geographical areas that would have been unreachable before. The Internet effectively
provides a world wide market that is open 24 hours per day, seven days per week. It is
difficult to think of any traditional media which would have permitted this global reach so
cheaply. Furthermore, the web site might also omit the actual physical location of the
company because there is no requirement for information to be physically sent to an
address. It should also be impossible for the potential customer to gauge the size of the
supplying company. AEC has exploited this to some extent as it serves a world-wide
market from no clear geographical centre. However, the absence of on-line course booking
means that certain physical contact details have to be provided and these might
undermine the global perspective.
87
Lecture 21 - Roll of Process
88
Illustration 1
Explain, using Harmons process-strategy matrix, how the complexity and strategic
importance of process initiatives can be classified.
Solution
LDB could assess the priority of the three initiatives on the process-strategy matrix
suggested by Paul Harmon. The matrix has two axes. The vertical axis is concerned with
process complexity and dynamics. At the base of the vertical axis are simple procedures
often with simple algorithms while at the top are complex processes which may require
negotiation, discussion and complicated design.
On the horizontal axis is the strategic value of these processes. Their importance
increases from left to right with low value processes concerned with things that must be
done but which add little value to products or services. On the extreme right of this axis are
high value processes which are very important to success and add significant value to
goods and services. From these two axes, Harmon categorises four quadrants and makes
suggestions about how processes should be tackled in each quadrant.
Low strategic importance, low process complexity and dynamics
This quadrant contains relatively straightforward stable processes which add little business
value. They are processes that must be done in the company but add nothing to the
companys value proposition. These processes need to be automated in the most efficient
way possible. They are often called commodity processes and are suitable for standard
software package solutions and/or outsourcing to organisations that specialise in that
area.
Low strategic importance, high process complexity and dynamics
This quadrant is for relatively complex processes that need to be done but do not add
significant value to the companys products or services. They are not at the heart of the
companys core competencies. Harmon suggests that these should be outsourced to
organisations which have them as their core business.
High strategic importance, low process complexity and dynamics
These processes lie in the lower right quadrant of the model. They tend to be relatively
straightforward processes which, nevertheless, have a significant role on the
organisations activities. They are central to what the business does. The aim is to
automate these, if possible, to gain cost reduction and improve quality and efficiency.
High strategic importance, high process complexity and dynamics
Finally, in the top right hand quadrant are high value, complex processes which often
include human judgement and expertise and are often very difficult to automate. Harmon
suggests that these might be the focus of major process redesign initiatives focusing on
business process improvement through the improved performance of the people
undertaking those processes.
89
Illustration 2
Branch rationalisation project Four years ago Lowlands Bank acquired Doe Bank, one of
its smaller rivals. Both had relatively large local branch bank networks and the newly
merged bank (now called LDB) found that it now had duplicated branches in many towns.
One year after the takeover was finalised, LDB set up a project to review the branch bank
network and carry out a rationalisation that aimed to cut the number of branches by at
least 20% and branch employment costs by at least 10%. It was agreed that the project
should be completed in two years. There were to be no compulsory staff redundancies. All
branch employment savings would have to be realised through voluntary redundancy and
natural wastage.
LDB appointed its operations director, Len Peters as the sponsor of the project. The
designated project manager was Glenys Hopkins, an experienced project manager who
had worked for Lowlands Bank for over fifteen years. The project team consisted of six
employees who formerly worked for Lowlands Bank and six employees who formerly
worked for Doe Bank. They were seconded full-time to the project.
Project issues and conclusion
During the project there were two major issues. The first concerned the precise terms of
the voluntary redundancy arrangements. The terms of the offer were quickly specified by
Len Peters. The second issue arose one year into the project and it concerned the amount
of time it took to dispose of unwanted branches. The original project estimates had
underestimated how long it would take to sell property the bank owned or to re-assign or
terminate the leases for branches it rented. The project board overseeing the project
agreed to the project managers submission that the estimates had been too optimistic and
they extended the project deadline for a further six months.
The project team completed the required changes one week before the rearranged
deadline. Glenys Hopkins was able to confirm that the branch network had been cut by
23%. Six months later, in a benefits realisation review, she was also able to confirm that
branch employment costs had been reduced by 12%. At a post-project review the project
support office of the bank confirmed that they had changed their project estimating
assumptions to reflect the experience of the project team.
Potential process initiatives
LDB is now ready to undertake three process initiatives in the Information Technology
area. The IT departments and systems of the two banks are still separate. The three
process initiatives under consideration are:
1.
The integration of the two bespoke payroll systems currently operated by the two
banks into one consolidated payroll system. This will save the costs of updating and
maintaining two separate systems.
2.
The updating of all personal desktop computer hardware and software to reflect
contemporary technologies and the subsequent maintenance of that hardware. This
will allow the desktop to be standardised and bring staff efficiency savings.
3.
The bank has recently identified the need for a private personal banking service for
wealthy customers. Processes, systems and software have to be developed to
support this new service. High net worth customers have been identified by the bank
as an important growth area.
90
The bank will consider three solution options for each initiative. These are outsourcing or
software package solution or bespoke development.
The branch rationalisation was a successful project.
Recommend and justify a solution option for each of the three process initiatives.
Solution
In the context of LDB, the following is suggested. Clearly these are value judgements and
credit will be given for coherently argued answers which do not match the examiners
conclusions.
!
The integration of the two bespoke payroll systems currently operated by the two
banks into one consolidated payroll system. Payroll has to be produced but does not add
significant value to the end-customer. It is unlikely that the recipients of the system (the
bank staff) will notice any difference if a new system is implemented. The bank is
considering re-developing this process because of the high cost of updating and
maintaining two separate systems. This appears to be of low strategic importance. From
the case study it is not clear how complex the payroll requirements are or how difficult it
will be to transfer data from the current systems to a new solution. The most obvious
approach is to suggest that a standardised software package is bought and data
transferred to this solution. It appears sensible to undertake this work using the in-house
IT departments who will be familiar with the current systems and so should be able to
undertake accurate data mapping and successful data transfer to the new system.
However, if this is difficult and time-consuming, there might be some benefit in outsourcing
the solution and data transfer problems to a specialist software provider, allowing internal
IT to concentrate on more strategic applications.
!
The updating of all personal computer hardware and software to reflect
contemporary technologies and the subsequent maintenance of that hardware. The bank
is perhaps looking for efficiency savings through the standardisation of the desktop. Again,
this does not appear to directly give value to the banks customers. Consequently, this also
appears to be of low strategic importance. However, it could be of relatively high
complexity, particularly when considering the maintenance of hardware. There seems a
clear case for outsourcing this process to a specialist technology company who can bring
all hardware and software up to date and then maintain it at that level.
!
The development of processes, systems and software to support private banking.
This appears to be of high strategic importance and high complexity. It delivers services to
end-customers who the bank has identified as a source of business growth. Elements of
human judgement and interaction will be required when providing this service. The
fulfilment of personal requirements for the wealthy customer will bring variety, risk and
reward. The development of processes, systems and software to support private banking
should have high priority and should be developed in-house. The success of such an
operation should deliver handsome profits to LDB. This may mean that, given resources
are finite, the development of the new payroll system should be outsourced to a specialist
in that functional area.
91
Lecture 22 - Lean Systems

& Innovation
92
Illustration 1
C is one of several insurance companies which offer insurance policies covering general
risks relating to individuals and families. Cost efficiency is a major factor in the success of
the companies in this industry. Competition is fierce.
Over the past three years C has seen the volume of business increase but profits have
remained static due to declining margins.
Although some of the processes within C are computerised, most of the processes which
involve communication with customers are still paper-based. Responses from telephone
enquiries involve paper-based communications both with the enquirers and internally
within C. Additionally, sales staff visit potential customers in their homes to try to sell them
insurance policies for their homes and their possessions. These transactions are again
paper-based. This process is often slow and has led to complaints both from customers
and from the companys sales staff.
C has also been receiving a regular, and increasing, number of complaints from current
and potential customers about errors in the paperwork that they receive.
The Board of Directors of C has announced that there is a need for a business process reengineering exercise to be conducted with the intention of modernising the business. The
intention is to streamline the business model as much as possible and to increase the
profitability of the company. C intends to computerise almost all of the work done within the
company.
A number of staff have expressed concern about business process re-engineering and its
implications for those who work at C.
Explain the stages involved in implementing a BPR exercise that might be
undertaken by C.
93
Solution
C intends to conduct a BPR exercise to streamline the business model in operation. This is
being done to improve the customer experience by reducing the error rate and by
speeding the process generally. Additionally, C will want to improve the margins on the
business to increase the profitability.
The stages that the BPR process should go through are as follows:
1.
Clearly set the scope of the project re-design. The company wishes to improve the
transactions between customers and sales staff. These sales staff operate both in the
office, by telephone, and in the potential customers homes. The process will involve
recording the customers details, the nature of the risk to be covered and providing a
quote for the variety of options that can be provided by C.
2.
Analyse the existing process & reasons for change. In the case of C the change
levers that make the process improvement necessary are the declining margins, the
increased error count, the customer dissatisfaction, and the fiercely competitive
nature of the industry. The existing processes within C will need to be
comprehensively mapped and understood. Once this has been comprehensively
recorded and understood it is possible to look for areas where IT/IS could be
incorporated to improve the efficiency of the operation.
3.
Develop the process vision. C needs to have a clear idea of what it wishes to achieve
by the improvement process. There should be targets set at the beginning of the
exercise which will specify the speed with which enquiries will be answered, the
acceptable level of errors, the level of customer satisfaction and the margins that
should be achieved on the business conducted.
4.
Design and prototype the new process. The proposed new system can then be
developed and tested on a relatively small part of the operation. Before the trial
commences there should be thorough training of the staff to be involved. As a result
of those trials there may be adjustments necessary before the system can be rolled
out across the whole of C.
5.
Manage the implementation of the new process. There will be a need for training of
all staff that would be affected by the proposed process changes. Those who were
involved in the testing stage should be used as product champions to assist in the
training and familiarisation process.
94
Lecture 23 - Change
Management
95
Illustration 1
WAL is a manufacturer of biscuits which it sells to retailers. Its current years revenue of
120 million represents approximately 3% of the UK market. WAL has a centralised
marketing information system based on a software package bought in 2005. This package
is financial accounts orientated: the only management information provided to support the
marketing staff consists of reports showing revenue, profit, inventory value, receivables
and payables balances. WALs marketing staff and the Marketing Director, M, have
complained that they are not provided with information such as customers profitability,
market share and market growth which would support their strategic decision-making.
They consider the inadequacies of the current marketing information system to be so
serious that they would like a Big Bang change which would mean moving straightaway to
a new marketing information system that would give them the information they need. They
feel WAL is being left behind by its competitors and is losing customers.
The Company Secretary, R, manages WALs IS/IT staff. R was responsible for buying the
existing marketing information software in 2005 and he would also be responsible for the
procurement of its replacement. R has identified three possible solutions to meeting the
marketing staffs needs: the first two are evolutionary, the third would be a 'Big Bang'.
Solution 1
Modification: the existing marketing information system would be redesigned by WALs inhouse IS/IT staff to meet the needs of the marketing staff. Although WALs IS/IT staff have
limited experience of the type of work which would be required, they are confident the
redesign could be done within a year. The IS/IT staff are unsure of the cost.
Solution 2
Development: WALs in-house IS/IT staff would develop new bespoke software to meet the
marketing staffs needs. The IS/IT staff have stated that because WALs needs are unique,
costs can only be roughly estimated. However, this solution is likely to be considerably
more expensive than the 'Modification' solution. The final cost would be dependent upon
the length of the project. It should take a minimum of six months to develop new software
but it might take as long as two years. We have little experience of software development
but are very enthusiastic about trying.
Solution 3
Purchase: WAL could purchase the biscuit industry standard marketing information system
software: this would be an expensive purchase but the product is well proven. Some of
WALs marketing staff have experience of using this software in other companies, are very
appreciative of its benefits and believe it would help them considerably in their jobs. The
software supplier claims that 90% of the biscuit industry uses our product and if you buy it
we guarantee to have it working inside WAL within three months of you buying it.
R believes that he represents the majority of opinion within the IS/IT staff who very much
prefer that change should be evolutionary. They would be very resistant to change if it was
carried out in any other way. R also pointed out that WAL has experience of 'Big Bang'
organisational change in the recent past which failed because WALs culture didnt change
to reflect this.
R stated, It looks straightforward to go out and buy a software package but its a lot more
complicated than people think and its my department that would have to do all the work.
96
(i) Explain the circumstances in which it would be appropriate to use

1.
2.
Evolutionary change.
'Big Bang' change.
(ii) Evaluate each of the three solutions proposed by R. and suggest which should
be adopted.
97
Solution
The case for change to WALs software-based marketing information system seems to
have been accepted by the two main parties which will be affected by the change: the
marketing staff and the Company Secretary, R.
What is in dispute is the speed of the required change. The marketing staff want change to
be revolutionary: to happen straightaway. R is opposed to revolutionary change and has
suggested three possible solutions.
The first two of these would be evolutionary, i.e. not be immediate: purchase would be
revolutionary, i.e. quick, but R is sceptical about its effectiveness.
1. Evolutionary change is appropriate when it's a proactive response to anticipated
changes in the environment. However, in the case of WALs marketing information
system the changes in the environment have already happened: WAL is being left
behind by its competitors and is losing customers.
2. Big Bang/Revolutionary change is likely to be forced and reactive because of changing
competitive conditions which is the situation in which WAL finds itself.
The case for revolutionary change to WALs marketing information system seems to be
dominant, that is, it should happen. However, a caveat needs to be noted because of Rs
opposition and WALs previous experience of failed change.
(ii)
Solution 1 - Modification
This solution relies upon WALs in-house IS/IT staff who have limited experience of the
work which would be required and they are unsure of the cost. Despite their lack of
relevant experience the IS/IT specialists are confident that they could complete the work
within a year.
The judgement that this project could be completed within a year is questionable because
of the staffs lack of experience. The staffs uncertainty about the cost means that WAL
may pay excessively for this project's completion.
As this solution relies upon modifying what is an inadequate system, the final result may
not meet WALs marketing staffs needs: neither will it present them with a quick enough
remedy to the current systems inadequacies.
An important advantage of this solution is that it would fit the preference of R and the IS/IT
staff for evolutionary change. As these are people who would be closely affected by the
change to the marketing information system their views should be taken into consideration.
Summary
This solution is not recommended because the lack of certainty about its duration, cost
and ability to meet its users needs.
Solution 2 - Development
98
WALs IS/IT staff would like the opportunity to develop new bespoke software themselves
to meet the marketing staffs needs. If this solution was adopted it could have a positive
motivational effect on the IS/IT staff. This solution would also meet the preference
expressed by R for evolutionary change although it would not satisfy the marketing staffs
need for a rapid change.
They have stated that because WALs needs are unique, costs can only be roughly
estimated. However, this solution is likely to be considerably more expensive than the
'Modification' solution. The final cost would be dependent upon the length of the project. It
should take a minimum of six months to develop new software but it might take as long as
two years. 'We have little experience of software development but are very enthusiastic
about trying.
Summary
This solution has an uncertain duration and cost. It is dependent upon WALs IS/IT staff
who have little experience of software development. For these reasons, this solution is not
recommended.
Solution 3 - Purchase
WAL could buy the biscuit industry standard software. This software is expensive but there
would be a boundary put upon its cost which would be its contractual price. This provides
WAL with certainty.
The software is a proven product and some of WALs marketing staff have experience of
using this software in other companies, are very appreciative of its benefits and believe it
would help them considerably in their jobs. The software supplier claims that 90% of the
biscuit industry uses our product. This suggests that this software would be readily
accepted by its users. If the suppliers claim about having the software working within
three months is a valid one, this solution would meet the need of the marketing staff for a
revolutionary, rapid change.
As WAL does not currently use the biscuit industry marketing information software it may
be operationally at a competitive disadvantage: the Purchase solution would put WAL on
an equal footing, in this respect, with its competitors.
However, R is resistant to the Purchase solution and has indicated that the majority of IS/
IT staff prefer evolutionary change and would be resistant to this solution. R was
responsible for buying the current marketing information system and may feel that its
proposed replacement is a criticism of the decision he made in 2005.
As R would make the decision about Purchase he would not want to be responsible for a
failure. Although there is a high failure rate for software projects this would be a
consideration for all three options so it should not preclude the Purchase option.
R also believes that many of his staff would be resistant to this option and he would have
to deal with the problems this would create.
Summary
The Purchase option would give WAL the biscuit industry standard marketing information
software. It would have a known cost and a guaranteed time span for implementation. This
software should be readily accepted by marketing staff and would remove a possible
source of competitive disadvantage.
99
Although the Purchase solution is likely to provoke some resistance to change within WAL
it is the recommended solution because of its speed, known cost and its proven ability to
meet the needs of WALs marketing staff.
100
Illustration 2
Introduction
Frigate Limited is based in the country of Egdon. It imports electrical components from
other countries and distributes them throughout the domestic market. The company was
formed twenty years ago by Ron Frew, who now owns 80% of the shares. A further 10% of
the company is owned by his wife and 5% each by his two daughters.
Although he has never been in the navy, Ron is obsessed by ships, sailing and naval
history. He is known to everyone as The Commander and this is how he expects his
employees to address him. He increasingly spends time on his own boat, an expensive
motor cruiser, which is moored in the local harbour twenty minutes drive away. When he is
not on holiday, Ron is always at work at 8.00 am in the morning to make sure that
employees arrive on time and he is also there at 5.30 pm to ensure that they do not leave
early.
However, he spends large parts of the working day on his boat, although he can be
contacted by mobile telephone. Employees who arrive late for work have to immediately
explain the circumstances to Ron. If he feels that the explanation is unacceptable then he
makes an appropriate deduction from their wages. Wages, like all costs in the company,
are closely monitored by Ron.
Employees, customers and suppliers
Frigate currently has 25 employees primarily undertaking sales, warehousing, accounts
and administration. Although employees are nominally allocated to one role, they are
required to work anywhere in the company as required by Ron. They are also expected to
help Ron in personal tasks, such as booking holidays for his family, filling in his personal
tax returns and organising social events.
Egdon has laws concerning minimum wages and holidays. All employees at Frigate Ltd
are only given the minimum holiday allocation. They have to use this allocation not only for
holidays but also for events such as visiting the doctor, attending funerals and dealing with
domestic problems and emergencies. Ron is particularly inflexible about holidays and work
hours. He has even turned down requests for unpaid leave. In contrast, Ron is often away
from work for long periods, sailing in various parts of the world.
Ron is increasingly critical of suppliers (trying to sell me inferior quality goods for higher
prices), customers (moaning about prices and paying later and later) and society in
general (a period working in the navy would do everyone good). He has also been in
dispute with the tax authority who he accused of squandering his hard-earned money. An
investigation by the tax authority led to him being fined for not disclosing the fact that
significant family expenditure (such as a holiday for his daughters overseas) had been
declared as company expenditure.
Company accountant
It was this action by the tax authority that prompted Ron to appoint Ann Li as company
accountant. Ann had previously worked as an accountant in a number of public sector
organisations, culminating in a role as a compliance officer in the tax authority itself. Ron
felt that recruiting someone like Ann should help keep the tax authorities happy. After all,
she is one of them.
101
Ann was used to working in organisations which had formal organisational hierarchies,
specialised roles and formal controls and systems. She tried to install such formal
arrangements within Frigate. As she said to Ron we cannot have everyone working as if
they were just your personal assistants. We need structure, standardised processes and
accountability. Ron resisted her plans, at first through delaying tactics and then through
explicit opposition, tearing up her proposed organisational chart and budget in front of
other employees. I regret the day I ever made that appointment, he said. After six months
he terminated her contract. Ann returned to the tax authority as a tax inspector.
Required:
The cultural web allows the business analyst to explore the way things are done
around here.
Analyse Frigate Ltd using the cultural web or any other appropriate framework for
understanding organisational culture.
102
Solution
The cultural web is a representation of the taken-for-granted assumptions, or paradigm, of
an organisation. The question specifically references the cultural web, but any framework
that is appropriate for understanding the culture of an organisation can be used.
Symbols such as logos, offices, cars, titles, language and terminology are a shorthand
representation of the nature of the organisation. At Frigate, the adoption of the term
Commander by its managing director, Ron Frew, and his use of naval terminology is
indicative of how he wishes to be perceived and the way he wants the company to run.
Indeed the name of the company itself reflects his naval obsession. The main symbol of
his success is the motor cruiser that Frew owns and moors at the local port. The irony is
that Frew actually has no naval experience. He is acting out a stereotype of how he
perceives naval life to be.
Power structures are also likely to influence the key assumptions of an organisation. The
most powerful groupings within the organisation are likely to be closely associated with
core assumptions and beliefs. At Frigate, power is centred on one person. Leadership
comes from a person who holds strongly held views, opinions and beliefs.
The organisational structure is likely to reflect power and show important roles and
relationships. At Frigate, there is little formal structure and Ann Lis attempt to put one in
place was opposed.
Control systems, measurements and reward systems emphasise what is important to
monitor in the organisation. Frew is primarily concerned with cost control. Emphasis is on
punishment (making deductions from wages for late arrival), rather than reward, which fits
his naval stereotype. There appear to be few formal process controls and relationships
with both customers and suppliers are confrontational. Ann Lis attempt to install formal
controls throughout the organisation was resisted by Frew.
Routines and rituals define the way we do things around here. For Frew there is a
distinction between the routines of staff (must arrive on time, minimum holidays with no
flexibility) and the rules that apply to himself flexible working, long holidays, the
expectation that employees will help him with his personal life.
The stories told by members of an organisation are usually concerned with success,
disasters, heroes, villains and mavericks. It appears that Frew is the hero, seeing off lazy
staff, unscrupulous suppliers (trying to sell me inferior quality goods for higher prices),
problematic customers (moaning about prices and paying later and later) and bureaucratic
officials (squandering my hard-earned money). These are identified as the villains. He
even extends his stories to society as a whole, believing that a period working in the navy
would do everyone good.
Finally, the company paradigm summarises and reinforces the other elements of the
cultural web. Underpinning all of this is Frews belief that the company is run for his own
gratification and that of his immediate family. The benefits he receives and the lifestyle he
enjoys is his reward for being a risk taker in a hostile environment which is always trying to
limit him. He appears to see expenditure on his family (such as share gifts and holidays)
as perfectly acceptable.
103
Lecture 24 - Managing
Change
104
Illustration 1
WAL is a manufacturer of biscuits which it sells to retailers. Its current years revenue of
120 million represents approximately 3% of the UK market. WAL has a centralised
marketing information system based on a software package bought in 2005. This package
is financial accounts orientated: the only management information provided to support the
marketing staff consists of reports showing revenue, profit, inventory value, receivables
and payables balances. WALs marketing staff and the Marketing Director, M, have
complained that they are not provided with information such as customers profitability,
market share and market growth which would support their strategic decision-making.
They consider the inadequacies of the current marketing information system to be so
serious that they would like a Big Bang* change which would mean moving straightaway to
a new marketing information system that would give them the information they need. They
feel WAL is being left behind by its competitors and is losing customers.
The Company Secretary, R, manages WALs IS/IT staff. R was responsible for buying the
existing marketing information software in 2005 and he would also be responsible for the
procurement of its replacement. R has identified three possible solutions to meeting the
marketing staffs needs: the first two are evolutionary, the third would be a 'Big Bang'.
Solution 1
Modification: the existing marketing information system would be redesigned by WALs inhouse IS/IT staff to meet the needs of the marketing staff. Although WALs IS/IT staff have
limited experience of the type of work which would be required, they are confident the
redesign could be done within a year. The IS/IT staff are unsure of the cost.
Solution 2
Development: WALs in-house IS/IT staff would develop new bespoke software to meet the
marketing staffs needs. The IS/IT staff have stated that because WALs needs are unique,
costs can only be roughly estimated. However, this solution is likely to be considerably
more expensive than the 'Modification' solution. The final cost would be dependent upon
the length of the project. It should take a minimum of six months to develop new software
but it might take as long as two years. We have little experience of software development
but are very enthusiastic about trying.
Solution 3
Purchase: WAL could purchase the biscuit industry standard marketing information system
software: this would be an expensive purchase but the product is well proven. Some of
WALs marketing staff have experience of using this software in other companies, are very
appreciative of its benefits and believe it would help them considerably in their jobs. The
software supplier claims that 90% of the biscuit industry uses our product and if you buy it
we guarantee to have it working inside WAL within three months of you buying it.
R believes that he represents the majority of opinion within the IS/IT staff who very much
prefer that change should be evolutionary. They would be very resistant to change if it was
carried out in any other way. R also pointed out that WAL has experience of 'Big Bang'
organisational change in the recent past which failed because WALs culture didnt change
to reflect this.
R stated, It looks straightforward to go out and buy a software package but its a lot more
complicated than people think and its my department that would have to do all the work.
105
Advise how WAL could overcome the resistance to change which would arise if
Solution 3, the purchase solution, were to be adopted.
106
Solution
R, who has an influential position as Company Secretary, appears to be resistant to
change, in general, unless it is done slowly and incrementally. He claims that this view is
shared by a sizable body of opinion within WAL. He has also pointed out that WAL has
experience of change in the recent past which failed because WALs culture didnt change
and also that it would be his department that would have to do all the work. R has
expressed serious anxieties based on his past experience, the amount of work a new
software package represents and, if he is right, some of these anxieties are shared by
others within WAL.
Unless Rs views are taken into account he may prove a serious obstruction to the change
process and prevent it happening. Two of the solutions which R has proposed,
Modification and Development, may not be genuine responses to the marketing staffs
requirements but may be ways of postponing change.
Kotter and Schlesinger proposed the following six point approach for dealing with
resistance to change.
1. Education and communication
R and his IS/IT colleagues need to be convinced that the limitations of the existing
software package are a serious constraint upon WAL. Given that R and his staff are likely
to be concerned for WALs success, if they can be persuaded that the old software is
obsolete then they might be prepared to accept a faster rate of change, and, purchase the
industry standard software. Rs point about the need for cultural change is also valid and
WAL needs to take this into account.
Rs concerns, and those of people who think like him, should be acknowledged and
provision made within the replacement project plan to deal with the issues raised by them.
2. Participation and involvement
Because of Rs position he would be intimately involved in the Purchase solution. This
means he would have every opportunity to be involved with the project. R could use his
position to involve other members of his staff. The impetus for the change has come from
outside R and his IS/IT colleagues: such a change cannot be imposed but will necessarily
require the active participation and involvement of R and the IS/IT staff. If they are given
opportunities to participate in the purchase of the new software this should increase their
commitment to the change and make it more likely to work.
3. Facilitation and support
R was responsible for buying the original software program in 1985 and will be responsible
for buying the replacement one. It could be that the source of Rs resistance is because he
anticipates he will have problems implementing the new software and adjusting to the new
demands inherent within it. R may be helped by having some of the responsibility for the
project being shared with other staff within WAL. He may also need to be reassured that
his personal position will not be jeopardised. Similarly, support could be offered to any of
the IS/IT staff who need it, if, for example, they lack skills to deal with the new software. In
such a case they could be offered training.
4. Negotiation and agreement
Rs resistance could be reduced if he is allowed to negotiate the degree of his involvement
in the project. If R can be made to feel empowered rather than threatened his attitude
107
could change. The IS/IT staff may also feel threatened by the forthcoming change: R has
reported that a majority of these staff prefer change to take place incrementally. The
Purchase solution represents revolutionary change but it may be possible for IS/IT staff to
be reconciled to this change. For example, based on what R has reported there is a
minority of IS/IT staff who are not opposed to revolutionary change: perhaps these could
be tasked with the introduction and implementation of the new marketing information
system software. The majority of staff who prefer evolutionary change could be used in
parts of WALs business where either no change or gradual change is contemplated.
5. Manipulation and co-optation
This approach can be used when other approaches wont work or are too costly. However,
CIMA members should be very cautious in case this conflicts with CIMAs Code of Ethics
or with general business ethics. Further, WAL may be trying to conduct its business
ethically and may feel that manipulation and co-optation lie outside the scope of ethical
business.
This approach may work in the short-term but may have adverse long-term consequences.
Further, although it might be possible to manipulate R into accepting the changes this
could rebound on WAL later if R realises he has been manipulated.
6. Explicit and implicit coercion
This method relies on the use of power, or the threat of force to enforce change. This
method would not generally be recommended for a CIMA member as it conflicts with the
spirit of the Code of Ethics although not any particular written section. However, there may
be occasions where coercion is justifiable as with any ethical dilemma a choice has to be
made between the lesser of two evils.
Kotter and Schlesinger published their model in 1979 since when it is arguable that what is
acceptable business behaviour has changed.
108
Illustration 2
MMM is a university whose mission is 'to be the best'. It has a wide range of educational
activities and is organised into six departments:
1. Arts
2. Medicine
3. Law
4. Engineering
5. Natural Sciences
6. Theology
Each of the six departments above is controlled by a senior manager, known as a Head
who has operational responsibility for their departments activities throughout the
university.
On the advice of management consultants, it has now been decided to reorganise the
University and establish the following three new departments which will replace the current
six departments listed above:
1. Student experience: this includes teaching, welfare, progression, pass rates and quality
for both undergraduates and postgraduates.
2. Research: this includes academic research and commercial research.
3. All profit-making activities other than commercial research.
Each of the new departments will be managed by one of the existing Heads. MMM wants
to introduce a control system for its Heads and departments that will measure their
performance against strategic and operational targets using quantitative and qualitative
criteria. MMMs executive board has the following objectives for the new control system:
To develop the Heads' motivation
To encourage the Heads to accept responsibility for achieving strategic and operational
targets
To encourage activities that generate income from external activities
MMM's executive board believes that the departmental reorganisation and the introduction
of the new control measures will require cultural change within the university.
Discuss the role that a change agent could play in the change process in MMM.
109
Change agent
In order to progress these changes MMM will need to assign the responsibility for
implementation to a person or a group of people. The person/people with this responsibility
could be assisted by a change agent.The change agent could come from within the
university or could be an external person or organisation, for example, a management
consultant could be employed. However, the change agent's role, per se, would not be
the implementation of the changes: rather it would be the facilitation of them.
A change agent would normally be able to assist in the change process in MMM by:
Defining the problem: for example, what to do with three 'surplus' Heads.
Examining the causes of the problem(s): the reduction in the number of departments.
Diagnosing how this can be overcome: offering redeployment.
Offering alternative solution: severance terms.
Devising implementation strategies: when, how, where the surplus Heads will be
redeployed.
Disseminating what has been learnt from this change process: MMM could use this
experience to help it with future changes.
110
Lecture 25 - Project
Management I
111
Illustration 1
A clothing company sells 40% of its goods directly to customers through its website. The
marketing manager of the company (MM) has decided that this is insufficient and has put a
small team together to re-design the site. MM feels that the site looks amateur and oldfashioned and does not project the right image. The board of the company has given the
go-ahead for the MM to re-design the website. The following notes summarise the
outcomes of the meetings on the website re-design. The team consists of the marketing
manager (MM), a product range manager (RP), a marketing image consultant (IC) and a
technical developer (TD).
Meeting 1: 9 July attended by MM, RP, IC and TD The need for a re-designed website to
increase sales volume through the website and to improve our market visibility was
explained by MM. IC was asked to produce a draft design.
Meeting 2: 16 August attended by MM, RP, IC and TD IC presented a draft design. MM
and RP were happy with its image but not its functionality, suggesting that it was too
similar to the current site. We expected it to do much more was their view.
Meeting 3: 4 September attended by MM, RP and IC IC produced a re-drafted design. This
overall design was agreed and the go-ahead was given for TD to produce a prototype of
the design to show to the board.
Meeting 4: 11 September attended by RP, IC and TD TD explained that elements of the
drafted re-design were not technically feasible to implement in the programming language
being used. Changes to the design were agreed at the meeting to overcome these issues
and signed off by RP.
Meeting 5: 13 October attended by MM, RP, IC and TD The prototype re-design was
demonstrated by TD. MM was unhappy with the re-design as it was moving too far away
from the original objective and lacked functionality that should be there. TD agreed to
write a technical report to explain why the original design (agreed on 4 September) could
not be adhered to.
Meeting 6: 9 November attended by MM, IC and TD It was agreed to return to the 4
September design with slight alterations to make it technically feasible. TD expressed
concerns that the suggested design would not work properly with all web browsers.
At the board meeting of 9 December the board expressed concern about the time taken to
produce the re-design and the finance director highlighted the rising costs (currently
$25,000) of the project. They asked MM to produce a formal cost-benefit of the re-design.
The board were also concerned that the scope of the project, which they had felt to be
about re-design, had somehow been interpreted as including development and
implementation.
On 22 December MM produced the following cost-benefit analysis of the project and
confirmed that the word re- design had been interpreted as including the development
and implementation of the website.
112
Year
Costs
Benefits*
50,000
10,000
10,000
10,000
10,000
15,000
25,000
35,000
35,000
*These benefits are extra sales volumes created by the websites extra functionality and
the companys increased visibility in the market place.
Meeting 7: 24 February attended by MM, RP, IC and TD A partial prototype system was
demonstrated by TD. RP felt that the functionality of the re-design was too limited and that
the software was not robust enough. It had crashed twice during the demonstration. He
suggested that the company delay the introduction of the re-designed website until it was
complete and robust. MM declared this to be impossible.
Conclusion
The re-designed website was launched on 1 March. MM declared the re-design a success
that had come in on time and under budget. On 2 and 3 March, numerous complaints
were received from customers. The website was unreliable and did not work with a
particular popular web browser. On 4 March an emergency board meeting decided to
withdraw the site and reinstate the old one. On 5 March, MM resigned.
Most project management methods have an initiation or definition stage which includes the
production of a document that serves as an agreement between the sponsors and
deliverers of the project. This may be called a project initiation document or a project
charter. Defining the business case is also an important part of the initiation or definition
stage of the project.
Explain how a business case and a project initiation document would have helped
prevent some of the problems that emerged during the conduct of the website redesign project.
113
Solution
The production of initial documentation concerning the business case and initiation of the
project would have addressed many of the issues that subsequently arose in the website
re-design. This documentation would typically include:
A summary of the business justification of the project. These are the business objectives
that have been defined in the business case to justify the project.
The scope of the project, defined in terms of project objectives and ultimate deliverables.
Constraints and targets that apply to the project.
Project roles and responsibilities, for example; the definition of the project sponsor and the
project manager. It is useful if this part of the document specifies the level up to which
named individuals (or roles) can authorise:
The commitment of resources
The sign-off of deliverables
Changes to project objectives and deliverables
Changes to constraints
Resources committed to the project
Risks and assumptions associated with the project.
These are considered below in the context of the clothing companys website re-design
project.
The business justification of the project
The MM does specify business objectives such as increase sales revenue and improve
market visibility (see meeting 1) but these are poorly defined objectives in that they are
not quantified. A formal cost-benefit analysis undertaken at the start of the project would
have forced the MM to quantify how much sales would increase and by when. The MM
would also have been required to document the assumptions behind these predictions and
to demonstrate a causal link between the functionality of the website and sales volume.
The other suggested objective, improve market visibility, also requires further specification
and quantification. The MM provides no evidence of current market visibility (and what this
actually means) and how its improvement will be measured. Some research is needed to
quantify market visibility and to set realistic targets for its improvement. The statement of
the projects business benefits is an important issue in contemporary project management.
It is suggested that these benefits are kept constantly under review to ensure that the
project has not strayed from its original justification. Furthermore, at the end of the project,
the business benefits have to be reviewed to assess whether they have been realised.
Because the MM has not specified measurable objectives in advance, the success of the
project is impossible to assess. There is no benchmark to assess it against.
The scope of the project
On at least two occasions there appears to be confusion about the scope of the project.
The TD originally produces a design that is too like the current site, We expected it to do
much more (meeting 2). However, the most significant misunderstanding about scope is
between the board and the MM. It concerns the interpretation of the scope of the word redesign. The board appears to perceive that re-design does not include the development
114
and implementation of the software, while the MM holds the opposite view. The scope of
the re-design would have been clarified in a project initiation document.
Constraints that apply to the project
Constraints are often defined in terms of cost and time. The absence of a formal costbenefit analysis for this project has already been recognised, so costs (and budget) were
not formally agreed at the start of the project. There is also no evidence that a projected
delivery time for the project was agreed at the start of the project. Indeed, it was the
elapsed time, as well as the escalating cost, that first caused the board to be alarmed
about the website re-design project. It also appears that the TD had technical constraints
in mind which were also not articulated. These emerged in meeting 4 and caused delays
documented in meetings 5 and 6. Again, technical constraints should have been
documented in the project initiation document.
Project roles and responsibilities
Although it is not clearly stated, it appears that the sponsor of the project is the MM.
However, at one critical point of the project the RP makes a decision to accept a design
(meeting 4) which is subsequently overturned by the MM. This confusion of responsibility
causes both cost and delay. If project roles and responsibilities had been properly defined,
then it would have been recognised that the RP did not have sufficient authority to sign-off
deliverables. Furthermore, the formal allocating of roles would have also meant that a
project manager would have been nominated with the responsibility of delivering the
project. In the scenario there is never any clear indication of who is playing the role of
project manager and this is a major flaw.
Resources committed to the project
There is no evidence that the resources available to the project had been identified and
documented at the start of the project. Problems only begin to emerge late in the project
when the Boards decision to launch on 1 March prompts the TD to express concern that
there are not enough developers to deliver the system on time.
Risks and assumptions associated with the project
Most project management methods suggest that risks should be formally documented and
managed. Each risk is identified and its potential effect quantified. For each significant risk,
avoidance actions are suggested which are steps that can be taken to prevent the risk
from occurring. Mitigation actions are also defined for each risk. These are steps that can
be taken to reduce the impact of the risks if they occur. Again there is no evidence to show
that this has been done. As problems emerged in the project they were dealt with on an ad
hoc basis. A consideration of risk at the outset of the project can lead to changes in how
the project is conducted. For example, the risk of poor scoping of requirements could have
prompted a more formal definition of requirements scope (an avoidance action).
Initial project structure and arrangements for management control
This is an initial project structure describing how the project will be broken down into
stages with an associated list of project milestones. It is a very high-level plan which
provides a context for the detailed plans that will follow. There is no evidence of such a
structure in the website re-design project and so the absence of detailed planning (see
below) goes unnoticed. The project initiation document might also include management
control information concerning, for example, progress reporting and monitoring
arrangements. If these had been defined in advance then their absence (see below) would
have been clear in the actual project.
115
Management II
116
Illustration 1
HomeDeliver is a nationwide company that sells small household goods to consumers. It
produces an attractive, comprehensive catalogue which it distributes to staff known as
catalogue supervisors. There are 150 of these supervisors in the country. Each supervisor
has approximately 30 part-time home-based agents, who then deliver the catalogue to
consumers in their homes. Agents subsequently collect the catalogue and any completed
order forms and forward these forms to their supervisor. Payment is also taken when the
order is collected.
Payment is by cash or cheque and these payments are also forwarded to the supervisor
by the agent. At the end of the week the supervisor returns completed order forms (and
payments) to HomeDeliver. Order details are then entered into a computer system by
order entry administrators at HomeDeliver and this starts an order fulfilment process that
ends with goods being delivered directly to the customer. The supervisors and the agents
are all self-employed. HomeDeliver rewards supervisors on the basis of how many agents
they manage. Agents reward packages are based on how many catalogues they deliver
and a commission based on orders received from the homes they have collected orders
from.
In August 2010 HomeDeliver decided to replace the physical ordering system with a new
electronic ordering system. Agents would be provided with software which would allow
them to enter customer orders directly into the computer system using their home personal
computer at the end of each day. Payments would also be paid directly into a HomeDeliver
bank account by agents at the end of each day.
The software to support the new ordering system was developed in-house to requirements
provided by the current order entry administrators at HomeDeliver and managers
concerned with order fulfilment and invoicing. The software was tested internally by the
order entry administrators. At first, both the specification of requirements and initial
software testing progressed very slowly because order administrators were continuing with
their normal operational duties. However, as project delays became more significant,
selected order administrators were seconded to the project full-time. As a result the
software was fully acceptance tested by the end of July 2011, two months behind
schedule.
In August 2011 the software was rolled out to all supervisors and agents. The software
was claimed to be easy to use, so no formal training was given. A large comprehensive
manual with colour screenshots was attached as a PDF to an email sent to all supervisors
and agents. This gave detailed instructions on how to set up and use the software.
Unfortunately, problems began to appear as soon as the agents tried to load and use the
software. It was found to be incompatible with one particular popular browser, and agents
whose computers used that browser were advised to use an alternative browser or
computer. Agents also criticised the functionality of the software because it did not allow
for the amendment of orders once they had been submitted. It emerged that customers
often contacted agents and supervisors to amend their order prior to it being sent to
HomeDeliver. This was no longer possible with the new system. Many agents also claimed
that it was not possible to enter multiple orders for one household. However, HomeDeliver
confirmed that entering multiple orders was possible; it was just not clear from the
software, or from the instructions provided, how this could be achieved.
117
Most of the agents were reluctant to print off the manual (preferring to read it on screen)
and a significant number claimed that they did not receive the email with the manual
attachment. Agents also found quite a number of spelling and functionality errors in the
manual. At certain points the software did not perform in the way the manual stated that it
would.
Internal standards at HomeDeliver require both a post-project and a post-implementation
review.
HomeDeliver does not have a benefits management process and so a benefits realisation
review is inappropriate. However, it does feel that it would be useful to retrospectively
define the benefits to HomeDeliver of the new electronic ordering system.
Identify and discuss the potential benefits to HomeDeliver of the new electronic
ordering system.
118
Solution
The potential benefits to HomeDeliver of the new electronic ordering system might include:
!
Staff savings from the reduction or elimination of order administrators at
!
HomeDeliver. This benefit should be relatively easy to quantify.
!
Staff savings from reduced catalogue supervisor costs. In the new system,
!
supervisors appear to have significantly less work and so each supervisor should
!
be able to co-ordinate more agents. However, supervisors are currently rewarded
!
on the basis of how many agents they administer. So savings could only be made if
!
this contractual arrangement was changed.
!
Improved cash flow, because money is now sent daily rather than at the end of the
!
week. Improved cash flow will reduce borrowing costs or increase investment
!
income. This benefit should be relatively easy to quantify.
!
The system should lead to the customer receiving their goods more quickly. Orders
!
are entered at the end of the day, not in the week after the order has been placed.
!
This is a benefit for the customer, not HomeDeliver. However, it could be argued
!
that improved customer service may lead to more customers and, because there is
!
less elapsed time between order and delivery, to fewer cancelled orders. It would be
!
relatively difficult to quantitatively predict both of these benefits in advance.
119
Management III
120
Illustration 1
Explain briefly the difference between the project sponsor and the project manager.
Solution
The project sponsor is usually a senior member of the management team, often the
person with the most to gain from the success of the project and the most to lose from the
failure.
The project sponsor will direct the project and is the chief decision maker on behalf of the
organisation.
The project manager leads the project team on a day-to-day basis to ensure that the
project runs smoothly and that effectiveness and efficiency is achieved.
Illustration 2
ASW is a software house which specialises in producing software packages for insurance
companies. ASW has a basic software package for the insurance industry that can be
used immediately out of the box. However, most customers wish ASW to tailor the
package to reflect their own products and requirements. In a typical ASW project, ASWs
business analysts define the gap between the customers requirements and the basic
package.
These business analysts then specify the complete software requirement in a system
specification. This specification is used by its programmers to produce a customised
version of the software. It is also used by the system testers at ASW to perform their
system tests before releasing it to the customer for acceptance testing.
One of ASWs new customers is CaetInsure. Initially CaetInsure sent ASW a set of
requirements for their proposed new system. Business analysts from ASW then worked
with CaetInsure staff to produce a full system specification for CaetInsures specific
requirements. ASW do not begin any development until this system specification is signed
off. After some delay (see below), the system specification was eventually signed off by
CaetInsure.
Since sign-off, ASW developers have been working on tailoring the product to obtain an
appropriate software solution. The project is currently at week 16 and the software is ready
for system testing. The remaining activities in the project are shown in figure 1. This simple
plan has been put together by the project manager. It also shows who has responsibility
for undertaking the activities shown on the plan.
The problem that the project manager faces is that the plan now suggests that
implementation (parallel running) cannot take place until part way through week 28. The
121
original plan was for implementation in week 23. Three weeks of the delay were due to
problems in signing off the system specification. Key CaetInsure employees were
unavailable to make decisions about requirements, particularly in the re-insurance part of
the system. Too many requirements in this module were either unclear or kept changing as
users sought clarification from their managers. There have also been two further weeks of
slippage since the sign-off of the system specification.
The CaetInsure contract had been won in the face of stiff competition. As part of securing
the deal, the ASW sales account manager responsible for the CaetInsure contract agreed
that penalty clauses could be inserted into the contract. The financial penalty for late
delivery of the software increases with every weeks delay. CaetInsure had insisted on
these clauses as they have tied the delivery of the software in with the launch of a new
product. Although the delay in signing off the system specification was due to CaetInsure,
the penalty clauses still remain in the contract. When the delay was discussed with the
customer and ASWs project manager, the sales account manager assured CaetInsure
that the time could be made up in programming.
The initial planned delivery date (week 23) is now only seven weeks away. The project
manager is now under intense pressure to come up with solutions which address the
project slippage.
Evaluate the alternative strategies available to ASWs project manager to address
the slippage problem in the CaetInsure project.
Solution
The project manager could request an extension to the deadline The case study scenario
suggests that early delays in the project were caused by the absence of key CaetInsure
staff and changes in user requirements in the re-insurance module. These delays meant
that the full system specification was signed off three weeks later than initially agreed.
Unfortunately, the delivery date of the whole project was not re-negotiated at this point as it
was suggested that time could be made up during the programming stage.
Furthermore, the marketing department of CaetInsure had already announced the launch
of a new product to coincide with the implementation of the software and they did not want
to change these dates. However, the project manager could now return to CaetInsure and
inform them that it had not been possible to catch up with the proposed schedule and to
remind them that the initial slippage had been caused by them.
Although the deadline date is associated with a product launch it is unlikely that this is
crucial. It is not a matter of life and death. It might be irksome to delay the launch by a few
weeks, but it is unlikely that many people will notice or indeed care about it. There are
many significant successful products which have been released long after their intended
release date. In many ways it is an artificial deadline.
However, there are at least three problems associated with this suggestion. The first is that
the delay is now longer than the three weeks incurred at the specification stage.
Consequently, the project manager will have to explain that there have been further delays
to the project. Secondly, the project manager will have to be very confident about his
revised delivery date.
122
The project plan does not explicitly contain any time for programmers fixing faults found in
system and acceptance testing and it seems very likely that faults will be found in this
testing. Finally, some negotiation will have to take place on the late delivery penalty clause
charges the sales account manager agreed in the initial contract. If some (or all) of these
clauses are enacted then the profitability of the project will be significantly affected.
The project manager could consider a functional reduction in the scope of the
software solution.
The scenario suggests that the re-insurance functionality has been a problem throughout
the project. There may also be unresolved issues in other parts of the software. However,
it must be remembered that the ASW product is a proven software solution, bespoke
development is only concerned with customising the basic product to fulfil certain customer
requirements. Therefore it is likely that there are large areas of the software that can be
successfully delivered to the customer. The key issue here is whether this reduced
functionality will fulfil the requirements associated with the proposed new product which
CaetInsure intends to launch. If it does then the delivery of a partial solution does not have
a significant business impact and the product launch can go ahead as planned. The
project manager needs to discuss this with the customer as quickly as possible. He has to
be sure that the reduced scope does indeed fulfil these requirements and, if it does, to
focus testing, migration and document production on these parts of the software. He will
also have to estimate the delivery time of the second phase of the software that fulfils the
complete user requirement.
There are three elements of this suggestion that the project manager should bear in mind.
Firstly, the impact of reduced scope on the penalty clauses of the contract. It would appear
harsh to deliver a part solution but to still be fully penalised for not delivering the total
solution. Consequently some contract renegotiation is necessary. Secondly, there will be
an unexpected overhead associated with delivering a second phase which contains the full
product. This is the overhead of regression testing, making sure that changes made to the
product in the second release do not unintentionally affect the software solution that has
already been delivered. Finally, the specification of data migration programs will have to be
reviewed to see if they need to be changed in the light of the reduced functionality. Any
changes will affect data migration programs which are currently being written or tested.
The project manager could consider taking steps which might reduce the quality of
the product
A number of options might be considered around the testing of the software. One option is
to considerably reduce system testing and hand over the software to acceptance testing
ahead of the proposed schedule. The point has already been made that the software is
essentially a package that has to be tailored for specific functions. Consequently, large
areas of the software have been tested before, much of it by actual users out in the
businesses that are using this solution.
Programs for the CaetInsure version will have been unit tested by programmers before
they have been released to system testers and so no area of the system is untested,
although there will be areas that have not been independently tested. Another option is to
reduce the scope of system testing, focusing it on testing functionality rather than usability
(which will be one focus of acceptance testing) and performance (which can be difficult to
perform effectively in a software house environment where the users actual hardware
configuration cannot be easily mimicked). A further option is to execute system and
acceptance testing in parallel.
123
There are a number of issues with this approach which the project manager needs to
consider. The first is that the acceptance testers are likely to find significantly more faults
than they would if full system testing had preceded acceptance testing. This can lead to a
reduction in customer confidence which could jeopardise the whole project. Secondly,
faults identified by both system and user acceptance testers have to be carefully
managed. Configuration management becomes a very significant issue and appropriate
version control of the software is an essential overhead. Confidence is undermined by the
constant releases of new versions of the software, some of which, due to poor
configuration management, contain faults which have already been reported and fixed in
earlier versions of the software.
The project manager might consider requesting more resources
Finally the project manager may request further resources for the project. The current
project plan is at a high level of detail. It does not show how many system testers are
actually working on the system or how many technical authors are writing the
documentation. It may be possible to add more resources and so reduce the elapsed time
of the activity. Resources might also be asked to work smarter or work longer. For
example, testing might be prioritised so that the most important areas of the software from
the users perspective are tested first. It may also be possible to automate certain areas of
testing or to outsource it to specialist testing companies. Programmers might be asked to
focus more on static testing (which is particularly effective at finding faults) and to work
overtime to beat their deadlines.
However, the project manager must be aware that adding resources to a late running
project often slows the project down as established members of the project team explain
requirements, standards and procedures to any newcomers. A key factor here will be the
precision of the requirements. If these are well specified then it should be possible to add
testing staff reasonably effectively, or indeed to outsource testing to countries where it can
be conducted relatively cheaply. It may also be possible to bring in technical authors and
automated testing tools specialists who can speed up these activities. Programming is
more of an issue. It will be very difficult to bring new programmers up to speed. However, it
may be possible to transfer resources from other projects and to support the established
programmers by providing appropriate hardware and software.
Finally, the addition of resources to the project will have an impact on project profitability.
The project estimate will have assumed a certain commitment of resources. Adding
resources will reduce the profit margin and indeed, in the extreme, may make the project
itself unprofitable.
124
Illustration 3
Explain the purpose of each of the following: a post-project review, a postimplementation review and a benefits realisation review.
Solution
(i)
A post-project review takes place once the project has been completed. In fact, it can often
be the last stage of the project, with the review culminating in the sign-off of the project
and the formal dissolution of the project team. The focus of the post-project review is on
the conduct of the project itself, not the product it has delivered. The aim is to identify and
understand what went well and what went badly in the project and to feed lessons learned
back into the project management standards with the aim of improving subsequent project
management in the organisation.
A post-implementation review focuses on the product delivered by the project. It usually
takes place a specified time after the product has been delivered. This allows the actual
users of the product an opportunity to use and experience the product or service and to
feedback their observations into a formal review. The post-implementation review will
focus on the products fitness for purpose. The review will not only discuss strategies for
fixing or addressing identified faults, but it will also make recommendations on how to
avoid these faults in the future. In this instance these lessons learned are fed back into the
product production process.
A benefits realisation review also takes place after the product has been delivered. It is
primarily concerned with revisiting the business case to see if the costs predicted at the
initiation of the project were accurate and that the predicted benefits have actually
accrued. In effect, it is a review of the initial cost/benefit analysis and any subsequent
updates made to this analysis during the conduct of the project. It may be part of a postimplementation review, although the long-term nature of most benefits means that the
post-implementation review is often held too soon to properly conduct benefits realisation.
In fact, it can be argued that benefits realisation is actually a series of reviews where the
predicted long-term costs and benefits of the business case are monitored. Again, one of
the objectives is to identify lessons learned and in this case to feed these back into the
benefits management process of the organisation.
125
Lecture 28 - Forecasting &

Analysis
126
Illustration 1
The following information applies to a product:
Total Cost
Level of Activity
26,000
20,000
21,000
10,000
Calculate the split between fixed costs and variable costs using the high/low method.
Solution
High/Low Method
Total costs at high level of activity
26,000
Total costs at low level of activity
21,000
Difference
5,000
Total units at high level of activity
20,000
Total units at low level of activity
10,000
Difference
Variable cost per unit

Fixed Costs
Difference in Costs
Difference in Units
$26,000 - (20,000 x 0.5)
10,000
5,000
10,000 = $0.50
$16,000
127
Illustration 2
ABC have the following total costs and units of production for the six month period in
question.
Total Costs
$
13,600
15,800
14,500
16,200
14,900
15,000
January
February
March
April
May
June
Units
2,100
2,800
2,200
3,000
2,600
2,500
Analyse the data into fixed and variable costs using linear regression analysis
Solution
X
$000
Y
$000
XY
$000
X2
$000
2.1
13.6
28.56
4.41
2.8
15.8
44.24
7.84
2.2
14.5
31.9
4.84
3.0
16.2
48.6
2.6
14.9
38.74
6.76
2.5
15.0
37.5
6.25
15.2
90
229.54
39.1
128
b (Variable Cost Per Unit)

b=
(6 x 229.54) (15.2 x 90.0)

(6 x 39.10) 15.22
b=
(1,377.24 1,368)
(234.6 231.04)
b=
9.24
3.56
b=
$2.60
a (Total Fixed Costs)

a=
90 _ (2.6)(15.2))
6
6
a=
8.41
a=
$8,400
129
Illustration 3
Using the information in illustration 2 calculate the correlation coefficient and the
percentage change in costs that can be explained by changes in the level of activity.
Solution
X
$000
Y
$000
XY
$000
X2
$000
Y2
$000
2.1
13.6
28.56
4.41
184.96
2.8
15.8
44.24
7.84
249.64
2.2
14.5
31.9
4.84
210.25
3.0
16.2
48.6
262.44
2.6
14.9
38.74
6.76
222.01
2.5
15.0
37.5
6.25
225
15.2
90
229.54
39.1
1354.3
r = Correlation Coefficient
r=
(6 x 229.54) (15.2 x 90.0)

[(6 x 39.10) 15.22) (6 x 1354.3 - 902)]
r=
(1,377.24 1,368)
[(234.6 231.04) (8125.8 - 8100)]
r=
9.24
9.58
r=
0.96
r2 =
0.93
93% of the costs can be explained by the units produced.
130
Illustration 4
A business has had the following costs over the last year:
Quarter
Costs
$000
150
192
206
245
Calculate the average growth in costs over the year.
Solution
Average Growth
[nValue in most recent period / Value in period 1] -1
[3(245/150)] -1
17.7%
131
Illustration 5
A business has had the following sales over the last 5 years:
Year
Sales
$000
160
195
220
245
270
Calculate the average growth in sales over the year.
Solution
Average Growth
[4(270/160)] -1
19%
132
Illustration 6
A business has had a 12% increase in sales results each year over the last 5 years. The
sales in the current period were $100,000.
Predict the sales for the following year.
Solution
Sales Prediction
Sales in current year
Trend in sales
Forecast sales for following year
$100,000
+12%
112,000
133
Illustration 7
A business has had a trend of sales increases of 5% per quarter over the last 5 years. The
seasonal variations for each quarter are shown below
Quarter
Seasonal Variation
25,000
-10,000
55,000
-70,000
The sales in Q4 of the current year were $100,000.

Forecast the sales for each of the 4 quarters of the next year.
Solution
Quarter
Trend
Seasonal Variation
Forecast
Q4 Current Period
100,000
105,000
25,000
130,000
110,250
-10,000
100,250
115,763
55,000
170,763
121,551
-70,000
51,551
Total Annual Sales
452,563
452,563
134
Illustration 8
A business has had a trend of sales increases shown by the formula Y = 100 + 5X where
Y = Sales in thousands and X is the quarter number.
X1 was Quarter 1 of 2009 making X5 Quarter 1 of 2010.
The seasonal variation is as shown below:
Quarter
Seasonal Variation
1.10
0.94
1.06
0.90
Forecast the sales for each of the 4 quarters of 2011.
Solution
Quarter
Y = 100 + 5X
(Trend in sales $000)
5X
If Q1 in 2010 was an X value of 5, Q2 2010 would be X = 6 and so on until 2011 Q1

which would be X = 9
1
100
45
145
100
10
50
150
100
11
55
155
100
12
60
160
Quarter
Trend
Seasonal Variation
Forecast
145
1.10
160
150
0.94
141
155
1.06
164
160
0.90
144
Total Annual Sales
610
609
135
Test Your Knowledge

work on this area!
1. The total costs of production at ABC Co. are $25,000 when 5,000 units are produced
and $35,000 when 7,000 units are produced. Calculate the total fixed costs and the
variable cost per unit.
2. Why might regression analysis be used by a business?
3. Are there any problems with regression analysis?
4. ABC Co. had sales of $435,000 in 2005 and $500,000 in 2010. Calculate the average
growth in sales each year between 2005 and 2010.
5. What are the 4 elements of time series analysis?
6. A business has had a 7% increase in sales results each year over the last 5 years. The
sales in the current period were $200,000. Predict the sales for the following year.
7. A business has had a trend of sales increases of 3% per quarter over the last 5 years.
The seasonal variations for each quarter are shown below
Quarter
Seasonal Variation
35,000
-20,000
27,000
-42,000

Forecast the sales for each of the 4 quarters of the next year and the total sales for the
year..
8. Are there any problems with time series analysis?
136
Test Your Knowledge Answers

work on this area!
1. The total costs of production at ABC Co. are $25,000 when 52,000 units are produced
and $35,000 when 79,000 units are produced. Calculate the total fixed costs and the
variable cost per unit.
High/Low Method
Total costs at high level of activity
35,000
Total costs at low level of activity
25,000
Difference
10,000
Total units at high level of activity
79,000
Total units at low level of activity
52,000
Difference
Variable cost per unit

Fixed Costs
Difference in Costs
Difference in Units
$25,000 - (52,000 x 0.37)
27,000
10,000
27,000 = $0.37
$5,760
2. Why might regression analysis be used by a business?

To separate out fixed and variable costs.
To establish relationships between different costs etc. in the business.
3. Are there any problems with regression analysis?
The relationship must be linear to use it to predict anything.
If results are outside the range of the data tested it will be less reliable.
Its based on historic data so using it to predict the future may well not be
appropriate.
If a small amount of data is used in the analysis it will be less reliable.
It assumes that Y can be predicted from X which is not always the case.
137
4. ABC Co. had sales of $435,000 in 2005 and $500,000 in 2010. Calculate the average
growth in sales each year between 2005 and 2010.
Average Growth
[5(500,000/435,000)] -1
2.8%
5. What are the 4 elements of time series analysis?
Trend - Underlying long term movement.
Seasonal variation - Short term movements due to seasonal factors.
Cyclical variation - Longer term cycles of movement.
Random - Unexpected fluctuations due to unpredictable events.
6. A business has had a 7% increase in sales results each year over the last 5 years. The
sales in the current period were $200,000. Predict the sales for the following year.
Sales Prediction
Sales in current year
Trend in sales
Forecast sales for following year
$200,000
+7%
214,000
138
7. A business has had a trend of sales increases of 3% per quarter over the last 5 years.
The seasonal variations for each quarter are shown below
Quarter
Seasonal Variation
35,000
-20,000
27,000
-42,000

Forecast the sales for each of the 4 quarters of the next year and the total sales for the
year.
Quarter
Trend
Seasonal Variation
4 Current Period
Forecast
500,000
515,000
35,000
550,000
530,450
-20,000
510,450
546,364
27,000
573,364
562,754
-42,000
520,754
Total Annual Sales
2,154,568
2,154,568
8. Are there any problems with time series analysis?

The future is inherently unpredictable.
All of the results are based on historic data which is not necessarily a good
predictor of future results.
Random events are ignored.
All forecasting requires the use of judgements which are not necessarily correct.
139
Lecture 29 - Interpretation
of Financial Statements
140
Illustration 1
2011
2010
ASSETS
$000
$000
Non Current Assets
1000
1000
Inventory
300
400
Receivables
200
300
Cash
300
200
1800
1900
Ordinary Shares
800
800
Reserves
200
100
Long term Liabilities
700
900
Payables
100
100
Overdraft
LIABILITIES
1800
1900
$000
$000
Revenue
1000
1200
COS
800
1100
Gross Profit
200
100
Other Costs
100
90
Net Profit
100
10
All sales are made on credit.

Required:
Calculate the Inventory, Receivables and Payables days for Inter Ltd. in each of the
2 years as well as the current and quick ratios.
141
Solution
Item
Working
2011
Working
2010
Inventory Period
300/800 x
365
137
400/1100 x
365
133
Collection Period
200/1000 x
365
73
300/1200 x
365
92
Payables Period
100/800 x
365
142
Illustration 2
X1
X2
X3
Non Current Assets
500
700
1000
Current Assets
150
200
300
650
900
1300
Ordinary Shares ($1)
300
300
300
Reserves
100
280
430
Loan Notes
150
200
300
Payables
100
120
270
650
900
1300
Revenue
3000
3500
4200
COS
2000
2400
3200
Gross Profit
1000
1100
1000
Admin Costs
300
350
400
Distribution Costs
200
250
300
PBIT
500
500
300
Interest
100
150
220
Tax
120
90
50
Profit After Tax
280
260
30
Dividends
100
110
30
Retained Earnings
180
150
$3.30
$4.00
$2.20
Share Price
143
Using the information on the previous page calculate and comment on the following
Ratios:
I. Return on Capital Employed
II. Return on Equity
III. Gross Margin
IV. Net Margin
V. Operating Margin
VI. Revenue Growth
VII. Gearing
VIII. Interest Cover
IX. Dividend Cover
X. Dividend Yield
XI. P/E Ratio
144
Solution
ROCE
Equity + LT
Liabilities
Non Current Assets

+ Net Current
Assets
Total Assets Current Liabilities
X1
X2
X3
Shares
300
300
300
Reserves
100
280
430
LT Loan Notes
150
200
300
Capital Employed
550
780
1030
Non Current Assets
500
700
1000
Net Current Assets

(Current Assets Current Liabilities)
(150 - 100) = 50
(200 - 120) = 80
(300 - 270) = 30
Capital Employed
550
780
1030
Total Assets
650
900
1300
Current Liabilities
100
120
270
Capital Employed
550
780
1030
500
500
300
(500 / 550) =
90.91%
(500 / 780) =
64.10%
(300 / 1030) =
29.13%
PBIT
Return on Capital
Employed
PBIT / Capital
Employed
145
Return on Capital Employed (ROCE)
X1
X2
X3
90.91%
64.10%
29.13%
In the first year the ROCE was 90.91%. At first glance this would appear to be a good return, however
without industry averages or prior period information we are unable to tell if this is the case.
In year X2 the ROCE is 64.10%. This is a fall of 29.5% from the previous year indicating that the business
in not able to make the same return on its assets that it has previously been able to do.
In the year X3 the ROCE is 29.13%. This is a fall of 54.55% indicating that there may be some serious
underlying problems which are affecting the ability of the business to generate the return on capital
previously generated.
ROE
X1
X2
X3
Profit After Tax
280
260
30
Ordinary Shares
300
300
300
Reserves
100
280
430
Total
400
580
730
(280 / 400) =
70%
(260 / 580) =
44.8%
(30 / 730) = 4.1%
Return on Equity (PAT / Ord Shares +

Reserves)
In the first year the ROE was 70%. At first glance this would appear to be a good return, however without
industry averages or prior period information we are unable to tell if this is the case.
In year X2 the ROE is 44.8%. This is a fall of 36% from the previous year indicating that the business in
not able to make the same return on the shareholders funds that it has previously been able to do.
In the year X3 the ROE is 41%. This is a fall of 8.4% indicating that the business may be having difficulty
generating the returns it was able to do previously.
146
Margins
X1
X2
X3
Revenue
3000
3500
4200
Gross Profit
1000
1100
1000
PAT
280
260
30
PBIT
500
500
300
Gross Margin (Gross Profit / Revenue)
(1000 / 3000) =
33.33%
(1100 / 3500) =
31.42%
(1000 / 4200) =
23.89%
Net Margin (PAT / Revenue)
(280 / 3000) =
9.3%
(260 / 3500) =
7.4%
(30 / 4200) =
0.7%
Operating Margin (PBIT / Revenue)
(500 / 3000) =
16.66%
(500 / 3500) =
14.28%
(300 / 4200) =
7.1%
The Gross Margin is 33.33% in X1 and holds reasonably steady in X2 at 31.42%. However in X3 the
Gross Margin falls to 23.89% indicating that the business has either had to cut prices to sell the greater
volume it has, or the cost of its purchases have gone up.
The Net Margin is 9.3% in X1 but begins to fall in X2 with 7.4% achieved, before falling dramatically to
0.7% in X3. The main reason for this is the fall in Gross Profit as other costs have risen in line with
expectations given the increase in sales. However another point to note is that interest costs have risen
with the increase in long term loans. The extra interest costs have put pressure on the business.
The Operating Margin dropped slightly in X2 to 14.28% from 16.66% the previous year - a fall of almost
15%. In X3 the Operating Margin fell away to 7.1%, a decrease of over 50%. This is due to the decreasing
Gross Margin achieved as well as rises in the other expenses.
147
Gearing
X1
X2
X3
150
200
300
Number of
Shares
300
300
300
Share Price
3.30
2.20
Market Value
(300 x 3.30) =
990
(300 x 4) =
1200
(300 x 2.20) =
660
(150 / 990) =
15%
(200 / 1200) =
16.66%
(300 / 660) =
45.45%
Debt
Equity
Gearing (Debt / Equity)
Gearing levels in year X1 are 15%. Without industry averages or prior year data we are unable to assess
this level although at first glance it does not seem excessive.
In year X2 gearing increases slightly to 16.66%, an increase of 11% from year X1. This is due to debt
levels increasing to 200 from 150, although this is offset by the increase in the share price from $3.30 to
$4.
In year X3 gearing increases dramatically to 45%, an increase of over 180%. This is due to debt levels
rising to 300 from 200 and the share price dropping to $2.20 due to the deteriorating results of the
business.
148
Interest Cover
X1
X2
X3
PBIT
500
500
300
Interest
100
150
220
(500 / 100) = 5
times
(500 / 150) = 3.33

times
(300 / 220) = 1.36

times
Interest Cover (PBIT / Interest)
Interest coverage in year X1 is 5 times. Without industry averages or prior year data we are unable to
assess this level although at first glance it does not seem unreasonable.
In year X2 interest coverage falls to 3.33 times. This has occurred due to the interest charge increasing in
the period while PBIT has remained constant.
In year X3 interest coverage has decreased again to 1.36 times. This is caused by the PBIT achieved
decreasing to 300 combined with the increase in the interest charge to 220. The increase in interest is
caused by the increase in the long term debt of the company as shown by the gearing ratios calculated
above.
Dividend Cover
X1
X2
X3
PAT
280
260
30
Dividends
100
110
30
(280 / 100) = 2.8

times
(260 / 110) = 2.36

times
(30 / 30) = 1 time
Dividend Cover (PAT / Dividends)
Dividend coverage in year X1 is 2.8 times. Without industry averages or prior year data we are unable to
assess this level although at first glance it does not seem unreasonable.
In year X2 dividend coverage falls to 2.36 times. This would not concern investors as although coverage
has gone down slightly, the dividend paid this year is greater than last.
In year X3 dividend coverage has decreased to 1 time. This is caused by the decrease in profit achieved
by the company restricting the level of dividend payable. This will be of concern to investors and their
concern is reflected in the fall in the share price from $4 in year X2 to $2.20 in year X3.
149
Dividend Yield
X1
X2
X3
Number of Shares (300 / 1)
300
300
300
Dividends
100
110
30
Dividends Per Share
(100 / 300) = 33c
(110 / 300) = 36c
(30 / 300) = 10c
Dividend Yield (Dividends Per Share /

Share Price)
(33 / 330) = 10%
(36 / 400) = 9%
(10 / 220) = 4.5%
The Dividend Yield is 10% in year X1. Whilst we do not have comparatives, this seems a reasonable
return.
In year X2 the Dividend Yield falls to 9%. This will not be overly concerning to investors as the increase in
share price over the year will have more than made up for the slightly lower yield.
In year X3 the Dividend Yield has fallen to 4.5% which is 50% lower than the previous year. This,
combined with the fall in share price and reduced profitability will be a major concern to investors.
P/E Ratio
X1
X2
X3
$3.30
$4
$2.20
Profit After Tax
280
260
30
No. Ordinary Shares
300
300
300
EPS
(280 / 300) = 93c
(260 / 300) = 86c
(30 / 300) = 10c
P/E Ratio (Share Price / EPS)
(330 / 93) = 3.54
(400 / 86) = 4.65
(220 / 10) = 22
Share Price
The P/E Ratio in year X1 is 3.54. We do not have industry comparatives or prior year information with
which to compare this.
In year X2 the P/E Ratio increases to 4.65. This indicates that the market expectations for this share have
risen since X1 and that investors are now willing to pay 4.65 times what the business earns in a year to
own the share.
In year X4 the P/E ratio has increased dramatically to 22. This is unusual as the earnings have decreased
to 12% of the previous year. The share price has fallen to reflect this, but not by as much as would be
expected. This may indicate that the market feels that the results in year X3 were perhaps a one-off and
that next years results will improve.
150
Lecture 31 - Decision Trees
151
Illustration 1
A student is deciding how to get to class and has 2 choices:
1. Walk to class which is free.
2. Take the bus costing $5.
There is a 25% chance that it will rain and if it does the student will have to pay $10 to get
their clothes dry cleaned.
Draw a decision tree to assess whether the student should walk or take the bus.
Solution
W1 - Expected Value of Public Transport
Event
Probability
Outcome
EV
Rain
0.25
No Rain
0.75
Total EV
Probability
Outcome
EV
Rain
0.25
-10
-2.5
No Rain
0.75
Total EV
-2.5
W2 - Expected Value of Walking

Event
W3 - Total Cost of each option

Choice
Initial Cost
EV 1
Total Cost
Public Transport
Walking
2.5
2.5
Walking has the lowest total cost so is the best option
152
153
Illustration 2
Say that the student in the above illustration could take an umbrella to avoid getting wet
when walking but there is a 10% chance that the student will lose the umbrella costing $20
at college.
Solution
W1 - Expected Value of Raining
Event
Probability
Outcome
EV
Rain
0.25
-10
-2.5
No Rain
0.75
Total EV
-2.5
W2 - Expected Value of losing umbrella

Event
Probability
Outcome
EV
Losing
0.1
-20
-2
Not Losing
0.9
Total EV
-2
W3 - Total Cost of each option

Choice
Initial Cost
EV Rain
EV Lost
Umbrella
Total Cost
Public
Transport
Walking - No
umbrella
2.5
2.5
Walking - With
umbrella
Walking with the umbrella has the lowest total cost so is the best option
154
155
Illustration 3
We have 3 choices, we can invest in stocks, bonds or put the money on deposit. The
returns of each are sumarised below:
Market
Direction
Return on
Stocks
Return on
Bonds
Return on
Deposit
Up
(50% chance)
$1,500
$900
$500
Even
(30% chance)
$300
$600
$500
Down
(20% chance)
-$800
$200
$500
(i) Calculate the expected value for investing in each of stocks, bonds and deposit.
(ii)Select the best investment for each of the 3 possibilities i.e that the market goes up,
goes down and is even and calculate the expected value of these best choices.
(iii)Based on the above answers, what is the price of perfect information in this instance?
Solution
(i)
Market
Direction
Return on Stocks
Return on Bonds
Return on Deposit
Up
(50%
chance)
$1,500 x
0.5
750
$900 x 0.5
450
$500 x 0.5
250
Even
(30%
chance)
$300 x 0.3
90
$600 x 0.3
180
$500 x 0.3
150
Down
(20%
chance)
-$800 x
0.2
-160
$200 x 0.2
40
$500 x 0.2
100
$680
EV
EV
$500
EV
$670
156
(ii)
Market
Direction
Investment
Working
Value
Up
(50% chance)
Stocks
1500 x 0.5
750
Even
(30% chance)
Bonds
600 x 0.3
180
Down
(20% chance)
Deposit
500 x 0.2
100
Expected Value
$1,030
(iii)
$
Expected Value of Investing in Stocks
680
Expectation to Maximise Profit
1030
Difference (Price of perfect information)
350
157
Test Your Knowledge

work on this area!
1. What is a decision tree?
2. What is the decision?
3. What is the event?
4. How is each of the items outlined in Q2 & Q3 represented on the decision tree?
5. How is the value of perfect information calculated?

below:
New area of the syllabus so no questions (yet!)
Now do it!
158
Test Your Knowledge

work on this area!
1. What is a decision tree?
A problem solving technique.
2. What is the decision?
A choice that the manager must make that is therefore controlled by the manager.
3. What is the event?
The event is what will occur - it cant be controlled but the probability of it
happening can be calculated and used to make the decision.
4. How is each of the items outlined in Q2 & Q3 represented on the decision tree?
The decision is a rectangle.
The event is a circle.
5. How is the value of perfect information calculated?
By comparing the expected value of the outcome with the expected value if you
knew what was going to happen.

below:
New area of the syllabus so no questions (yet!)
159
Lecture 33 - Strategy &

People II
160
Illustration 1
Judy Sodhi is in her first teaching year at the National College, a private college offering
short courses in accounting, auditing and management. In her first year Judy has primarily
taught the Certificate in Managerial Finance. This is a three-day short course which ends
in an externally set examination, marked and invigilated by staff employed by the Institute
of Managerial Finance (IMF). The IMF also defines the syllabus, the length of the course
and accredits colleges to run the course. There are no pre-conditions for candidates who
wish to attend the course. Last year Judy ran the course 20 times with an average of nine
students on each running of the course. At the end of each course every student has to
complete a post-course evaluation questionnaire. Judy does not see these questionnaires
and has received no feedback about her performance.
As the college is a virtual organisation using serviced training rooms, Judy rarely sees her
manager Blake Jones. However, he contacted her recently to suggest that they should
conduct her first appraisal and a date and time was agreed. Blake explained that it would
be just a general chat looking at how the year had gone. We need to do one to satisfy the
college and the IMF. The time of the appraisal was set for 3.00 pm, finishing at 5.00 pm.
The appraisal did start with a general discussion. Blake outlined the plans of the
organisation and his own promotion hopes. Judy was surprised to see that Blake was not
following any standard list of questions or noting down any of the answers she made. She
told him that one of her main problems was the numeracy level of some of the candidates.
She recognised that the course had no pre-conditions, but it does require some basic
mathematical skills that some of our candidates just do not have.
After listening to Judy for a while Blake produced a statistical summary of the feedback
questionnaires from the courses she had run in the last year. He said that the organisation
expected its lecturers to attain an acceptable result in all 10 questions given in the postcourse questionnaire. An acceptable result is that 90% of all candidates said that they
were satisfied or very satisfied with key aspects of the course. Judy had achieved this on
seven of the questions but specifically failed on the following performance measures;
Percentage of candidates who felt that the course was relevant to their current job only
65% of your candidates felt that the course was relevant to their current job.
Percentage of candidates who passed the examination only 8888% of your
candidates passed the examination.
Percentage of candidates who felt that the course pace was satisfactory only 75% of
your candidates felt that the pace of the course was satisfactory.
After expressing her surprise that she had not been given this information before, she
immediately returned to the problem of numeracy skills. As I told you she said some of
these students lack the mathematical skills to pass. Thats not my fault, it is yours you
should not have let them on the course in the first place. You are just filling the places to
make money.
After a heated discussion, Blake then turned to the last thing on my agenda. He
explained that it was only college policy to give pay increases to lecturers who had
achieved 90% in all 10 questions, so there would be no increase for Judy next year.
However, he also needed to discuss her workload for next year. He produced a
spreadsheet and had just begun to discuss course planning and locations in great detail
161
when his mobile phone rang. I am sorry, Judy, I have to collect the children from school I
must go. I will write down your planned course assignments and e-mail them to you. I think
that was a very useful discussion. Overall we are very happy with you. See you at the endof-year party, and of course at next years appraisal. He left at 4.30 pm.
Explain the concept and purpose of competency frameworks for organisations,
assessing their potential use at the National College and the Institute of Managerial
Finance.
Solution
Competencies define what is expected from an individual in an organisation, both in terms
of content and levels of performance. They should provide a map of the behaviours that
will be valued, recognised and, in some organisations, rewarded. Employees have a set of
objectives to work towards and are clear about how they are expected to perform their
jobs. This would have been very useful at National College because the inappropriateness
of some of the performance measures would have become clearer at a much earlier stage.
Originally, many competency frameworks concentrated on behavioural elements, for
example, developing softer skills such as problem-solving. However, competency
frameworks are increasingly becoming more ambitious and including technical
competencies that in many ways are more specific and easier to assess than behaviours.
Many examination syllabuses are cross-referenced to national competency frameworks
and the Institute of Managerial Finance might consider this for their examinations.
Competencies are normally expressed at a number of levels; reflecting increasing
demands in those competences. For example, in the Skills Framework for the Information
Age (SFIA), which has four levels (37), level 3 is apply, level 4 is enable, level 5 advise
and level 6 initiate or influence.
The competency framework usually defines competencies for each role within the
organisation. There are typically ten or less competencies for each role. The detail for
each competence has to be carefully balanced. If it is too general then employees are
unsure of what is required and managers will have a problem in assessing staff against the
defined competency.
On the other hand, if the definition of each competence is too detailed, it can be
excessively time-consuming to develop, administer and maintain. In reality, defining the
appropriate level of detail is one of the key challenges of defining an effective competency
framework. Performance against current competencies and the development of desired
competencies becomes one of the focuses of the appraisal. Adopting an appropriate
competency framework should lead to a fairer appraisal system at the National College. It
should also improve the fairness of the recruitment process.
Competency frameworks may be developed internally, usually using HR consultants.
KPMG developed theirs in partnership with Saville & Holdsworth Ltd (ACCA Case Study).
Alternatively, the organisation can use a framework published by an external organisation
usually a trade association or a government body.
The best solution is often a compromise between the two, using externally proven
frameworks but tuning them so that they are relevant to the organisation. This has the
162
added promise of providing a link between organisational and personal objectives. SFIA is
published in two variants; SFIA, which is intended as a basis for tailoring to an
organisations needs, and SFIAplus which should be treated as a standard and should not
be customised.
Competency frameworks were originally focused on performance management and
development. However, contemporary advocates now see competency frameworks as a
significant contributor to organisational performance through focusing and reviewing an
individuals capability and potential. The competency framework might also be an
important element in change management.
The CIPD Change Agenda Focus on the Learner concluded that competencies have been
a feature of progressive human resources development for more than a decade. What is
new is their central importance as a means of providing a framework for the learner to take
responsibility for their own learning. Gold (referencing Holbeche, 1999) suggests that
advocates of competencies perceive them as a mechanism for aligning organisational
objectives with the various HR activities of recruitment, selection, appraisal, training and
reward.
163

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