In chapter-1:

List of Models:

1. PESTEL Analysis
2. Porter’s Five Forces
3. Competitor Analysis
4. CSF Factors (BS-488 page)
5. Stakeholder mapping
6. Product Life Cycle
7. Boston Consulting Group (BCG) Matrix
8. Value Chain Analysis
9. Industry Life Cycle
10. Gap analysis
11. SWOT Analysis
12. TOWS Matrix
13. Benchmarking
14. Balanced Scorecard
15. Levels of strategy
16. Strategic Risk analysis
17. Shell Directional Policy Matrix
18. Business Process analysis
19. Value based management (VBM)
20. Strategic value analysis (SVA)

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 Model-(1): “PESTEL Analysis”

In Short Cut:

The PESTEL framework is used to analyse the macro-environment into the following segments:
Political
Economic
Socio-cultural
Technological
Environmental protection
Legal
This analysis is a useful checklist for general environmental factors, although in the real world they are
obviously all interlinked. Any single environmental development can have implications for all six
PESTEL segments.
A report may contain strategic information about change in the wider business environment. In such a
context, PESTEL analysis can provide a useful framework when reading a report and considering its
strategic implications. Changes in the environment may prompt a change in strategic thinking.

(a) Political change: Political change may have implications for business and business strategy:
 A change of government could have implications for the government's fiscal policy and spending
plans. This may be significant for companies that earn substantial revenues from government
contracts. In the UK, government policy towards privatisation of public services has implications
for private sector service providers.
 Political change in another country may affect strategic plans for investing in the country.
Liberalisation of politics may attract more foreign investment: greater autocracy in government or
the threat of nationalisation of foreign businesses is likely to deter foreign investment.
 International political co-operation may have implications for business: examples may be changes
in international attitudes to free trade and free trade agreements, and international efforts to restrict
opportunities for tax avoidance by international companies.
(b) Economic change: Changes in economic conditions have obvious implications for business strategy.
As one example, the slow economic recovery after the global financial crisis in 2008 may have persuaded
some companies to defer new investment decisions, whereas others may have had difficulty in obtaining
new finance to invest.
(c) Social change: Social change may have implications for business strategy. For example, as a result of
an ageing population, companies may be affected by changes in demand for certain types of product such
as healthcare, and there may be implications for retirement age in the working population. Very high and
sustained levels of youth unemployment could have implications for social unrest and security.
(d) Technological change: Some technological changes, with associated social change, continue to have
a major impact on businesses, especially those producing technology-related products such as
smartphones, tablets, broadband services and software products. With some technological changes, an
important strategic concern is the speed of adoption by consumers, and so the need of companies to
respond very quickly to changes as they happen.
(e) Environmental change: Environmental change affects most companies in some ways and to some
extent, and many large companies have environmental policies aimed at reducing levels of pollution and

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waste. Changes in government attitudes to environmental protection, such as changes in carbon pollution
regulation, 'green' energy sources, the use of fracking to extract shale gas and the use of genetically-
modified food products, can have long-term strategic implications for many companies in many different
industries.
(f) Legal change: Legal and regulatory change can also have important strategic implications. In the UK
for example, it seems probable that the insurance industry has been affected by the development of a
'compensation culture' and increased legal actions for compensation by consumers.
The examples given here are indicative of issues that may be raised in a strategic level report. When
change is identified, organisations should consider the implications of the change for strategy. When the
report relates to the wider business environment, PESTEL is a useful checklist of areas to consider. It is a
framework for analysis, however, and does not provide automatic answers.

In Broad: (Page attached)

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 Model-(2): “Porter’s Five Forces”

In Broad:
Porter suggests that the competitive environment and, in turn, competitive strategy is shaped by five
forces:
Threat of new entrants
Threat of substitute products or services
Bargaining power of customers
Bargaining power of suppliers
Rivalry among existing competitors in the industry

These forces influence the strength of the competition in an industry, and consequently also determine the
profit potential of that industry as a whole.

Porter argues that the stronger each of the five competitive forces is, the lower the profitability of an
industry.

Potential
entrant

Industry
Competitors
Suppliers Customers
Rivalry among
existing firms

Substitute.

Figure: “Porter’s Five Forces.”

1. The threat of new entrants:

A new entrant into an industry will bring extra capacity and more competition. The strength of this threat
is likely to vary from industry to industry, depending on the strength of the barriers to entry. Barriers to
entry discourage new entrants and influence the likely response of existing competitors to the new entrant.

Barriers to entry:
1. Scale economies
2. Product differentiation
3. Capital requirements
4. Switching costs
5. Access to distribution channels
6. Cost advantages of existing producers, independent of economies of scale. These include:
 Patent rights
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  Experience and know-how (the learning curve)
 Government subsidies and regulations
 Favored access to raw materials
7. Response of incumbents. This includes:
 Incumbents have substantial resources including cash to fight back
 May cut prices to keep market share
 Slow growth in a mature market may mean all companies' profits are reduced.

Entry barriers might be lowered by-

1. Changes in the environment
2. Technological changes
3. Novel distribution channels for products or services
2. The threat from substitute products:
A substitute product is a product /service produced by another industry which satisfies the same customer
needs.
Substitutes affect profitability of an industry through:
 Putting a ceiling on prices
 Affecting volumes of demand
 Forcing expensive investments and service improvements
Threat from substitutes determined by:
 Relative price/performance
 Switching costs from one to another.

3. The bargaining power of buyers (customers):

Buyers (customers) may include:
 Industrial customers and distributors,
 Governmental or other not-for-profit organizations,
 Consumers wanting better quality products and services at a lower price

Satisfying their wants may lead them to trade around the industry, forcing down the profitability of the
industry. Buyer power is increased if:
1. The customer buying a large proportion of total industry output
2. The product not being critical to the customer's own business
3. Low switching costs (i.e. the cost of switching suppliers)
4. Products are standard items and hence easily copied
5. Low customer profitability forcing them to prioritize cost reductions
6. Ability to bypass (or acquire) the supplier
7. The skills of the customer's purchasing staff
8. High degrees of price transparency in the market

4. The bargaining power of suppliers:

Suppliers can exert pressure for higher prices but this depends on a number of factors.
1. Are there just one or two dominant suppliers to the industry?
2. Able to charge monopoly or oligopoly prices?
3. The threat of new entrants or substitute products to the supplier's industry.
4. Whether the suppliers have other customers outside the industry,
5. Whether the suppliers do not rely on the industry for the majority of their sales.
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 6. The importance of the supplier's product to the customer's business.
7. Whether the supplier has a differentiated product which buyers need to obtain.
8. Would switching costs for customers be high?
9. The level of switching costs for their customers.

5. Competitive rivalry:
The intensity of competition will depend on the following factors:
1. Market growth: Rivalry is intensified when firms are competing for a greater market share in a
total market where growth is slow or stagnant.
2. Cost structure: High fixed costs may lead a company to compete on price, as in the short run any
contribution from sales is better than none at all.
3. Switching: Suppliers will compete if buyers switch easily (e.g. Coke vs Pepsi).
4. Capacity: A supplier might need to achieve a substantial increase in output capacity, in order to
obtain reductions in unit costs.
5. Uncertainty: When one firm is not sure what another is up to, there is a tendency to respond to
the uncertainty by formulating a more competitive strategy.
6. Strategic importance: If success is a prime strategic objective, firms will be likely to act very
competitively to meet their targets.
7. Exit barriers: These make it difficult for an existing supplier to leave the industry.
Non-current (fixed) assets with a low break-up value.
The cost of redundancy payments to employees
If the firm is a division or subsidiary of a larger enterprise, the effect of withdrawal on the other
operations within the group.

In Short:

Porter's five forces model identifies five factors within an industry or market that affect the strength of
competition within the market and so the potential for profitability. Profitability will be limited in markets
where the following forces are strong.
(1) Competition between firms that are already in the market: both price and non-price competition
affects profit margins.
(2) Low barriers to entry. When new entrants are able to enter a market easily, it will be impossible for
existing firms to sustain high levels of profitability for long. High profits will attract new entrants, and
the added competition will reduce prices and profit margins.
(3) Supplier strength. When a market has a small number of dominant suppliers, or a single monopoly
supplier, costs of supply are likely to be high and opportunities for supply flexibility are low.
(4) Buyer strength. When a market is dominated by a small number of buyers, the buyers are able to put
pressure on companies in the industry to sell to them at low prices. An example is the ability of large
supermarket companies to demand low prices from their suppliers and squeeze profit margins in
industries such as food manufacturing and farming.
(5) Availability of substitute products. Profit margins in a market may be low when consumers have a
choice of available alternatives, and can switch between the different products or services. For example,
prices of tickets to live entertainment events may be restricted by the alternative that consumers have to
watch the event on subscription television.
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 Model-(3): “Competitor Analysis”

 Definition:
As the name suggests, competitor analysis is an assessment of the strengths and weaknesses of current
and potential competitors.
The company should gather as much information as possible about its competitors, as both new and
existing competitors are one of the main elements in its immediate task environment.

 The main stages and the related information:

1. Identifying the competitors:

The first stage in the competitor analysis process is the identification of who the main competitors are.
The best way to identify the current and future competitors is to target products.

2. Identifying competitor’s goals or strategic objective:

Once the company has established who its main competitors are, then it should focus on-
a) What are their goals or strategic objectives (e.g. maintaining profitability, building market share;
or entering new markets)?
b) Whether managerial beliefs affect their company’s goals?

3. Establishing competitor’s assumptions:

a) What assumptions does it hold about itself and the industry (e.g. the trends in the market, products
and consumers)?
It is essential as this will play a large part in determining their future activity.

4. Identifying competitor’s current strategies:

a) What strategies are the competitors currently pursuing (e.g. are they looking to compete on the
basis of low cost or product quality?
b) Are they attempting to service the whole market, or a specific niche?

5. SWOT analysis:
a) What are the competitor’s strengths and weaknesses, their opportunities and threats?
b) What key resources and capabilities does the competitor have (or not have)?

6. Preparing competitor response profiles:

Once an organization has analysed its competitors’ future goals, assumptions, current strategies and
capabilities, it can begin to ask the crucial questions about-
a) How a competitor is likely to respond to any competitive strategy that the organization might
pursue?
b) Trying to assess what the competitors’ responses are likely to be a major consideration in making
any strategic or tactical decision?

 Benefits:
1. Basis of competitive advantage: It helps the management to understand their competitive advantages
or disadvantages relative to competitors.

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2. Strategy development: It provides an informed basis to develop strategies to create or strengthen
future competitive advantage.
3. Increased knowledge: It makes the company more knowledgeable about who its competitors are and
what they are doing?
4. Formal process: A formal process of information gathering and analysis provides the best route to
through coverage without unnecessary duplication.
5. Increased profitability: As the profitability of a firm is influenced by the competitive environment,
understanding this environment, the Co could hope to continue its success.
6. Responding to competitors’ strategies: It will allow the company to adjust its strategy to meet the
challenges posted by competitors’ behaviour.
7. Competitor’s responses: Gaining competitor intelligence can also help the Co to gauge competitors’
likely responses to any new strategies which the co is planning to introduce.
8. Understanding competitor’s strategies: It helps to understand the competitor’s current and future
strategies.
9. Identifying the risk of new entrants: Through it, the Co would be able to identify the risk of new
entrants in the market.

10. Improve forecasting: It will also enable the Co to improve its forecast and business plan.
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 Model-(4): “CSF Factors”

Definition:
Critical success factors are a small number of key operational goals vital to the success of an organisation.
If these operational goals are achieved, the organisation should be successful. CSFs are measured by
KPIs.
The use of (CSFs) can help to determine the information requirements of an organisation. The CSF
approach is sometimes referred to as the strategic analysis approach. The philosophy behind this approach
is that managers should focus on a small number of objectives, and information systems should be
focused on providing information to enable managers to monitor these objectives.

Types:
Two separate types of CSF can be identified:
(a) Monitoring CSFs are important for maintaining business. A monitoring CSF is used to keep abreast
of existing activities and operations.
(b) Building CSFs are important for expanding business. A building CSF helps to measure the progress of
new initiatives and is more likely to be relevant at senior executive level.

How to determine:
One approach to determining the factors which are critical to success in performing a function or making
a decision is as follows:
List the organisation's corporate objectives and goals
Determine which factors are critical for accomplishing the objectives
Determine a small number of KPIs for each factor
Note that most KPIs will be quantitative. It is quite possible that CSFs will be quantitative as well.
Where measures use quantitative data, performance can be measured in a number of ways:
In physical quantities, for example units produced or units sold
In money terms, for example profit, revenues, costs or variances
In ratios and percentages
Example:
One of the objectives of an organisation might be to maintain a high level of service direct from inventory
without holding uneconomical inventory levels. This is first quantified in the form of a goal, which might
be to ensure that 95% of orders for goods can be satisfied directly from inventory, while minimising total
inventory holding costs and inventory levels.
CSFs might then be identified as the following:
Supplier performance in terms of quality and lead times
Reliability of inventory records
Forecasting of demand variations
The determination of KPIs for each of these CSFs is not necessarily straightforward. Some measures
might use factual, objectively verifiable data, while others might make use of 'softer' concepts such as
opinions, perceptions and hunches.

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For example, the reliability of inventory records can be measured by means of physical inventory counts,
either at discrete intervals or on a rolling basis. Forecasting of demand variations will be much harder to
measure.

Data sources for CSFs:

In broad terms, we can identify four general sources of CSFs (based on Rockart's work in this area in the
1970s and 1980s).
(a) The industry that the business is in. For example, in the supermarket industry, having the right
product mix available in each store, and having products actually available on the shelves for customers to
buy, will be prerequisites for an organisation's success, regardless of the detailed strategy it is pursuing.
(b) The company itself and its situation within the industry (eg, market leader or small company;
competitive strategy; geographical location).
(c) The external environment, for example consumer trends, the economy, and political factors of the
country in which the company operates (PEST factors).
(d) Temporary organisational factors, which are areas of corporate activity that are currently
unacceptable and represent a cause of concern, such as high inventory levels. New laws or regulations
could also be seen as temporary factors: eg, if a regulator has recently fined a financial services company
for mis-selling its products, then a possible CSF for the company would be: to ensure that similar mis-
selling does not occur again in the near future.
More specifically, possible internal and external data sources for CSFs include the following:
(a) The existing system. The existing system can be used to generate reports showing failures to meet
CSFs.
(b) Customer service department. This department will maintain details of complaints received, refunds
handled, customer enquiries etc. These should be reviewed to ensure all failure types have been identified.
(c) Customers. A survey of customers, provided that it is properly designed and introduced, would reveal
(or confirm) those areas where satisfaction is high or low.
(d) Competitors. Competitors' operations, pricing structures and publicity should be closely monitored.
(e) Accounting system. The profitability of various aspects of the operation is probably a key factor in
any review of CSFs.
(f) Consultants. A specialist consultancy might be able to perform a detailed review of the system in
order to identify ways of satisfying CSFs.

Resources Competences

Threshold Threshold
No SCA Resources Competences

Unique Core
SCA
Resources Competences

Explanation:
Threshold Resources: The basic resources needed by all firms in the market.

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Unique Resources: Those resources which give the firm a sustainable competitive advantage over its
competitors, enabling it to meet the CSFs. They are resources which are better than those of the
competition and difficult to replicate.
Threshold Competences: The activities and processes involved in using and linking the firm's resources
necessary to stay in business.
Core Competences: The critical activities and processes which enable the firm to meet the CSFs and
therefore achieve a sustainable competitive advantage. The core competencies must be better than those
of competitors and difficult to replicate.
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 Model-(5): “Stakeholder mapping”

Definition:
Stakeholders: Groups or persons with an interest in the strategy of an organisation, and what the
organisation does.
Type: There are three broad types of stakeholders in an organization, as follows:
 Internal stakeholders: Employees, managers.
 Connected stakeholders: Shareholders, customers, suppliers & financiaries
 External stakeholders: Government & regulatory agencies, interest/pressure groups, industry
association & trade unions.
Stakeholders’ interests: Organisations have a variety of stakeholders, each of which is likely to have its
own interests:
(a) Managers and employees – typically interested in job security, career progression, salaries and
benefits, job satisfaction
(b) Shareholders – interested in maximising their wealth from holding shares (as measured by
profitability, P/E ratios, market capitalisation, dividends and yield)
(c) Lenders – interested in the security of loans given, and adherence to loan agreements
(d) Suppliers – achieving profitable sales, payment for goods, developing long-term relationships.
(e) Customers – receiving goods and services as purchased, achieving value for money in their
purchases.
(f) Government and regulatory agencies – jobs created, tax revenues, compliance with laws and
regulations, investment and infrastructure, national competitiveness
(g) Environmental and social bodies, and other non-governmental organisations – primarily
interested in social responsibility
(h) Industry associations and trades unions – interested in members' rights
(i) Local communities – interested in local jobs on one hand, but also environmental impact (noise,
pollution etc) on the other
When determining its strategy, an organisation needs to consider how well that strategy fits in with the
interests of different stakeholders. The organisation should also consider how stakeholders could respond
to strategies which do not uphold their interests; for example: shareholders could raise concerns at the
company's AGM, or even sell their shares; banks could refuse to lend money to a company or could
demand higher interest charges; customers may choose to purchase goods and services from a competitor;
and employees could resign or take part in industrial action (supported by trade unions).
Focus of stakeholders' interests:
When considering stakeholders, organisations need to be aware of two important differences in
stakeholder focus:
Economic or social focus:
Some stakeholders' interests are primarily economic (for example, shareholders are interested in
profitability; employees, in salaries) while other stakeholders will care more about social issues (such as
social responsibility and environmental protection).
Local or national focus:
Often, the interests of local stakeholder groups may be different from national (or international) groups.
Think, for example, of the debate about whether to build a third runway at Heathrow Airport. Local
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residents are concerned about increased noise, pollution and traffic, but at a national level politicians have
highlighted the economic benefits of expansion.
Stakeholder management
Conflict is likely between stakeholder groups due to the divergence of their interests. This is further
complicated when individuals are members of more than one stakeholder group and when members of the
same stakeholder group do not share the same principal interest. For example, if some members of a
workforce are also shareholders while others are not, the interests of the two groups may be different.
Different stakeholder groups are likely to have a range of responses to possible business strategies. When
an organisation is evaluating a strategy, it should consider what impact that strategy will have on key
stakeholder groups.
In this respect, Mendelow's matrix is a useful tool for helping an organisation establish its priorities and
manage stakeholder expectations, by looking at the relative levels of interest and power that different
stakeholder groups have in relation to the organisation or its strategy.

Level of Interest

Low High

Low A B
Power
C D
High

Figure 1.3: Mendelow's matrix

A. Stakeholders in this segment of Mendelow's matrix have low interest and low power, therefore only
minimal effort should be given to meeting their needs.
B. Stakeholders in this quadrant have important views, but little ability to influence strategy, therefore
they should be kept informed only.
C. An organisation should treat stakeholders in this quadrant with care because while they are often
passive, they are capable of moving to segment D. Therefore, it is important to keep them satisfied.
D. These are key players (for example, a major customer), so the strategy must be acceptable to them at
least. Equally, powerful stakeholder groups must have confidence in the management team of an
organisation. Regular communication with the stakeholder groups can be a good way to help achieve this.

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 Model-(6): “Product Life Cycle”

The product life cycle concept holds that products have a life cycle and that a product demonstrates
different characteristics of profit and investment at each stage in its life cycle. The life cycle concept is a
model, not a prediction (not all products pass through each stage of the life cycle). It enables a firm to
examine its portfolio of goods and services as a whole. Product life cycle analysis can be used to assess
the position within its life cycle where a product has reached:
The stages in a product's life cycle are:
Introduction
Development and growth
Maturity
Decline
During strategic planning, products should be assessed in three ways:
The stage of the life cycle the product has reached
The product's remaining life (how much longer will it contribute to profits?)
How urgent is the need to innovate (to develop new and improved products)?
Many businesses will not wish to risk having only a single product (or group of closely related products)
or all their products at the same stage of development. Many will seek to maintain a balanced portfolio of
products with variety to protect against downturns in the fortunes of individual products and to have
products at different stages of development. The product life cycle and BCG models can help assess the
balance of a product portfolio.
Strategies for each stage can be summarised as:
1. Introductory stage:
Early introduction and early growth phases, where revenues are small, investment requirements are high,
the product is making a loss and cash flows are negative.
Strategies:
Attract trend-setting buyer groups by promotion of technical novelty or fashion
Price high (skim) to cash in on novelty or price low (penetration) to gain adoption and high initial share
Build channels of distribution

2. Growth stage:
A rapid growth phase where new investment is still required, but revenues grow strongly and the product
eventually becomes profitable and generates positive cash flows.
Strategies:
Build brand awareness to resist impact from new entrants
Improve and refine product features
High promotion of benefits to attract early majority of potential buyers
Penetrate market, possibly by reducing price.

3. Maturity stage:
A maturity phase, where the product becomes a cash cow.

Strategies:
Defend market position by matching pricing and promotion of rivals.
Modify markets by positioning product to gain acceptance from non-buyers (e.g. new outlets or
suggested new uses).
Modify the product to make it cheaper or of greater benefit.
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 Intensify distribution

4. Decline stage:

A decline phase, where sales revenues fall, and a decision for the company is whether to withdraw from
the product market, or whether to remain in the market, but operating at lower levels of output.
Strategies:
Harvest cash flows by minimising spending on promotion or product refinement
Simplify range by weeding out variations
Narrow distribution to target loyal customers to reduce stocking costs

The response of competitors is particularly important – there may be threats as they attempt to defend
their position, or opportunities, e.g. when a competitor leaves the market.
A company will not wish to have all products at the same stage as they may all decline together.
Solutions:
– Products with different length cycles.
– Lots of products in development/introductory stage.
– Lots of products in maturity to support others.

In Short:

The product life cycle concept holds that products have a life cycle and that a product demonstrates
different characteristics of profit and investment at each stage in its life cycle. The life cycle concept is a
model, not a prediction (not all products pass through each stage of the life cycle). It enables a firm to
examine its portfolio of goods and services as a whole.
The stages in a product's life cycle are:
Introduction
Development and growth
Maturity
Decline
During strategic planning, products should be assessed in three ways:
The stage of the life cycle the product has reached
The product's remaining life (how much longer will it contribute to profits?)
How urgent is the need to innovate (to develop new and improved products)?
An analysis of a product's position in its life cycle can also help an organisation determine what type of
strategy might be suitable for that product. For example, once they reach maturity, products become more
standardised and differences between competing products become less distinct. Consequently, a strategy
based on efficiency may be more appropriate than a differentiation strategy for mature products.
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 Model-(7): “Boston Consulting Group (BCG) Matrix”

In Broad:
The Boston Consulting Group developed a matrix that assesses businesses in terms of potential cash
generation and cash expenditure requirements. Strategic business units are categorized in terms of market
growth rate and relative market share.

The matrix is as follows:

Relative market share
Relative Market Share
High Low
Market
Market High Stars Question marks
Growth Rate Low Cash cows Dogs

Figure : “BCG matrix”

A company's portfolio should be balanced with cash cows generating finance to support stars and question
marks and with a minimum of dogs.

However, as well as analysing where different products or business units fit into their portfolio,
companies also have to determine the strategy appropriate for them.
Stars: Stars are products with a high share of a high growth market. In the short term, these require
capital expenditure in excess of the cash they generate, in order to maintain their market position, and to
defend their position against competitors' attack strategies, but they promise high returns in the future.
Strategy: Build.
Cash cows: In due course, stars will become cash cows, with a high share of a low-growth market. Cash
cows need very little capital expenditure (because opportunities for growth are low) and generate high
levels of cash income. However, products which appear to be mature can be re-invigorated, possibly by
competitors, who could come to dominate the market. Cash cows can be used to finance the stars or
question marks which are in their development stages.
Strategies: Hold, or Harvest if weak.
Question marks/Problem children: Question marks are products in a high-growth market, but where
they have a low market share. Do the products justify considerable capital expenditure in the hope of
increasing their market share, or should they be allowed to 'die' quietly as they are squeezed out of the
expanding market by rival products? Because considerable expenditure would be needed to turn a
question mark into a star by building up market share, question marks will usually be poor cash
generators and show a negative cash flow.
Strategies: Build, harvest or divest.

Dog products: Dogs are products with a low share of a low growth market. They may be ex-cash cows
that have now fallen on hard times or question marks that never succeeded in gaining critical mass in a
market. Dogs should be allowed to die, or should be killed off. Although they will show only a modest net
cash outflow, or even a modest net cash inflow, they are 'cash traps' which tie up resources such as stocks
and productive capacity and provide a poor return on investment, and not enough to achieve the
organisation's target rate of return.

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However, they may have a useful role, either to complete a product range or to keep competitors out.
There are also many smaller niche businesses in markets that are difficult to consolidate that would count
as dogs but which are quite successful.
Strategies: Divest or hold.

Explanation of the strategies:

Build: A build strategy forgoes short term earnings and profits in order to increase market share.
This could either be done through organic growth, or through external growth (acquisition; strategic
alliances etc).
Hold: A hold strategy seeks to maintain the current position, defending it from the threat of would-be
'attackers' as and where necessary.
Harvest: A harvesting strategy seeks short-term earnings and profits at the expense of long-term
development.
Divest: Disposal of a poorly-performing business unit or product. Divestment stems the flow of cash to a
poorly performing area of the business and releases resources for use elsewhere.
There are also infants (i.e. products in an early stage of development), war horses (i.e. products that have
been cash cows in the past, and are still making good sales and earning good profits even now) and even
cash dogs, which are dogs still generating cash, and dodos, which have low shares of low growth markets
and which are losing cash.

In Short:
The Boston Consulting Group (BCG) matrix provides a method of analysing the product portfolio of a
company into cash cows, stars, question marks and dogs. A company needs a sufficient number of cash
cows to generate profits and funding for new investments. It also needs 'stars' that currently require
substantial investment, but are expected to be successful and the cash cows of tomorrow. For 'question
marks', the strategic problem may be to decide whether to stop investing in the product and use resources
elsewhere.
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 Model-(8): “Value Chain Analysis”

Michael Porter (who developed the value chain) argues that competitive advantage arises from the way an
organisation uses its inputs and transforms them, through value activities, into outputs that customers are
willing to pay for.
The value chain describes those activities of the organisation that add value to purchased inputs. Primary
activities are involved in the production of goods and services; support activities provide necessary
assistance to support the primary activities; and linkages are the relationships between activities.

Figure: Porter’s Value Chain

As well as using the value chain to establish where it creates value for the customer, an organisation can
also use the model in other strategically beneficial ways, including the identification of critical success
factors and opportunities to use information strategically. For example, an organisation can use the value
chain to contribute towards competitive advantage by:
Inventing new or better ways to perform activities.
Combining activities in new or better ways.
Managing the linkages in its own value chain to increase efficiency and reduce cost. (For example,
could some activities be outsourced, or could cost-savings be made by changing the way activities are
structured through combining fragmented purchasing activities into a central procurement system for
instance?).
Managing the linkages in the value system.

The value chain helps managers identify those activities which create value for a firm's customers. As a
result, value chain analysis can also help managers to identify the key processes and areas in which a firm
has to perform successfully in order to secure a competitive advantage. These key areas are the firm's
critical success factors (CSFs)
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Example of Value activities:

Primary activities relate to production, sales, marketing, delivery and service, in other words anything
directly relating to the process of converting resource inputs into outputs.Activity Comment
 Inbound logistics: Receiving, handling and storing inputs to the production system (i.e.
warehousing, transport, stock control etc).
 Operations: Convert resource inputs into a final product or service. Resource inputs are not only
materials. 'People' are a 'resource', especially in service industries.
 Outbound logistics: Storing the product and its distribution to customers: packaging,
warehousing etc.
 Marketing and sales: Informing customers about the product, persuading them to buy it, and
enabling them to do so: advertising, promotion etc.
 After sales service: Installing products, repairing them, upgrading them, providing spare parts,
advice (e.g. helplines for software support).

Support activities provide purchased inputs, human resources, technology and infrastructural functions
to support the primary activities. Each provides support to all stages in the primary activities. For instance
procurement where at each stage items are acquired to aid the primary functions. At the inbound logistics
stage it may well be raw materials, but at the production stage capital equipment will be acquired, and so
on.ity Comment
 Procurement: Acquire the resource inputs to the primary activities (e.g. purchase of materials,
subcomponents, equipment).
 Technology development: Product design, improving processes and/or resource utilisation.
 Human resource management: Recruiting, training, developing and rewarding people.
 Management planning and firm infrastructure: Planning, finance, and quality control: these
are crucially important to an organisation's strategic capability in all primary activities.

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 Model-(9): “Industry Life Cycle”

In Broad:
Industry: A group of organisations supplying a market offering similar products using similar
technologies to provide customer benefits.
The concept of life cycle analysis is popular in strategic management. In later chapters life cycle analysis
will be used to describe the stages products pass through from their first introduction to the market
through to their withdrawal and replacement.
The present section considers the application of life cycles at a higher level, that of the industry as a
whole.
The stages of the industry life cycle are:
Introduction – newly invented product or service is made available for purchase
Growth – a period of rapid expansion of demand or activity as the industry finds a market
Maturity – a relatively stable period of time where there is little change in sales volumes year to year
but competition between firms intensifies
Decline – a falling off in activity levels as firms leave the industry and the industry ceases to exist or is
absorbed into some other industry.

The industry life cycle has been characterised by:

Accelerating pace of change. The CD had only 15 years of dominance compared to 40 years for
gramophone records.
Meta-technology waves. The replacement of analogue gramophone by digital CD was part of the meta-
technology wave that also replaced typewriter with PCs and fixed line telephone with digital mobiles.
Consequent industrial restructuring following technological convergence. Sony the electronics
manufacturer bought CBS records, the ISP firm America On Line merged with Time-Warner, Virgin
Media combined with cable provider NTC.

Industry life cycle

Some industry life cycles are identical in pattern and timing to that of their product (e.g. in the hat
industry, or steel industry). Others have longer life cycles than the particular products, e.g. the music
industry which has endured from sheet music till MP3, merely releasing (and re-releasing) its music as
new products as the format changes.

“From Printed Page from BS”

Growth stage
Ensure capacity expands sufficiently to meet firm's target market share objectives
Maintain barriers to entry (e.g. fight patent infringements, keep price competitive)
Ensure investors are aware of potential of new products to ensure support for financial strategy
Search for additional markets and product refinements
Consider methods of expanding and reducing costs of production (e.g. contract manufacturing
overseas, building own factory in a low cost location)
Shakeout phase
Monitor industry for potential mergers and rationalisation behaviour

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 Seek potential merger candidates
Periodic review of production and financial forecasts in light of sales growth rates
Shift business model from customer acquisition to extracting revenue from existing customers
Seek to extend growth by finding new markets or technologies

Maturity phase
Maximise current financial returns from product
Leverage the existing customer database to gain additional incomes (e.g. mobile phone operators
seeking to earn from content management)
Engage in integration activities with rivals (e.g. mergers, mutual agreements on competition)
Ensure successor industries are ready for launch to pick up market

Decline phase
Evaluate exit barriers and identify the optimum time to leave the industry (e.g. leases ending, need for
renewal investment)
Seek potential exit strategy (e.g. buyer for business, firms willing to buy licenses etc)
In short:
The product (or industry) life cycle model highlights the importance of integrating business and financial
strategies.
The life cycle model illustrates that during the introduction and growth phases, a company's cash flow is
likely to be negative, due to the investment in assets and working capital required to support growth.
However, early-stage businesses are also risky, because there are many unknowns about their
performance.
It would be unwise then to attempt to finance the business with debt, because this would increase their
financial risk (gearing) and would lead to outflows of cash (interest) from companies that are already cash
negative. Thus, companies in the early stages of their life cycle should seek equity funding as far as
possible.
However, companies in the early stages of their life cycle often pay no dividends to their investors. As has
already been noted, these companies are likely to be cash negative but, perhaps more importantly, they are
likely to have exciting growth prospects. Therefore, they are better able to earn value for the shareholders
by reinvesting any profits back into the company rather than paying money out by way of dividend.

---o---

Model-(10): “Gap analysis”

This tool enables organisations to study what they are doing currently and where they want to go in the
future. Gap analysis can be conducted from the perspective of the organisation, the direction of the
business, the processes of the business, and Information Technology. It provides a starting point for
measuring the amount of time, money and human resources required to achieve a particular outcome. It
can also be used for new products, or to identify gaps in the market.
Importantly also, if an organisation has identified that it has a 'gap' between the profit it expects to
generate and its target profit, then this may indicate the need to identify new strategies or initiatives which
can help fill that gap.

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 Model-(11): “SWOT Analysis”

SWOT analysis is a key technique for analysing the strategic position of a company. SWOT analysis
identifies an organisation's strengths and weaknesses (based on its internal resource and capabilities)
along with the opportunities and threats which have been identified from environmental analysis.
By combining environmental analysis with internal appraisal, SWOT analysis provides a means of
assessing an organisation's current and future strategic fit (or lack of it) with the environment.
Although strategic data analysis may focus mainly on external analysis of the environment, industry and
competition, internal analysis of resource strengths and weaknesses may also be relevant.
Data may indicate strengths or weaknesses in the resources and competences of an organisation, which
can give them a competitive advantage over rival organisations, or expose them to serious competitive
disadvantage.
Strengths and weaknesses could exist in any key resource, such as:
Intellectual property
Management
Location or distribution channels
Employee skills
Business experience
A complete awareness of the organisation's environment and its internal capacities is necessary for a
rational consideration of future strategy, but it is not sufficient. The threads must be drawn together so that
potential strategies may be developed and assessed.
Effective SWOT analysis does not simply require a categorisation of information; it also requires some
evaluation of the relative importance of the various factors under consideration.
A cruciform chart (literally 'cross form') can be drafted on a flip-chart by the person facilitating the
strategy discussions. Its benefits are:
Limitations on space restricts management to focusing on the big points
Allows mapping of connections between points (see below)

Internal to the company

Strengths Weaknesses

Exist independently of Opportunities Threats

The company

Figure: SWOT Analysis

Match strengths with market opportunities:

Strengths which do not match any available opportunity are of limited use while opportunities which do
not have any matching strengths are of little immediate value.
Conversion:
This requires the development of strategies which will convert weaknesses into strengths in order to take
advantage of some particular opportunity, or converting threats into opportunities which can then be
matched by existing strengths.
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 Model-(12): “TOWS Matrix”

Strengths and weaknesses identified by internal personnel are only relevant if they are perceived as such
by the organisation's consumers. Strengths that cannot be matched with an available opportunity are of
limited value; and likewise, with opportunities that cannot be matched with strengths. Threats can
sometimes be converted into opportunities which can then be matched with strengths. Weaknesses may
also be converted into strengths which can be matched with opportunities.
The organisation should look to match strengths with opportunities, neutralise threats, and overcome
weaknesses. This 'matching' is expressed in the TOWS matrix.

Weirich, one of the earliest writers on corporate appraisal, originally spoke in terms of a TOWS matrix in
order to emphasise the importance of threats and opportunities. It has several benefits:
It provides a clear set of steps to move from SWOT to the formulation of strategic options.
It makes management aware of the need for defensive strategies (WT) in addition to strategies to grasp
opportunities.

Strengths Weaknesses

Opportunities SO Strategies WO Strategies

Threats ST Strategies WT Strategies

Note that this is therefore an inherently positioning approach to strategy. A further important element of
Weirich's discussion was his categorisation of strategic options:
SO strategies employ strengths to seize opportunities.
ST strategies employ strengths to counter or avoid threats.
WO strategies address weaknesses so as to be able to exploit opportunities.
WT strategies are defensive, aiming to avoid threats and the impact of weaknesses.
One useful impact of this analysis is that the four groups of strategies tend to relate well to different time
horizons. SO strategies may be expected to produce good short-term results, while WO strategies are
likely to take much longer to show results. ST and WT strategies are more probably relevant to the
medium term.

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 Model-(13): “Benchmarking”

Benchmarking is defined by the CIMA as:

'The establishment, through data gathering, of targets and comparators, through whose use relative levels
of performance (and particularly areas of underperformance) can be identified. By the adoption of
identified best practices it is hoped that, performance will improve.’

Benchmarking enables organisations to meet industry standards by copying others. It is less valuable as a
source of innovation but is a good way to challenge existing ways of doing things. It involves comparing
your own performance with recognised targets, such as industry averages, and allows you to identify areas
where you are performing relatively well as well as areas where your relative performance is below
expectations.

Bases for/Type of benchmarking:

Internal benchmarking
Historical comparison looks at performance over time to ascertain trends/significant changes, etc. but
the danger is that performance against competitors is ignored.
Branch comparisons within the same organisation may help to identify best practice which can be
implemented in all branches. Again, the danger is ignoring competitors.

Competitive benchmarking
This involves comparing performance with other firms in the same industry or sector. This may involve
the use of league tables (e.g. schools, hospitals, universities). The problem with industry norm
comparisons is that the whole domestic industry may be performing badly (so international comparisons
are better) or the whole international industry is losing out to other industries (so a wider perspective is
needed).
Activity (or best in class) benchmarking
Comparisons are made with best practice in whatever industry can be found. British Airways improved its
aircraft maintenance, refuelling, turnaround, etc. by studying Formula One motor-racing pit teams.

Generic benchmarking
Benchmarking against a conceptually similar process. Again Formula One was used by car manufacturers
to help reduce changeover times on production lines. (Return to the diagram on page 158 to see how
resources and competences are related to SCA and CSFs.)

Usefulness:
1. Assessing strategic position: In this respect, benchmarking can be useful in helping an organisation
assess its current strategic position (as in a SWOT analysis). For example, if an organisation believes that
one of its strengths is the reliability of its products, how can it be sure of this unless it has tested the
reliability of its products against the reliability of other organisations' products?

Equally, however, if a benchmarking exercise identifies that the organisation's products are more reliable
than a competitor's products, the organisation could use these findings as the basis for an advertising
campaign.
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2. Assessing competitive strategy: Benchmarking could also be useful for assessing an organisation's
generic competitive strategy (cost leadership or differentiation). For example, before an organisation
decides to implement a cost leadership strategy it would be useful for the organisation to know what its
competitors' costs are, and therefore whether it can beat them. If the organisation cannot produce a
product or service at a lower cost (or at least the same cost) as its competitors, then it would not seem to
be sensible for it to implement a cost leadership strategy.

The same logic applies to differentiation. Whatever an organisation wants its differentiating factor to be, it
needs to measure its performance in that area against its competitors before deciding whether or not to use
it as the basis for its competitive strategy.

What questions should be asked:

When carrying out benchmarking exercises, you should be asking such questions as:
Why are these products or services provided at all?
Why are they provided in that particular way?
What are the examples of best practice elsewhere?
How should activities be reshaped in the light of these comparisons?

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 Model-(14): “Balanced Scorecard”

In Broad:
Definition:
The scorecard was devised as a way of integrating the traditional financial indicators with nonfinancial
measures, such as operational performance quality, customer satisfaction and staff potential. It is balanced
in the sense that managers are required to think in terms of all four perspectives in order to prevent
improvements being made in one area at the expense of another.
The aspects of the balanced scorecard can be as effective as financial measures (as indicators of long-term
profitability), control mechanisms, business trends or benchmarks against other organizations. They can
act as targets for employees, and will be more effective if linked to the organization’s reward schemes.
The range of perspectives they provide can be a better link with strategy than a few financial measures.
This scorecard offers four perspectives on performance:
Financial
Customer
Internal business
Innovation and learning
Features:
Broadbent and Cullen identify the following important features of this approach:
It looks at both internal and external matters concerning the organisation.
It is related to the key elements of a company's strategy.
Financial and non-financial measures are linked together.
Purpose:
Kaplan and Norton have found that organisations are using the balanced scorecard to:
 Identify and align strategic initiatives
 Link budgets with strategy
 Align the organisation (structure and processes) with strategy
 Conduct periodic strategic performance reviews with the aim of learning more about, and
improving, strategy
Kaplan and Norton suggest that using the balanced scorecard can also help an organisation improve its
strategic performance:
 The process of identifying key outcomes and drivers should help individuals and divisions become
more aware of how their work fits in with the organisation's strategy.
 Giving individuals and divisions regular reports on their performance against key measures will
help them monitor their own performance, and identify areas for improvement.
 The scorecard as a whole should provide senior management with regular information on how
their organisation is performing against key measures, and therefore how well strategies are being
implemented.
Implementation:
The introduction and practical use of the balanced scorecard is likely to be subject to all the problems
associated with balancing long-term strategic progress against the management of short-term tactical
imperatives.
Kaplan and Norton recognise this and recommend an iterative, four-stage approach to the practical
problems involved.
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(a) Translating the vision. The organisation's mission must be expressed in a way that has to have clear
operational meaning for each employee.
(b) Communicating and linking. The next stage is to link the vision or mission to departmental and
individual objectives, including those that transcend traditional short-term financial goals. This stage
highlights an important feature of the scorecard – that it translates strategy into day to day operations.
(c) Business planning. The scorecard is used to prioritise objectives and allocate resources in order to
make the best progress towards strategic goals.
(d) Feedback and learning. The organisation learns to use feedback on performance to promote progress
against all four perspectives.

Strategic application:
If an organisation decides to introduce and use a balanced scorecard, it will then have to decide what
KPIs should be collected, and how these should be reported in a way that helps the organisation make
better decisions.
The choice of KPIs could be informed via the hierarchy identified by Robert Anthony (see section 2.1).
Once the organisational strategy has been defined, this can be distilled into a sequence of vertically
consistent objectives. These objectives should be orientated in a manner that allows the organisation to
improve performance in the business critical processes that support its CSFs (those things the
organisation must excel in to be competitive). The balanced scorecard can then be used to track
performance against the CSFs via the KPIs selected.
It follows, therefore, that the balanced scorecard can be used to track performance at the hierarchical
levels identified by Anthony. Thus, some KPIs will be derived to track operational efficiency; others, to
assess management's tactical performance; and still others, to illustrate the success of the overall
organisational strategy.
284

Example indicators
The exact measures an organisation uses will depend on its context, but the indicators below suggest some
possible measures for each scorecard category:

Financial perspective: Financial perspective

Increase monthly turnover
Increase monthly operating profit (by division)
Improve asset utilisation
Increase market share
Increase ROI
Increase cash flow
Customer perspective: Financial perspective Customer perspective
Increase market share
Number of new customers attracted
Extend product range
Customer satisfaction rating
Number of recommendations or referrals
Customer retention rates
Level of returns/refunds
On-time delivery
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Percentage of sales from new products (introduced in the last two years)
Internal Business Process:
Reduce inventory levels
Reduce lead times
Minimise wastage/errors
Actual delivery dates of new products/services in line with plan
Reliability and usability (for websites in online business)
Security of transactions and credit card handling
arning perspective (learning and growth)
Innovation and learning perspective (Learning & growth):
Develop new products
Time to market (time taken for new product ideas to become 'live')
Percentage of sales from new products (introduced in the last two years)
Number of new products introduced (< last two years) compared to competitors
Ideas from employees
Adaptability and flexibility of staff
Reward and recognition structure for staff

Using the balanced scorecard:

(a) Like all performance measurement schemes, the balanced scorecard can influence behavior among
managers to conform to that required by the strategy. Because of its comprehensive nature, it can be used
as a wide-ranging driver of organisational change.
(b) The scorecard emphasises processes rather than departments. It can support a competence-based
approach to strategy, but this can be confusing for managers and may make it difficult to gain their
support.
(c) Deciding just what to measure can be difficult, especially since the scorecard vertical vector lays
emphasis on customer reaction. This is not to discount the importance of meeting customer expectations,
but purely to emphasise the difficulty of establishing what they are.

Strategy maps
As an extension to the balanced scorecard, Kaplan and Norton also developed the idea of strategy maps,
which could be used to help implement the scorecard more successfully.
Strategy maps identify six stages:
(a) Mission and objectives. Identify the organisation's mission and its key objectives.
(b) Value creation. In the light of the key objectives identified, determine the main ways the
organisation creates value.
(c) Financial perspective. Identify financial strategies to support the overall objective and strategy.
(d) Customer perspective. Clarify customer-orientated strategies to support the overall strategy.
(e) Internal processes. Identify how internal processes support the strategy and help to create value.
(f) Innovation and learning. Identify the skills and competences needed to support the overall strategy
and achieve the objectives.

The sequence of these stages also suggests there is a hierarchy among the different perspectives. The
financial perspective is the highest level perspective, and the measures and goals from the other
perspectives should help an organisation achieve its financial goals.
Page 28 of 43
Perspective Measures
Financial ROCE; shareholder value
↑ ↑
Customer Relationships and loyalty; timeliness of service
↑ ↑
Internal business Quality, efficiency and timeliness of processes
↑ ↑
Innovation and learning Employee skills

In this way, the strategy map highlights how the four perspectives of the scorecard help create value, with
the overall aim of helping an organisation achieve its objectives. It can also help staff appreciate theway
that different elements of performance management are linked to an organisation's overall strategy.
However, it is also important to recognise that the balanced scorecard only measures performance. It does
not indicate that the strategy an organisation is employing is the right one. Therefore, if improvements in
operational performance do not result in improved financial performance, managers may need to rethink
the company's strategy or its implementation plans; for example, whether the areas which have been
targeted for operational improvements really are the ones which are critical in delivering value for the
organisation.
Problems with using the balanced scorecard:
As with all techniques, problems can arise when the balanced scorecard is applied.

 Conflicting measures: Some measures in the scorecard, such as research funding and cost
reduction, may naturally conflict. It is often difficult to determine the balance which will achieve
the best results.
 Selecting measures: Not only do appropriate measures have to be devised but the number of
measures used must also be agreed. Care must be taken that the impact of the results is not lost in
a sea of information.
The innovation and learning perspective is, perhaps, the most difficult to measure directly, since
much development of human capital will not feed directly into such crude measures as rate of new
product launches or even training hours undertaken. It will, rather, improve economy and
effectiveness and support the achievement of customer perspective measures.
When selecting measures it is important to measure those which actually add value to an
organisation, not just those that are easy to measure.
 Expertise: Measurement is only useful if it initiates appropriate action. Non-financial managers
may have difficulty with the usual profit measures. With more measures to consider, this problem
will be compounded.
Measures need to be developed by someone who understands the business processes concerned.
 Interpretation: Even a financially trained manager may have difficulty in putting the figures into
an overall perspective.
 Management commitment: The balanced scorecard can only be effective if senior managers
commit to it. If they revert to focusing solely on the financial measures they are used to, then the
value of introducing additional measures will be reduced.
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 In this context, do not overlook the cost of the scorecard. There will be costs involved in data
gathering and in measuring the performance of additional processes.
It may also be worth considering the following issues in relation to using the balanced scorecard:
(a) It doesn't provide a single aggregate summary performance measure. For example, part of the
popularity of ROI or return on capital employed (ROCE) comes from the fact that they provide a
convenient summary of how well a business is performing.
(b) In comparison to measures like economic value added, there is no direct link between the
scorecard and shareholder value.
(c) Introducing the scorecard may require a shift in corporate culture; for example, in understanding
an organisation as a set of processes rather as departments.
(d) Equally, implementing the scorecard will require an organisation to move away from looking
solely at short-term financial measures, and focus on longer-term strategic measures instead.
The scorecard should be used flexibly. The process of deciding what to measure forces a business to
clarify its strategy. For example, a manufacturing company may find that 50–60% of costs are represented
by bought-in components, so measurements relating to suppliers could usefully be added to the scorecard.
These could include payment terms, lead times and quality considerations.

Financial indicators and ratios:

As the balanced scorecard illustrates, it is important for companies to monitor non-financial performance
metrics as well as financial ones.
Nonetheless, financial performance measures are still important, and the measures used should cover a
balanced range of perspectives:
Growth
Profitability
Liquidity
Gearing
Equally, when an organisation operates in a competitive environment, it should try to obtain information
about the financial performance of competitors, to make a comparison with the organisation's own results.
Competitor financial information that could be obtained:
 Total profits, sales and capital employed
 ROCE, profit/sales ratio, cost/sales ratios and asset turnover ratios
 The increase in profits and sales over the course of the past 12 months and prospects for the future,
which will probably be mentioned in the chairman's statement in the report and accounts
 Sales and profits in each major business segment that the competitor operates in
 Dividend per share and earnings per share
 Gearing and interest rates on debt
 Share price, and P/E ratio (stock exchange information)

In Short:
The balanced scorecard (developed by Kaplan and Norton) emphasises the need for a broad range of key
performance indicators and builds a rational structure that reflects longer-term prospects as well as
immediate performance. A balanced scorecard approach to operational performance analysis links
performance targets and performance measures through all levels of an organisation, from operational
level to strategic level.
Page 30 of 43
The scorecard was devised as a way of integrating the traditional financial indicators with nonfinancial
measures, such as operational performance quality, customer satisfaction and staff potential. It is balanced
in the sense that managers are required to think in terms of all four perspectives in order to prevent
improvements being made in one area at the expense of another.
[The aspects of the balanced scorecard can be as effective as financial measures (as indicators of long-
term profitability), control mechanisms, business trends or benchmarks against other organisations. They
can act as targets for employees, and will be more effective if linked to the organisation's reward schemes.
The range of perspectives they provide can be a better link with strategy than a few financial measures.]
The four perspectives of performance in the balanced scorecard are:
Customer perspective:
Addresses:
Measures relating to what actually matters to customers (time, quality, performance of product)
Example:
Customer complaints
On-time deliveries
Internal business process:
Addresses:
Measures relating to the business processes that have the greatest impact on customer satisfaction
(quality, employee skills)
Example:
Average set-up time
Quality control rejects
Innovation and learning perspective:
Addresses:
Measures to assess the organisation's capacity to maintain its competitive position through the acquisition
of new skills/development of new products.
Example:
Labour turnover rate
% of revenue generated by new products
Financial perspective:
Addresses:
Measures that consider the organisation from the shareholders' viewpoint
Example:
Return on capital employed
Earnings per share
Note, however, that none of the perspectives of Kaplan and Norton's balanced scorecard link directly to
aspects of social responsibility or sustainability, which are becoming increasingly important elements of
an organisation's overall performance. In this respect, in an article for ICAEW's Finance and Management
Faculty ('The new thinking on key performance indicators', May 2006), David Parmenter suggested that
in order to achieve a properly balanced view of performance, the number of perspectives of the balanced
scorecard should be increased to six:
 Financial;
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 Customer;
 Internal process;
 Employee satisfaction;
 Learning and growth; and
 Environment and community.

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 Model-(15): “Levels of strategy”

Strategy is the direction and scope of an organization over the long term, which achieves advantage for
the organization through its configuration of resources within a changing environment, to meet the
needs of markets and to fulfill stakeholder expectations.' (Johnson, Scholes and Whittington).
Strategies can exist at three main levels within organisations: corporate-level strategy, business-level
strategy and operational/functional-level strategy.
Corporate-level strategy: Corporate strategy is concerned with an organisation’s basic direction for the
future, its purpose, its ambitions, its resources and how it interacts with the world in which it operates’
(Lynch). It is generally determined at head office/main board level. The types of matters dealt with
include:
 Determining the overall corporate mission and objectives.
 Overall product/market decisions, e.g. Expand, close down, enter new market, develop new
product etc. via methods such as organic growth, merger and acquisition, joint venture etc.
 Other major investment decisions besides those for products/markets, e.g. information
systems, IT development.
 Overall financing decisions-obtaining sufficient funds at lowest cost to meet the needs of
the business.
 Relations with external stakeholders, e.g. shareholders, bondholders, government, etc.

Business-level strategy: This normally takes place in strategic business units (SBUs). An SBU is 'a
section, within a larger organization, which is responsible for planning, developing, producing and
marketing its own products or services'. Competitive strategy is normally determined at this level covering
such matters as:
 How advantage over competitors can be achieved.
 Marketing issues, such as the 4Ps (Product, Price, Promotion, Place)
Operational/functional-level strategy: This refers to the main functions within each SBU, such as
production, purchasing, finance, human resources and marketing, and how they deliver effectively the
strategies determined at the corporate and business levels.
Typical functional strategies are:
 R&D
 Operations – including purchasing, procurement and supply chain management; capacity
management; production; quality management
 Marketing – including marketing mix, market segmentation and customer relationship
management
 Human resources – including recruitment and selection; remuneration and reward; appraisal
 Finance
 Information systems and information technology (IS/IT)
In most businesses, successful business strategies ultimately depend, to a large extent, on decisions that
are taken, or activities that occur, at operational level. Operational decisions are therefore vital to
successful strategy implementation.
[Just to understand: Equally importantly, though, operational strategies need to be properly aligned with
business-level or corporate-level strategy if these higher-level strategies are going to be successfully
implemented. For example, if a business's competitive strategy is based on delivering the highest quality

Page 33 of 43
service to its customers, then its human resource management will need to ensure that it has sufficient,
well-trained and highly motivated staff to deliver that level of service to its customers.
Although operational strategy may appear to be at the bottom of the strategic hierarchy, this does not
mean that operational strategies are any less important than corporate strategies. Satisfying the customer
is a key task to meet corporate objectives for most businesses; but businesses will not be able to satisfy
their customers if operations are poorly managed, meaning that their strategies will fail.]

Contrasting strategic with operational decisions

The contrasting decisions in organisations can be analysed as in the table below. The contrast between
corporate-level and operational decisions is also important because it means that the type of information
which is required for decision-making at corporate level is very different from that required at operational
level.
Charecteristics Corporate strategic decisions tend Operational decisions tend to be
to be
Defined.
Clarity Ambiguous.
Simple.
Complexity Complex and open-ended.
Whole organisation, or significant
Organisational scope Restricted to the business function.
parts of it.
Consciously fundamental to what the Important, possibly, but does not
Significance
business is doing. question the nature of the business.
Short term, mostly, but could have long-
Time horizon Long term, mostly.
term implications.

For levels of information and decision-making:

Robert Anthony suggested that there are three levels or tiers within an organisation's decision-making
hierarchy.
Strategic planning is the process of deciding on objectives of the organisation, on changes in these
objectives, on the resources used to attain these objectives, and on the policies that are to govern the
acquisition, use and disposition of these resources.
Management control is the process by which managers assure that resources are obtained and used
effectively and efficiently in the accomplishment of the organisation's objectives.
Operational control is the process of assuring that specific tasks are carried out effectively and
efficiently.
The 'management' level is sometimes also called the tactical level; eg, tactics or tactical planning.

Strategic planning, management control and operational control may be seen as a hierarchy of planning
and control decisions. (This is sometimes called the Anthony hierarchy, after the writer Robert Anthony.)

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 Strategic
Planning

Management Control

Operational Control

Figure 4.1: The Anthony hierarchy

Types of information:
Strategic information:
Strategic information is used to plan the objectives of the organization and to assess whether the
objectives are being met in practice. Such information includes overall profitability, the profitability of
different segments of the business, future market prospects, the availability and cost of raising new funds,
total cash needs, total manning levels and capital equipment needs.
Tactical information
Tactical information is used when strategic decisions are implemented. It is used when decisions are made
on how the resources of the business should be employed, to monitor how they are being and have been
employed. Such information includes productivity measurements (output per hour), budgetary control
reports, variance analysis reports, cash flow forecasts, staffing levels within a particular department of the
organization and short-term purchasing requirements.
Operational information:
Operational information is used to ensure that specific operational tasks are planned and carried out as
intended. It assists in controlling the day-to-day activities of an organization and should be pushed
upwards to assist in tactical decision-making if necessary.
[Just to understand: So, for example, store managers working for a supermarket group are likely to need
information about daily or weekly sales against budget, inventory levels and stock-outs, and information
about staffing levels and staff costs. Such information will be tactical information. In turn, the operational
information which informs inventory management, for example, will be the details of individual product
sales which have been scanned through the EPOS tills.]
As well as highlighting the three levels in the hierarchy, it is also important to note the different
characteristics of the information produced (and required) at different levels in the hierarchy:

Strategic information Management (tactical) Operational information

information
 Derived from both  Primarily generated  Derived from internal
internal and external internally (but may have a sources; often includes
sources limited external component) 'transaction data' from
 Summarised at a high  Summarised at a lower level transaction processing
level  Relevant to the short and systems.
 Relevant to the long medium term  Detailed, being the
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 term  Concerned with activities or processing of raw data.
 Concerned with the departments, and with the  Relevant to the immediate
whole organisation efficiency/effectiveness of term
 Often prepared on an resource usage  Task-specific
ad hoc basis  Prepared routinely and  Prepared very frequently
 Both quantitative and regularly  Largely quantitative, but
qualitative  Based on quantitative often expressed in
 Focus on planning; measures (eg, budgets, operational measures (eg,
future orientation benchmarks) units produced,
 Uncertain, as the  Some focus on planning, but transactions processed)
future cannot be greater focus on control. rather than monetary
accurately predicted terms
 Focus on control (rather
than planning)

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 Model-(16): “Strategic Risk analysis”

This involves recognising and assessing risks faced by the organisation, developing strategies to manage
them and mitigating risks using managerial resources. Strategies include transferring risk to other parties,
avoiding the risk altogether, reducing negative effects of the risk and accepting some or all of the
consequences of a particular risk.

Risk appetite
Alongside risk analysis it is also important for companies to articulate their risk appetite. If companies do
not articulate their risk appetite, how can they set suitable strategic goals? For example, can a company
that is only prepared to take a very low level of risk expect to achieve as rapid growth as a company that
is prepared to accept a higher level of risk?

Since risk management is bound up with strategy, how organisations deal with risk will not only be
determined by events and the information available about events, but also by management perceptions or
appetite to take risk. These factors will also influence risk culture, and the values and practices that
influence how an organisation deals with risk in its day to day operations.

1.1 Personal views:

Surveys suggest that managers acknowledge the emotional satisfaction from successful risk taking,
although this is unlikely to be the most important influence on appetite.

1.2 Response to shareholder demand:

Shareholders demand a level of return that is consistent with taking a certain level of risk. Managers will
respond to these expectations by viewing risk taking as a key part of decision-making.

1.3 Organisational influences:

Organisational influences may be important, and these are not necessarily just a response to shareholder
concerns. Organisational attitudes may be influenced by significant losses in the past, changes in
regulation and best practice, or even changing views of the benefits that risk management can bring.

1.4 National influences:

There is some evidence that national culture influences attitudes towards risk and uncertainty. Surveys
suggest that attitudes to risk vary nationally according to how much people are shielded from the
consequences of adverse events.

1.5 Cultural influences:

Adams argued that there are four viewpoints that are key determinants in how risks are viewed.
1) Fatalists: Think they have no control over their own lives hence risk management is pointless
2) Hierarchists: Most likely to exist in a bureaucratic organisation, with formal structures and procedures.
Will emphasise risk reduction through formal risk management procedures

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3) Individualists: Seek to control their environment rather than let their environment control them. Often
found in small, single person dominated organisations with less formal structures, and hence, risk
management too will be informal, if indeed it is considered at all
4) Egalitarians: Loyal to groups but have little respect for procedures. Often found in charities and public
sector, non-profit making activities, prefer sharing risks as widely as possible, or transfer of risks to those
best able to bear them.
Risk management:
The process of identifying and assessing risks and the development, implementation and monitoring of a
strategy to respond to those risks.
Risk management strategy:
A risk management strategy involves the selection, implementation, monitoring and review of suitable
risk treatments for each risk identified.

Once risks have been identified, assessed and quantified, decisions must be taken as to how to respond to
these risks. Methods of dealing with risk include avoidance, reduction, acceptance (retention) and
transfer.

Risk response can be linked into the likelihood/consequences matrix and also the organisation's appetite
for risk taking.

Consequences
Low High
Accept or absorb Transfer
Risks are not significant. Keep Insure risk or implement
Low under review, but costs of contingency plans. Reduction of
dealing with risks unlikely to severity of risk will minimize
be worth the benefits. insurance premiums.
Likelihood Reduce or manage Avoid or control
Take some action, eg, self- Take immediate action to reduce
High insurance to deal with severity and frequency of losses,
frequency of losses. eg, insurance, charging higher
prices to customers or ultimately
abandoning activities.

Risk strategies include:

Risk avoidance –not undertaking the relevant activity
Risk reduction –taking steps to reduce the severity of the impact
Risk transfer –passing the risk to a third party through hedging or insurance
Risk retention –accepting the loss, if and when it occurs.

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 Model-(17): “Shell Directional Policy Matrix”

The matrix (developed by Shell in the 1970s) resembles the BCG matrix, but measures the attractiveness
of the market (based on its potential profitability) and a company's strength to pursue it (based on the
company's competitive capabilities).
Recommendations based on the position of these two elements are shown below:

Business strengthusiness strengths

High Low
High Invest Grow
Market attractiveness
Low Harvest Divest

Figure: Shell Directional Policy Matrix

Explanation of the strategies:

Build: A build strategy forgoes short term earnings and profits in order to increase market share.
This could either be done through organic growth, or through external growth (acquisition; strategic
alliances etc).
Hold: A hold strategy seeks to maintain the current position, defending it from the threat of would-be
'attackers' as and where necessary.
Harvest: A harvesting strategy seeks short-term earnings and profits at the expense of long-term
development.
Divest: Disposal of a poorly-performing business unit or product. Divestment stems the flow of cash to a
poorly performing area of the business and releases resources for use elsewhere.
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Model-(18): “Business Process analysis”

This tool helps organisations improve how they conduct their functions and activities with a view to
reducing costs, improving the efficient use of resources and giving better support to customers. The idea
is to concentrate on and rethink activities that create value for customers while removing any activities
that do not add value.
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 Model-(19): “Value based management (VBM)”

Definition:
Value-based management: A management process which links strategy, management and operational
processes with the aim of creating shareholder value.

Elements:
VBM consists of three elements:
(a) Strategy for value creation – ways to increase or generate the maximum future value for an
organisation
(b) Metrics – for measuring value
(c) Management – managing for value, encompassing governance, remuneration, organization structure,
culture and stakeholder relationships

Creating shareholder value:

Although it is easy to identify the logic that companies ought to be managed for shareholder value, it is
much harder to specify how this can be achieved. For example, a strategy to increase market share may
not actually increase shareholder value.
Good quality information is essential in a VBM system, so that management can identify where value is
being created – or destroyed – in a business. For example, continuing the previous example, there is no
value in increasing market share if the market in question is not profitable.
An organisation will need to identify its value drivers, and then put strategies in place for each of them.
When identifying its value drivers, an organisation may also find that its organisational structure needs
reorganising, to ensure its structure is aligned with the processes which create value.

Measurement:
Introducing VBM will require a change in the performance metrics used in a company. Instead of
focusing solely on historical returns, companies also need to look at more forward-looking contributions
to value: for example, growth and business sustainability. The performance measures used in VBM are
often non-financial.

Managing value:
In today's companies, the intellectual capital provided by employees plays a key role in generating value.
VBM attempts to align the interests of the employees who generate value and the shareholders they create
value for. Otherwise VBM could drive a wedge between those who deliver economic performance
(employees) and those who harvest its benefits (shareholders). In practice, companies try to improve the
alignment between employees and shareholders by using remuneration structures which include some
form of share-based payments.
Successfully implementing VBM will also involve cultural change in an organisation. The employees in
the organisation will need to commit to creating shareholder value. Value is created throughout the
company as a whole, not just by senior management, so all employees need to appreciate how their roles
add value.
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Nonetheless, visible leadership and strong commitment from senior management will be essential for a
shift to VBM to be successful.
However, as with any change programme, implementing VBM could be expensive and potentially
disruptive, particularly if extensive restructuring is required.
Consideration:
A comprehensive VBM programme should consider the following:
(a) Strategic planning – Strategies should be evaluated to establish whether they will maximize
shareholder value.
(b) Capital allocation – Funds should be allocated to the strategies and divisions that will create most
shareholder value.
(c) Operating budgets – Budgets should reflect the strategies the organisation is using to create value.
(d) Performance measurement – The economic performance of the organisation needs to lead to
increases in share prices, because these promote the creation of shareholder wealth.
(e) Management remuneration – Rewards should be linked to the value drivers, and how well
valuebased targets are achieved.
(f) Internal communication – The background to the programme and how VBM will benefit the
business need to be explained to staff.
(g) External communication – Management decisions, and how they are designed to achieve value, must
be communicated to the market. The market's reaction to these decisions will help determine movements
in the organisation's share price.

Implications:
Adopting a value-based approach to management is likely to have wide-ranging implications for a
company.
Culture: Shareholder value must be accepted as the organisation's purpose. This may have greatest
impact at the strategic apex, where directors may have had different ideas on this subject. However, the
importance of creating shareholder value must be emphasised in all parts of the business.
Nevertheless, it is crucial that management do not overlook underlying business processes in the quest for
value-based metrics. Core business processes (for example, quality management, innovation and customer
service) should still be monitored alongside value-based metrics.
Relations with the market: Shareholder value should be reflected in share price. The company's senior
managers must communicate effectively with the market so that their value-creating policies are
incorporated into the share price. However, they must not be tempted to manipulate the market. This may
be a difficult area to manage, as executive rewards should reflect the share price. One way in which
management can communicate performance to the market is through key performance indicators. These
metrics should then, in turn, form the basis of the performance targets for divisional managers to achieve.
Strategic choices: The maximisation of shareholder value must be the objective underlying all strategic
choices. This will affect such matters as resource allocation and HR policies, and will have particular
relevance to the evaluation of expensive projects such as acquisitions and major new product
development.

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[Just to understand: Importantly, VBM starts from the premise that the value of a company is measured
by its discounted future cash flows (not profits). Value is created only when companies invest capital at
returns which exceed the cost of that capital.
Consequently, VBM seeks to use the idea of value creation to align strategic, operational and
management processes to focus management decision-making on what activities create value for the
shareholders.
However, VBM focuses on a company's ability to generate future cash flows, rather than looking at the
profits the company has earned or will earn in the short-term future. Proponents of VBM argue that profit
has become discredited as a performance measure.
VBM highlights that management decisions which are designed to lead to higher profits do not
necessarily create value for shareholders. Often, companies are under pressure to meet short-term profit
targets, and managers are prepared to sacrifice long-term value in order to achieve these short-term
targets. For example, management might avoid initiating a project with a positive net present value if that
project leads to their organisation falling short of expected profit targets in the current period.
Consequently, VBM argues that profit-based performance measures may obscure the true state of a
business. By contrast, VBM seeks to ensure that analytical techniques and management processes are all
aligned to help an organisation maximise its value. VBM does this by focusing management decision
making on the key drivers of value, and making management more accountable for growing an
organisation's intrinsic value.
Therefore, whereas profit-based performance measures look at what has happened in the past, VBM seeks
to 42aximize returns on new investments. What matters to the shareholders of a company is that they earn
an acceptable return on their capital. As well as being interested in how a company has performed in the
past, they are also interested in how it is likely to perform in the future.]

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 Model-(20): “Strategic Value Analysis (SVA)”

One of the benefits of value chain analysis for managers is that it enables them to understand how the
processes they manage add value for the customer. In turn, they can then help identify where the amount
of value added can be increased, or else costs lowered, with a view to enhancing the competitive position
of their organisation.
However, gaining and sustaining a competitive advantage requires an organisation to understand the
entire value delivery system, not just the portion of the value system in which it participates. For example,
the upstream value chain (suppliers) and the downstream value chain (distributors, retailers) are a crucial
part of a manufacturer's value system.
Moreover, the upstream and downstream portions of the value system have profit margins that will be
important when identifying a company's cost/differentiation positioning, since the end user consumer
ultimately pays for the profit margins along the entire value chain.
Strategic value analysis (SVA) highlights the need to analyse business issues and opportunities across the
entire value chain for an industry. Such analysis is critical for multi-stage industries because change in
one stage will almost inevitably have an impact on other businesses all along the chain.
SVA prompts companies to ask four key questions:
(a) Are there any new or emerging players in the industry (in any portion of the value chain) that may be
more successful than existing players?
(b) Are these companies positioned in the value chain differently from existing players? (In particular, are
companies emerging which specialise in single activities within the value chain, eg, marketing and
logistics, rather than trying to cover all activities?)
(c) Are new market prices emerging across segments of the value chain?
(d) If we used these market prices as transfer prices within our company, would it fundamentally change
the way any of the operating units behave?

SVA is particularly relevant to vertically integrated companies, because it encourages them to consider
whether it would be more profitable for them to outsource certain functions or activities rather than
continuing to perform them all in-house.
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