NCCP

SBL Course notes

Syllabus A: Leadership............................................................................................................... 2
Syllabus A1. Qualities of Leadership ..............................................................................................................................2
Syllabus A2. Leadership and Organisational Culture ......................................................................................................22
Syllabus A3. Professionalism, Ethical Codes & The Public Interest................................................................................... 26

Syllabus B: Governance ...........................................................................................................38

Syllabus B1. Agency ..................................................................................................................................................38
Syllabus B2. Stakeholder Analysis & Social Responsibility ..............................................................................................39
Syllabus B3. Governance Scope and Approaches ....................................................................................................... 48
Syllabus B4. Reporting To Stakeholders .......................................................................................................................64
Syllabus B5. The Board Of Directors ...........................................................................................................................77
Syllabus B6. Public sector governance ......................................................................................................................103

Syllabus C: Strategy ..............................................................................................................113

Syllabus C1. Concept of Strategy .............................................................................................................................113
Syllabus C2. Environmental Issues ............................................................................................................................132
Syllabus C3. Competitive Forces...............................................................................................................................143
Syllabus C4. The Internal Resources, Capabilities & Competences of An Organisation....................................................166
Syllabus C5. Strategic Choices .................................................................................................................................176

Syllabus D: Risk.....................................................................................................................196
Syllabus D1. Identification, Assessment & Measurement Of Risk ..................................................................................196
Syllabus D2. Managing, Monitoring and Mitigating Risk ................................................................................................216

Syllabus E: Technology And Data Analytics .............................................................................227

Syllabus E1. Cloud And Mobile Technology ................................................................................................................227
Syllabus E2. Big Data And Data Analytics ...................................................................................................................231
Syllabus E3. Principles of e-business .........................................................................................................................235
Syllabus E4. IT Systems Security And Control.............................................................................................................253

Syllabus F: Organisational Control And Audit ...........................................................................259

Syllabus F1. Management and Internal Control Systems ..............................................................................................259
Syllabus F2. Audit and Compliance ...........................................................................................................................270
Syllabus F3. Internal Control And Management Reporting ............................................................................................281

Syllabus G: Finance in Planning and Decision-Making .............................................................284

Syllabus G1. Finance Function ..................................................................................................................................284
Syllabus G2. Financial Analysis & Decision-Making Techniques..................................................................................... 288
Syllabus G2. Adjusting For Risk And Uncertainty In Investment Appraisal ........................................................................318
Syllabus G3. Cost And Management Accounting ....................................................................................................... 332

Syllabus H: Innovation, Performance Excellence & Change Management .................................360

Syllabus H1. Enabling Success: Organising ...............................................................................................................360
Syllabus H2. Enabling Success: Disruptive Technology ................................................................................................375
Syllabus H3. Enabling Success: Talent Management ..................................................................................................378
Syllabus H4. Enabling Success: Performance Excellence ............................................................................................381
Syllabus H5. Managing Strategic Change ..................................................................................................................387
Syllabus H6. Managing Innovation And Change Management ......................................................................................400
Syllabus H7. Leading And Managing Projects.............................................................................................................409

1
 Syllabus A: Leadership
Syllabus A1. Qualities of Leadership

Syllabus A1ac. Effective Leadership and Key Leadership Traits.

Effective Leadership

Leadership is:
Influencing an organisation in its efforts towards achieving an aim

Effective leadership is vital. But it comes in many forms. However, a clear, well

communicated vision is key to inspiring others.

Effective leadership is ethical. Behaviour and decision-making show a high standard of

ethics, continuing therefore through the whole organisation.

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Perspectives on leadership

1. Power-Influence Approach

This is power in relation to subordinates, peers, superiors and external stakeholders.

Leadership can be autocratic (leaders exercise significant power)

Leadership can be participative (power is limited and subordinates exercise more

decision-making and autonomy).

2. Situational Approach

Different leadership traits, skills and behaviours will be effective in different situations.

Success depends on the characteristics of the followers, nature of the work performed,
type of organisation and the external environment.

Sometimes called the Contingency Theory.

3. Integrative Approach

This means considering more than one type of the leadership variables described above.

3
 Syllabus A1a. Introduction to Leadership Theories

Leaders can think creatively in non-routine situations &

influence the actions, beliefs and feelings of others

In this sense being a leader is personal.

It comes from a person's qualities and actions.

However, it is also often linked to some other role such as manager or expert.

Here there can be a lot of confusion. Not all managers, for example, are leaders; and not all
leaders are managers.

4 main generations of Leadership theory

It is important to recognize that none of the four ‘generations’ is mutually exclusive or totally
time-bound.

1. Trait theories

2. Behavioural theories

3. Contingency theories

4. Transformational theories

The next few sections we will look at these in more detail..

4
 Syllabus A1a. Trait Theory

If we can identify the distinguishing characteristics of

successful leaders, we will at least be able to select
good leaders

A number of common traits can be found in good leaders

1. Ability to solve problems creatively

2. Ability to communicate and listen

3. Many interests and sociability

4. Self-Confidence

5. Enthusiasm

6. Self-Discipline

7. Manners

8. Emotional stability

9. Positive & Sincere attitudes towards subordination

Leaders are people, who are able to express themselves fully.

They also know what they want, why they want it, and how to communicate what they want
to others, in order to gain their co-operation and support.

Lastly, they know how to achieve their goals.

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But what is it that makes someone exceptional in this respect?

As soon as we study the lives of people who have been labelled as great or effective
leaders, it becomes clear that they have very different qualities.

We only have to think of political figures like Nelson Mandela, Margaret Thatcher and Mao
Zedong to confirm this.

Instead of starting with exceptional individuals many turned to setting out the general
qualities or traits they believed should be present.

Surveys of early trait research by Stogdill (1948) and Mann (1959) reported that many
studies identified personality characteristics that appear to differentiate leaders from
followers.

Problems with Trait Theories

It's not always true

As Peter Wright (1996: 34) has commented, ‘others found no differences between leaders
and followers with respect to these characteristics, or even found people who possessed
them were less likely to become leaders’.

Yet pick up almost any of the popular books on the subject today and you will still find a list
of traits that are thought to be central to effective leadership.

The basic idea remains that if a person possesses these she or he will be able to take the
lead in very different situations. At first glance, the lists seem to be helpful. But spend any
time around them and they can leave a lot to be desired

Different situations need different traits

The first problem is that the early searchers after traits often assumed that there was a
definite set of characteristics that made a leader - whatever the situation. In other words,
they thought the same traits would work on a battlefield and in the staff room of a school.

They minimised the impact of the situation (Sadler 1997). They, and later writers, also
tended to mix some very different qualities.

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Some are aspects of a person's behaviour, some are skills, and others are to do with
temperament and intellectual ability

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The list is very big but still not exhaustive

Like other lists of this nature it is quite long - so what happens when someone has some but
not all of the qualities?

On the other hand, the list is not exhaustive and it is possible that someone might have other
‘leadership qualities’. What of these?

More recently people have tried looking at what combinations of traits might be good for a
particular situation. There is some mileage in this. However, it remains an inexact science!

Different traits needed for different genders?

One of the questions we hear most often around such lists concerns their apparent
‘maleness’ (e.g. Rosener 1997).

When men and women are asked about each others characteristics and leadership qualities,
some significant patterns emerge.

Both tend to have difficulties in seeing women as leaders.

The attributes associated with leadership on these lists are often viewed as male. However,
whether the characteristics of leaders can be gendered is questionable.

If it is next to impossible to make a list of leadership traits that stands up to questioning, then
the same certainly applies to lists of gender specific leadership traits!

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 Syllabus A1a. Behavioural Theory

This is a move from leaders to Leadership

As the early researchers ran out of steam in their search for traits, they turned to what
leaders did - how they behaved (especially towards followers).

This became very popular in organisations in the 1950s and early 1960s.

Different patterns of behaviour were grouped together and labelled as styles.

This became a very popular activity within management training – perhaps the best known
being Blake and Mouton’s Managerial Grid (1964; 1978).

The four main styles that appear are:

1. Concern for task:

Here leaders emphasise the achievement of concrete objectives.

They look for high levels of productivity, and ways to organise people and activities in
order to meet those objectives.

2. Concern for people:

In this style, leaders look upon their followers as people - their needs, interests,
problems, development and so on.

They are not simply units of production or means to an end.

3. Directive leadership:

This style is characterised by leaders taking decisions for others - and expecting
followers or subordinates to follow instructions.

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4. Participative leadership:

Here leaders try to share decision-making with others.(Wright 1996: 36-7)

Often concern for task is set against concern for people; and directive is contrasted with
participative leadership.

If you have been on a teamwork or leadership development course then it is likely you
will have come across some variant of this in an exercise or discussion.

Many of the early writers that looked to participative and people-centred leadership,
argued that it brought about greater satisfaction amongst followers (subordinates).

Problems with Behavioural Theory

No 1 style is best

However, as Sadler (1997) reports, when researchers really got to work on this it didn’t
seem to stand up. There were lots of differences and inconsistencies between studies. It
was difficult to say style of leadership was significant in enabling one group to work
better than another.

Different styles suit different situations

Perhaps the main problem, though, was one shared with those who looked for traits
(Wright 1996: 47). The researchers did not look properly at the context or setting in
which the style was used. Is it possible that the same style would work as well in a gang
or group of friends, and in a hospital emergency room?

The styles that leaders can adopt are far more affected by those they are working with,
and the environment they are operating within, than had been originally thought.

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 Syllabus A1a. Transformational Theory

Transformational Leaders are the opposite of

transactional leaders

The transactional leader:

Recognises what it is that we want to get from work and tries to ensure that we get it if
our performance merits it

Exchanges rewards and promises for our effort

Is responsive to our immediate self interests if they can be met by getting the work done.

The Transformational leader

Raises our level of awareness about the significance and value of designated outcomes,
and ways of reaching them

Gets us to transcend our own self-interest for the sake of the team, organisation or larger
polity

Alters our need level (after Maslow) and expands our range of wants and needs

Transformational Leaders are visionary leaders who seek to appeal to their followers
better nature and move them toward higher and more universal needs and purposes. In
other words, the leader is seen as a change agent

It is impossible to say how effective transformational leadership is with any degree of

certainty.

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 We will return to some questions around charisma later – but first we need to briefly
examine the nature of authority in organisations (and the relationship to leadership).

Authority

Frequently we confuse leadership with authority.

Authority is often seen as the possession of powers based on formal role. In

organisations we obey managers because we see their exercise of power as legitimate.
It may also be that we fear the consequences of not following their orders or ‘requests’.

We may also follow them because they show leadership. As we have seen, the latter is
generally something more informal

In this way, leaders don’t simply influence; they have to show that crises or unexpected
events and experiences do not faze them.

Leaders may have formal authority, but they rely in large part on informal authority. This
flows from their personal qualities and actions. They may be trusted, respected for their
expertise, or followed because of their ability to persuade.

The leader also relies on ‘followers’ for feedback and contributions. Without these they
will not have the information and resources to do their job. Leaders and followers are
interdependent.

People who do not have formal positions of power can also enjoy informal authority. In a
football team, for example, the manager may not be the most influential person. It could
be an established player who can read the game and energise that colleagues turn to.

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 Charisma

Before moving on it is important to look at the question of charisma.

Charisma is, literally, a gift of grace or of God

Such leaders gain influence because they are seen as having special talents or gifts that
can help people escape the pain they are in

When thinking about charisma we often look to the qualities of particular individuals -
their skills, personality and presence. But this is only one side of things.

To make our lives easier we may want to put the burden of finding and making solutions
on someone else. In this way we help to make the role for ‘charismatic leaders’ to step
into.

They in turn will seek to convince us of their special gifts and of their solution to the crisis
or problem.

When these things come together something very powerful can happen. It doesn’t
necessarily mean that the problem is dealt with - but we can come to believe it is.
Regarding such leaders with awe, perhaps being inspired in different ways by them, we
can begin to feel safer and directed. This can be a great resource.

Someone like Martin Luther King used the belief that people had in him to take forward
civil rights in the United States. He was able to contain a lot of the stress his supporters
felt and give hope of renewal. He articulated a vision of what was possible and worked
with people to develop strategies.

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 Steve Jobs used his charisma with Apple to take it from a small failing tech company to
the biggest company in the world

But there are also considerable dangers.

By placing people on a pedestal the distance between ‘us’ and ‘them’ widens. They
seem so much more able or in control.

Rather than facing up to situations, and making our own solutions, we remain followers
(and are often encouraged to do so).

Just as we turned to charismatic leaders, we can turn against them. Especially when, or
if, he has not made things better. It might be that some scandal or incident reveals the
leader in what we see as a bad light. Whatever, we can end up blaming, and even
destroying, the leader.

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 Syllabus A1a. Contingency Theory

The idea that what is needed changes from situation to

situation

Another way of putting this is that particular contexts would demand particular forms of
leadership.

This placed a premium on people who were able to develop an ability to work in different
ways, and could change their style to suit the situation.

What began to develop was a contingency approach. The central idea was that effective
leadership was dependent on a mix of factors.

Three things are important here:

1. The relationship between the leaders and followers: If leaders are liked and respected
they are more likely to have the support of others.

2. The structure of the task: If the task is clearly spelled out as to goals, methods and
standards of performance then it is more likely that leaders will be able to exert influence.

3. Position power: If an organisation or group confers powers on the leader for the purpose
of getting the job done, then this may well increase the influence of the leader

Models like this can help us to think about what we are doing in different situations.

For example, we may be more directive where a quick response is needed, and where
people are used to being told what to do, rather than having to work at it themselves.

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Problems with Contingency Theories

A North American bias

Some cultures are more individualistic, or value family as against bureaucratic models, or
have very different expectations about how people address and talk with each other.

All this impacts on the choice of style and approach

Gender Differences

As we saw earlier, there may be different patterns of leadership linked with men and women.

Some have argued that women may have leadership styles that are more nurturing, caring
and sensitive. They look more to relationships. Men are said to look to task.

However, there is a lot of debate about this. We can find plenty of examples of nurturing men
and task-oriented women.

Any contrasts between the style of men and women may be down to the situation.

In management, for example, women are more likely to be in positions of authority in people-
oriented sectors – so this aspect of style is likely to be emphasised

Not enough on structure of relationship

The focus is mainly on the relationship between managers and immediate subordinates, and
says little about issues of structure, politics or symbols

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 Syllabus A1a. Visionary Leadership

Leadership traits for Strategy Implementation and

Change:

Vision

Clear direction about what needs to be done;

Communication

Listening to what others have to say and enabling them to gain trust in you

Passion & Motivation

Inspiring others to work harder through passion and making others see the purpose & value
in what they do

Flexibility

Adapting one’s leadership style to the circumstances in which one has to lead.

Criticisms of leadership traits

1. Possession of all the traits is impossible

2. There are too many exceptions

3. Good leaders may have many of these qualities but possession of them does not always

make one a good leader

4. The traits are so ill defined as to be useless in practice

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 Syllabus A1a. The Style Of Leadership And Strategic Change

Kotter and Schlesinger identified 6 methods of dealing

with resistance to change:

Education and Communication

Raising awareness and providing knowledge on the reasons, main outcomes and underlying

benefits of the change process

Participation and Involvement

Employees provide a direct input in the decision making process.

This method reduces the resistance by taking the employees views into account.

In view of such involvement, a lower probability of resistance is likely.

Facilitation and Support

Providing counselling or training to employees to enable them to overcome their fears and

anxieties

Negotiation and Agreement

Reaching comprising and bargaining with the people or their representative being impacted

by the change

Compensating those who lose out (e.g. redundancy package)

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Manipulation and Co-optation

Selective dissemination and distortion of information to convey the more positive benefits of

the change.

This method involves the presentation of partial or misleading information to those resisting

change or "buying-off" the main individuals who are at the heart of the resistance.

Coercion

Undertaking a compulsory approach by management to implement change.

This involves the use or threat of force to push through the change.

A very last resort if parties are operating from fixed positions and are unwilling to move.

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 Syllabus A1a. Theory X and Y

Do the quiz you hairy, SBL loving, goofball..

https://www.acowtancy.com/textbook/acca-sbl/a1-qualities-of-leadership/theory-x-and-y/quiz

20
 Syllabus A1b. Entrepreneurship

Entrepreneurship

A process where individuals or organisations identify and exploit opportunities for new
products that satisfy a market need

Intrapreneurship

Applying entrepreneurial principles within organisations.

Intrapreneurship can help innovation, for example by giving employees more autonomy,
encouraging a risk-taking culture and rewarding intrapreneurial behaviour

Social entrepreneurship is applying similar principles to addressing social problems and

needs

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 Syllabus A2. Leadership and Organisational Culture

Syllabus A2a. Leadership In Defining & Managing Organisational Culture

An organisation's culture may be influenced by a

number of factors:

1. The National Culture

...where the organisation is located

2. The Founders

..particularly if the organisation is fairly new

3. The History of the Organisation

An organically grown org is more likely to have a distinctive culture than one which has
grown by acquisition (as it had to absorb other cultures)

4. Current Leadership Style

For example, an autocratic style may encourage a "compliance culture".

5. Organisational Structure

Organisations sometimes restructure to try to change their culture.

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 Syllabus A2c. Cultural web and organisational change

The Cultural Web

23
The Cultural Web was explored in a previous lecture and is reproduced below:

1. Identify what changes need to be made to the current paradigm.

2. Map out an organisation’s position on the various aspects outlined in the web;

3. Set out a strategy to change the various elements in the cultural web.

The impact of change of each element on the cultural web is reproduced below:

Stories

Identify the core beliefs of the stories and extent of their pervasiveness within the
organisation; Do they show the ‘reality’ that management wants

Daily routine in the organization

Routines & Rituals office timings, long working hours, punctuality, strictness, leaves, etc.

Do they help or hinder? To what extent can these be changed?

Gain insight on the type of message driven by training programmes;

Organisational Structures

The type of structure used Functional/Project Based; What is the level of hierarchy ;

What is the type of power structure being deployed; Is it now appropriate for the desired
change?

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 cost focused or quality focused
Control Systems

What are the key controls put in place;

What form of incentive schemes and motivation tools are being adopted; Are they
appropriate and promote the desired change?

Power Structures

What values are being enforced by the leaders; Do they fully believe in the change required?
How is power distributed across the organisation?

show-off, status symbols

Symbols

What is the overall language and jargon used at the place of work? What status symbols are
associated with the organisation? What aspects of strategy that are highlighted in publicity?
Are they a barrier or help to change?

Overall

What is the dominant culture? How easy is this to change.

25
 Syllabus A3. Professionalism, Ethical Codes & The Public
Interest

Syllabus A3a. Tucker's Model

Tucker’s 5-question model

Is the decision:

profitable?

legal?

fair?

right?

sustainable or environmentally sound?

It might be the case that not all of Tucker’s criteria are relevant to every ethical decision.

The reference to profitability means that this model is often more useful for examining
corporate rather than professional or individual situations.

When the model asks, ‘is it profitable?’, it is reasonable to ask, ‘compared to what?’

‘Similarly, whether an option is ‘fair’ depends on whose perspective is being adopted.

This might involve a consideration of the stakeholders involved in the decision and the
effects on them.

Whether an option is ‘right’ depends on the ethical position adopted.

26
Using Tucker's Model

In the exam you may be asked to assess a situation using this model

Although some marks will be available for remembering the questions in the model, the
majority of marks will be assigned for its application.

If the situation is relatively complex, exam answers should reflect that complexity, showing,
for example, the arguments for and against a given question in the model and also showing
this in the final decision.

In most situations, the model can be used as a basis for identifying the factors that need to
be addressed.

In only the most clear-cut cases, or when the case provides a minimum of information, will
the decision be straightforward.

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 Syllabus A3b. Professions and the Public Interest

Professions and the public interest

Profession

Has two essential and defining characteristics:

1. A body of theory

2. Knowledge which guides its practice and commitment to the public interest

Professionalism

Professionalism may be interpreted more as a state of mind while the profession provides
the rules that members of that profession must follow.

Over time, the profession appears to be taking more of a proactive than a reactive approach.
This means seeking out the public interest and positively contributing towards it

Employees
Customers
The Public Interest Suppliers
Society
Providing information that society as a whole should be aware of in many cases ‘public
interest’ disclosure is used to establish that disclosure is needed although there is no law to
confirm this action

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A professional accountant

Society accords professional status to those that both possess a high level of technical
knowledge in a given area of expertise (accounting, engineering, law, dentistry, medicine) on
the understanding that the expertise is used in the public interest.

The body of knowledge is gained through passing examinations and gaining practical
expertise over time. Acting in the public interest means that the professional always seeks to
uphold the interests of society and the best interests of clients (subject to legal and ethical
compliance).

Fundamental principles (responsibilities) as a professional

Society has reasonable expectations of all professionals. The major professional

responsibilities of any professional are as follows:

1. Integrity

The highest levels of probity in all personal and professional dealings. Professionals
should be straightforward and honest in all relationships.

2. Objectivity

Professionals should not allow bias, conflicts of interest or undue influence to cloud their
judgements or professional decisions.

3. Professional competence and due care

Professionals have a duty to ensure that their skills and competences are continually
being updated and developed to enable them to serve clients and the public interest.

4. Confidentiality

Professionals should, within normal legal constraints, respect the confidentiality of any
information gained as a result of professional activity or entrusted to them by a client.

5. Professional behaviour

Professionals should comply fully with all relevant laws and regulations whilst at the
same time avoiding anything that might discredit the profession or bring it into disrepute.

29
Responsibilities to employer

• Acting with diligence, probity and care in all situations.

• Absolute discretion of all sensitive matters both during and after the period of
employment.

• To act in shareholders - interests as far as possible and that he or she will show loyalty
within the bounds of legal and ethical good practice.

Responsibilities as a professional

• To observe the letter and spirit of the law in detail and of professional ethical codes
where applicable

• If no codes, apply - principles-based - ethical standards (such as integrity and probity)

such that they would be happy to account for their behaviour if so required.

• To act in the public interest

• Accounting has a large potential impact on the public - the working of capital markets -
and hence the value of tax revenues, pensions and investment - rests upon accountants
- behaviour.

• The stability of business organisations - and hence the security of jobs and the supply of
important products - also depends on the professional behaviour of accountants.

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 Syllabus A3c. Ethical Codes

Ethical Codes

Purposes of codes of ethics

To convey the ethical values of the company to employees, customers, communities and
shareholders.

To control unethical practice by limiting and prescribing behaviour in given situations

To stimulate improved ethical behaviour by insisting on full compliance with the code.

Contents of a corporate code of ethics

Remember this by the useful acronym ETHICS..

E mployees policies eg equal opportunities policies, training etc

T ransparent & Truthful Treatment of shareholders

H ow customers are treated (complaint procedures etc)

I nclude everyone affected (e.g. Community and wider society)

C ompany Values

S ourcing of products/ materials done ethically

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Professional Codes of Ethics

Content

1. Introduction

(Background and disciplinary measures)

2. Fundamental Principles

(Summary)

3. Conceptual Framework

(How principles are applied)

4. Detailed Application

(Specific circumstances)

Principles

1. Integrity

2. Objectivity

3. Professional Competence

4. Confidentiality

5. Professional Behaviour

6. Limitations of Codes

32
Limitations

They can convey the (false) impression that professional ethics can be reduced to a set of
rules contained in a code.

Personal integrity is needed also emphasised.

Ethical codes do not and cannot capture all ethical dilemmas that an accountant will
encounter.

Regional variations mean that such codes cannot capture important differences in emphasis
in some parts of the world.

The moral ‘right’ cannot be prescribed in every situation.

Professional codes of ethics are not technically enforceable in any legal manner

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 Syllabus A3de. Ethical threats

Ethical threats

You are an ASS IF you get caught doing any of these ;-)

A dvocacy

S elf-interest

S elf-review

I ntimidation

F amiliarity

Safeguards against these threats:

1. Be professional

CPD; Corporate governance regulations; professional monitoring and discipline

2. Create the right environment

Internal controls, reviews, ethics codes, discipline and reward systems

3. Individual ethics

comply with profession standards; mentoring, contact ACCA if in doubt, whistle-blowing

34
 Syllabus A3f. Bribery and Corruption

Bribery and corruption

Bribery

= "the offering, giving, receiving or soliciting of any item of value to influence the actions of
an official or other person in charge of a public or legal duty."

Bribing another person

You are guilty of this if you:

1. Offer

2. Promise or

3. Give an advantage

... to someone who you want to act improperly.

Being bribed

The recipient is also guilty.

If a person in your business bribes another personal to give your business an advantage -
the business is guilty then too.

35
How the business can avoid conviction

Must demonstrate that it had adequate procedures (see later) in place designed to prevent
bribery.

Practical steps to take

• Small and medium-sized enterprises will inevitably have fewer resources to counter

bribery than larger companies.

• Director-level and senior management support.

• Make sure that all senior managers and directors understand that they could be

personally liable.

• It is important that senior management lead the anti-bribery culture of the business,

especially if it wants to take advantage of the “adequate procedures” defence to the

offence of failing to prevent bribery.

Risk assessment

1. Make sure the risks that the business may be exposed to, are understood.

For example, certain industry sectors (such as construction, energy, oil and gas, defence
and aerospace, mining and financial services) and countries present a greater risk as
employees are more likely to engage in bribery in these areas.

2. Review how potential customers are entertained, especially those from government
agencies or state-owned enterprises or charitable organisations.

Routine or inexpensive corporate hospitality is unlikely to be a problem, but have clear

guidelines in place that everybody understands.

3. If the business operates in foreign jurisdictions, always check local laws.

4. Think about the types of transactions that the business engages in; who the transactions
are with and how they are undertaken.

36
High-risk transactions include:

procurement and supply chain management;

involvement with regulatory relationships (for example, licences or permits); and

charitable and political contributions.

Dealing with third parties

Review all relationships with any partners, suppliers and customers.

For example, if an agent or distributor uses a bribe to win a contract for the business, the
business could be liable.

Ensure background checks are carried out on any agents or distributors before engaging
them.

Policies and procedures

Review any existing policies and procedures that the business has on preventing bribery
and corruption and decide whether they need to be updated.

If the business operates in a high-risk industry sector or country, consider introducing a

compulsory training programme for all staff.

Corruption

= "the abuse of entrusted power for private gain".

37
 Syllabus B: Governance
Syllabus B1. Agency

Syllabus B1ab. Agency Relationship

Agency

Agency is defined in relation to a principal. What?! Well all this means is an owner (principal)

lets somebody run her business (manager).

The agent is doing this job on behalf of someone else.

Footballers, film stars etc all have agents. They work on behalf of the star. The star hopes

that the agent is working in their best interest and not just for their own commission…

Principals and Agents

A principal appoints an agent to act on his or her behalf.

In the case of corporate governance, the principal is a shareholder and the agents are the
directors.

The directors are accountable to the principals

Agency Costs

• A cost to the shareholder through having to monitor the directors

• Over and above normal analysis costs

• A result of comprised trust in directors

38
 Syllabus B2. Stakeholder Analysis & Social Responsibility

Syllabus B2a. The Mendelow Framework

Understanding the Influence of each Stakeholder

(MENDELOW)

This framework is used to attempt to understand the influence that each stakeholder has
over an organisation’s strategy.

The idea is to establish which stakeholders have the most influence by estimating each
stakeholder’s individual power over – and interest in – the organisation’s affairs.

The stakeholders with the highest combination of power and interest are likely to be those
with the most actual influence over objectives.

The Mendelow Framework

• Power

Is the stakeholder’s ability to influence objectives

• Interest

Is how much the stakeholders care

• Influence

= Power x Interest

39
However, it is very hard to effectively measure each stakeholder’s power and interest.

The ‘map’ is not static; changing events can mean that stakeholders can move around the
map

40
Mendelow Framework – explanation

• A) Low power, low Interest - Minimal effort minority shareholders

These can be largely ignored, although this does not take into account any moral or
ethical considerations.

It is simply the stance to take if strategic positioning is the most important objective.

majority is here
employees
• B) Low power, high interest - Keep informed community / society
smaller customers
Can increase their overall influence by forming coalitions with other stakeholders in order
to exert a greater pressure and thereby make themselves more powerful.

The management strategy for dealing with these stakeholders is to ‘keep informed’.

government
• C) High power, low interest - Keep satisfied major customers
All these stakeholders need to do to become influential is to re-awaken their interest.

This will move them across to the right and into the high influence sector, and so the
management strategy for these stakeholders is to ‘keep satisfied’.

• D) High power, high interest - Key players BOT/BOD

major shareholder
Those with the highest influence.

The question here is how many competing stakeholders reside in that quadrant of the
map.

If there is only one (eg management) then there is unlikely to be any conflict in a given
decision-making situation.

If there are several and they disagree on the way forward, there are likely to be
difficulties in decision making and strategic direction.

41
 Syllabus B2b. Stakeholders Definitions and Influence

Stakeholders Definitions and Influence

Definition
Freeman,1984 defined a stakeholder as:

‘Any group or individual who can affect or [be] affected by the achievement of an
organisation’s objectives’.

This definition shows important bi-directionality of stakeholders - that they can be affected by
- and can affect - an organisation.

Small v large companies’ stakeholders

Compare, for example, the different complexities of a small organisation, such as a corner
shop with a large international organisation as a major university.

The stakeholders can be:

1. shareholders

2. management

3. employees

4. trade unions

5. customers

6. suppliers

7. communities

42
Stakeholder Theory

Business are now so large and pervasive they are accountable to more than just direct
shareholders; they are also accountable to other stakeholders

STAKEHOLDER ‘CLAIMS’

A stakeholder makes demands of an organisation.

Some shareholders want to influence what the organisation does (those stakeholders who
want to affect) and the others are concerned with the way they are affected by the
organisation.

Some stakeholders may not even know that they have a claim against an organisation, this
brings us to the issue of..

• Direct stakeholder claims

Direct stakeholder claims are made by those with their own ‘voice’.

These claims are usually unambiguous, and are made directly between the stakeholder
and the organisation.

Stakeholders making direct claims will typically include:

1. trade unions

2. shareholders

3. employees

4. customers

5. suppliers

6. in some instances, local communities

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• Indirect stakeholder claims

Indirect claims are made by those stakeholders unable to make the claim directly
because they are, for some reason, inarticulate or ‘voiceless’.

This does not invalidate their claim however.

Typical reasons for this include the stakeholder being:

• (apparently) powerless (eg an individual customer of a very large organisation)

• not existing yet (eg future generations)

• having no voice (eg the natural environment), or

• being remote from the organisation (eg producer groups in distant countries).

The claim of an indirect stakeholder must be interpreted by someone else in order to be

expressed, and it is this interpretation that makes indirect representation problematic.

How do you interpret, for example, the needs of the environment or future generations?

The example is an environmental pressure group

44
 Syllabus B2c. Corporate Social Responsibility

organizations they involve in charitable activities social activities

or the betterment of the society which means that they are contributing in social welfare of the society

Corporate
기업의 사회적 책임 Social Responsibility
it’s a very strong marketing tool

This is concerned with business ethics and accountability to stakeholders.

Companies should look after ALL shareholders and be transparent in its dealings with them
when compiling corporate reports

CSR requires directors to look at the aims and purposes of the company and not assume
profit to be the only motive for shareholders

Arrangements should be put in place to ensure that the business is conducted in a

responsible manner.

This includes environmental and social targets, monitoring of these and continuous
improvement

There is pressure now for companies to show more awareness and concern, not only for the
environment but for the rights and interests of the people they do business with.

Governments have made it clear that directors must consider the short-term and long-term
consequences of their actions, and take into account their relationships with employees and
the impact of the business on the community and the environment.

45
Why prepare a social report?

• Build their reputation on it (eg body shop)

• Society expects it (Shell)

• Long term it will increase profits

• Fear that governments may force it otherwise

How companies interact responsibly with society

Provide fair pay to employees

Safe working environment

Improvements to physical infrastructure in which it operates

Is it against the maximising shareholder wealth principle?

Organisations are rarely controlled by shareholders as most are passive investors.

This means large companies can manipulate markets - so social responsibility is a way of
recognising this, and doing something to prevent it happening from within.

Also, of course, business get help from outside and so owe something back.

They benefit from health, roads, education etc of the workforce and suppliers and
customers.

This ‘social contract’ means that the companies then take on their own social responsibility

46
Human Capital Reporting

Sees employees as an asset not an expense and competitve advantage is gained by

employees.

The training, recruitment, retention and development of employees is all part of what would
therefore be reported

Implications:

People are a resource like any other and so needs to be effectively and efficiently managed

Safeguarding of the asset as normal

Impairment could mean a simple drop in motivation

Human Capital Management reports should:

• Show size of workforce

• Retention rates

• Skills needed for success

• Training

• Remuneration levels

• Succession planning

47
 Syllabus B3. Governance Scope and Approaches

Syllabus B3a. The Major Areas Of Organisational Life

The major areas of organisational life

i. Duties of Directors &Functions of the Board

Duties of Directors are:

1. to carry out their fiduciary duties to act in the best interest of the company

2. to use their powers in the appropriate way grounded according to statute and case law

3. to avoid conflicts of interests

4. to exercise a duty of care.

ii. The composition and balance of the board (and board committees)
The balance of the board is very important to the success of the company.

There are various ways boards can be made up from single tier, two or even three tier, but

the board must be balanced in terms of skills, knowledge, experience, skills, and in some

specialist areas gender and ethnicity also need to be considered.

48
iii. Relevance and reliability of corporate reporting and external auditing.
An important factor to investors are issues around financial reporting and external auditing,

as they provide indicators to the importance of management accountability.

Issues around reporting can be two fold:

• Internal auditors may not wish to ask difficult questions as they are asking these

questions to people who provide their employment.

• External auditors may not wish to ask awkward questions as they do not want to lose the

contract.

- Fixed pay
iv. Directors’ remuneration and rewards. - Variable / Performance based incentives
It has been reported in the media about ‘fat cat ‘salaries, and the abuse of the corporate

world in paying these salaries.

Strong corporate governance can help to stem these issues.

v. Responsibility of the board for risk management systems and internal

control.
It is the boards responsibility to ensure that they meet regularly, and if they do not then they

are failing to fulfil their responsibilities, and therefore are not in the position to manage risk

appropriately.

There needs to be robust reporting systems so that adequate systems are in place to

measure and report risk.

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vi. The rights and responsibilities of shareholders, including institutional
investors
All shareholders, and investors have the right to all relevant material that may have an effect

on their investment.

They should also have the right to vote on any measures that affect the management and

governance of the organisation.

vii. Corporate social responsibility and business ethics.

Corporate social responsibility and business ethics may not seem an important part of

corporate governance, but it is.

Inclusive corporate social responsibility can be a way to create solid business success, as

the relationship between a company and its stakeholders become jointly beneficial.

50
 Syllabus B3a. Shareholders

Shareholders and other investors

Now time for the big boys… the most important external actors in corporate governance.

They do, after all, own the business that we are looking to run and direct properly.

“Other Investors” include fixed-return bond-holders

Shareholders have the right to . . .

1. Elect representatives to the board of directors at the annual shareholder meeting

2. Recall board members who are not doing their job

3. Recommend amendments or propose policy to the Board

4. Call special meetings

5. Request shareholder education/training programs

Shareholders have the responsibility to . . .

1. Attend the annual meeting, and other important shareholder meetings

2. Vote competent representatives to the board of Directors

3. Take a turn serving on the Board, if elected

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Agency relationship

The shareholders are the principals . They expect agents (directors) to act in their best
economic interests

An agency relationship is one of trust between an agent and a principal which obliges the
agent to meet the objectives placed upon it by the principal.

As one appointed by a principal to manage, oversee or further the principal’s specific

interests, the primary purpose of agency is to discharge its fiduciary duty to the principal

Agency costs

Shareholders incur agency costs in monitoring the agents (directors).

If they didn’t have to keep checking the managers then there would be agency costs.

When a shareholder holds shares in many companies, the total agency costs can be
prohibitive;

shareholders therefore encourage directors’ rewards packages to be aligned with their own
interests so that they feel less need to continually monitor directors’ activities.

So let’s look at some examples of costs of monitoring and checking on directors’ behaviour

1. Attending relevant meetings (AGMs and EGMs)

2. Studying company results

3. Making direct contact with companies

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Types of Investor

Small investors

Individuals who hold shares in unit trusts, funds and individual companies.

They typically buy and sell small volumes and tend to have fewer sources of information
than institutional investors.

They also often have narrower portfolios, which can mean that agency costs are higher, as
the individuals themselves study the companies they have invested in for signs of changes
in strategy, governance or performance.

Institutional investors

The biggest investors in companies, dominating the share volumes on most of the world’s
stock exchanges.

Examples include Pension funds, insurance companies and unit trust companies each fund
being managed by a fund manager.

Fund managers have some influence over the companies so need to be aware of the
performance and governance of many companies in their funds, so agency costs can be
very large indeed.

When should institutional investors intervene in company affairs?

Concerns over strategy

Consistent underperformance (without explanation)

NEDs not doing their job properly

Internal Controls persistently failing

Failure to comply with laws and regulations

Inappropriate remuneration policies

Poor approach to social responsibility (reputation risk)

53
 Syllabus B3b. Approaches to Corporate Governance

There are 2 possible systems for trying to get

companies to have good corporate governance

These are:

1. Rules based (adopted in USA)

2. Principle based (adopted in the UK)

Rules-based system

In the rules-based system, companies adhere to the rules or pay penalties.

ADVANTAGES

1. Clarity

2. Standardisation

3. Penalties are a deterrent against bad CG

4. Easier compliance with the rules, as they are unambiguous, and can be evidenced

DISADVANTAGES

1. Can create just a "box-ticking" approach

2. Not suitable to all possible situations.

3. Creates unnecessary administration burden on some companies

4. One size does not necessarily fit all.

5. Expensive

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Principles-based System (Comply or explain)

In the principles system, companies adhere to the spirit of the “rule”, or explain why it hasn’t.

This does not mean the company has a choice not to adhere.

It just means it can TEMPORARILY explain why it has not.

The punishment for this non-adherence will be judged by investors.

ADVANTAGES

1. Not so rigid, allows for different circumstances.

2. Allows companies to go beyond the minimum required.

3. Less of an admin burden.

4. Can develop own specific CG and Internal controls (For example physical controls over

cash will be vital to some businesses and less relevant or not applicable to others.

DISADVANTAGES

1. The principles are so broad that they are of very little use as a guide to best corporate
government practice

2. Not easier compliance as with the rules, as they are ambiguous, and can not be
evidenced

55
Principles v Rules More Detail

Principles

The principle of ‘comply or explain’ means that companies have to take seriously the general
principles of relevant corporate governance codes.

Compliance is required under stockmarket listing rules but non-compliance is allowed based
on the premise of full disclosure of all areas of non-compliance.

It is believed that the market mechanism is then capable of valuing the extent of non-
compliance and signalling to the company when an unacceptable level of compliance is
reached.

On points of detail companies could be in non-compliant as long as they made clear in their
annual report the ways in which they were non-compliant and, usually, the reasons why.

This meant that the market was then able to ‘punish’ non-compliance if investors were
dissatisfied with the explanation (ie the share price might fall).

In most cases nowadays, comply or explain disclosures in the UK describe minor or

temporary non-compliance.

Some companies, especially larger ones, make ‘full compliance’ a prominent announcement
to shareholders in the annual report, presumably in the belief that this will underpin investor
confidence in management, and protect market value.

Remember though that companies are required to comply under listing rules but the fact that
it is not legally required should not lead us to conclude that they have a free choice.

The stock market takes a very dim view of most material breaches, especially in larger
companies.

Typically, smaller companies are allowed (by the market, not by the listing rules) more
latitude than larger companies.

56
This is an important difference between rules-based and principles-based approaches.

Smaller companies have more leeway than would be the case in a rules-based jurisdiction,
and this can be very important in the development of a small business where compliance
costs can be disproportionately high.

Rules

Rules-based control is when behaviour is underpinned and prescribed by statute of the

country’s legislature.

Compliance is therefore enforceable in law such that companies can face legal action if they
fail to comply.

US-listed companies are required to comply in detail with Sarbox provisions.

Sarbox compliance can also prove very expensive.

The same detailed provisions are required of SME's as of large companies, and these
provisions apply to each company listed in New York.

57
National differences

Developing countries

In developing economies - there are normally many SMEs. For these companies extra
regulations would be very costly

So, perhaps for them the option to ‘comply or explain’ is better.

This would allow those who seek foreign investment to comply more fully than those who
don't want it and are prepared to explain why

Developing countries may not have all resources that are needed for full compliance
(auditors, pool of NEDs, professional accountants, internal auditors, etc).

To help compliance, international standards help nations become competitive.

The OECD (Organisation for Economic Cooperation & Development) was established in
1961.

It is made up of the industrialised marketeconomy countries, as well as some developing

countries, and provides a forum in which to establish and coordinate policies.

The ICGN (International Corporate Governance Network) was founded in 1995 at the
instigation of major institutional investors, represents investors, companies, financial
intermediaries, academics and other parties interested in the development of global
corporate governance practices

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 Syllabus B3c. SMEs and stakeholder interests

Here, often, shareholders are not different from directors

Differences to a listed company

1. Often Family owned

2. Often no separation between management and owners

3. Little differences between owner and director objectives

4. Smaller number of shareholders - who are often in contact with the company - so conflict
less likely

In a listed Company it's different..

- More corporate governance regulations applicable on listed co
- Higher focus on risk management and internal audit
Objectives of shareholders and directors may be different

Asymmetry of information

Shareholders get less info than directors, making monitoring harder

A separation between ownership and control

Shareholders and directors are different people

59
 Syllabus B3d. International Codes of CG (OECD)

The Organisation for Economic Co-operation and

Development issued principles of Corporate
Governance in 1999

These principles are intended to ‘improve the legal, institutional and regulatory framework for
corporate governance’

and....

‘to provide guidance and suggestions for stock exchanges, investors, corporations and other
parties that have a role in the process of developing good corporate governance’

6 Principles relevant to the Auditor

1. There should be a clear basis for an effective corporate governance framework

This should ensure transparency and acceptance of responsibility of all parties involved.

2. Shareholders Rights should be upheld.

Management of the company should recognise that they are agents of the shareholders
and act in their interests at all times.

3. Shareholders should be treated equitably

All shareholders whether institutional or minority should be treated in a fair and just
manner.

60
4. Rights of Stakeholders should be recognised

Co-operation between the organisation and stakeholders should be encouraged.

5. Timely and accurate disclosures should be made.

All Material matters such as the financial situation, performance, ownership and
governance of the company should be disclosed.

6. Duties of the board

The strategic guidance of the company should be ensured by the corporate governance
framework.

The board should effectively monitor management and be accountable to the company
and shareholders.

Audit and OECD Principles

The OECD principles state that an annual audit should be carried out by an independent,
competent, qualified auditor to provide assurance to the board and to shareholders.

The auditors are also under a duty of care to provide a competent service and are
accountable to the shareholders.

61
The Board and the OECD Principles

The board have responsibility under the principles to:

Review and guide corporate strategy e.g. risk policy, business plans, capital investment,
mergers and acquisitions and setting performance objectives.

• Evaluate and monitor the effectiveness of corporate governance policy

• Appointment and monitoring of key executives

• Align executive and board remuneration in the long term interests of the company

• Monitor and manage the ‘agency problem’

• Taking responsibility for the accounting and financial reporting system ensuring an
appropriate system of control to manage risk is in place

• Ensure appropriate disclosures and communication

62
 Syllabus B3d. International Corporate Governance Network (ICGN)

International Corporate Governance Network (ICGN)

The ICGN issued a report to enhance the OECD guidance

It gives practical guidance for boards to meet investors' expectations

The ICGN believes that companies will only achieve value in the longer term it they manage
effectively their relationships with

stakeholders such as employees, customers, local communities and the environment as a

whole.

The ICGN guidance emphasises the following points:

1. Sustainable value — long term success is a prerequisite of good governance

2. Boards should be effective, diverse, experienced and accountable for their actions

3. Corporate culture should support ethical behaviour, supporting whistle-blowers it

necessary

4. Risk management should be formally undertaken in line with shareholders' expectations

5. Remuneration should be transparent and aligned appropriately with risk and other

objectives

6. Audit should be robust, etlective and independent (both internal and external)

7. Disclosure and transparency should be at the heart of all relations with stakeholders

8. Shareholders‘ rights should be protected and respected by directors

9. Shareholder responsibilities should also be respected by shareholders (ie not ignored)

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 Syllabus B4. Reporting To Stakeholders

Syllabus B4b. <IR> overview

Objective is a report which shows how organisations

create value
1- diff b/w FS and IR
2- 6 capitals
3- advantages of IR
Overview of the <IR> Framework

The 'integrated reporting' concept

Integrated reporting (stylised as '') is the basis for a fundamental change in how to manage

and report to stakeholders.

Integrated Thinking

is the active consideration of the relationships between how an organisation operates and
the capitals it uses

There are three fundamental concepts underpinning <IR>:

cover all other aspects (not only financials)
1. The Capitals

These are the resources and the relationships used by the organisation

They are financial, manufactured, intellectual, human, social and relationship, and
Tangible assets Intangibles
natural capital.
Environmental matters
However, an integrated report may not cover all capitals – the focus is on capitals that

are relevant to the entity

64
2. Value creation

An organisation’s activities influences its ability to continue to draw on capitals

continuously

3. The value creation process

At the heart of the value creation process is an entity’s business model

This creates outputs (products, services, by-products, waste) and outcomes (internal and

external consequences for the capitals).

Integrates social and environmental aspects in strategies and decision making

Objectives and fundamental concepts of integrated reporting

• To improve the quality of information available to providers of financial capital

• To communicate everything affecting how an organisation creates value

• Look after the broad base of capitals and show how they depend on each other

• Make decisions that focus on creating value in the short, medium and long term

65
 Syllabus B4bc. Purpose and content of an integrated report

To explain to providers of financial capital how an

organisation creates value over time

The ‘building blocks’ of an integrated report are:

• Guiding principles

These underpin the integrated report

They guide the content of the report and how it is presented

• Content elements

These are the key categories of information

They are a series of questions rather than a prescriptive list

66
Guiding Principles

1. Are you showing an insight into the future strategy..?

2. Are you showing a holistic picture of the the organisation's ability to create value over

time?

Look at the combination, inter-relatedness and dependencies between the factors that

affect this

3. Are you showing the quality of your stakeholder relationships?

4. Are you disclosing information about matters that materially affect your ability to create

value over the short, medium and long term?

5. Are you being concise?

Not being burdened by less relevant information

6. Are you showing Reliability, completeness, consistency and comparability when showing

your own ability to create value.

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Content Elements

1. Organisational overview and external environment

What does the organisation do and what are the circumstances under which it
operates?

2. Governance

How does an organisation’s governance structure support its ability to create value in the
short, medium and long term?

3. Business model

What is the organisation’s business model?

4. Risks and opportunities

What are the specific risk and opportunities that affect the organisation’s ability to create
value over the short, medium and long term, and how is the organisation dealing with
them?

5. Strategy and resource allocation

Where does the organisation want to go and how does it intend to get there?

6. Performance

To what extent has the organisation achieved its strategic objectives for the period and
what are its outcomes in terms of effects on the capitals?

7. Outlook

What challenges and uncertainties is the organisation likely to encounter in pursuing its

strategy, and what are the potential implications for its business model and future

performance?

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 Syllabus B4b. Social and Environmental Issues

Social and Environmental Issues

responsbile organization focuses on profit, social, environmental impact

Social and environmental issues in the conduct of business and of

ethical behaviour

Economic activity is only sustainable where its impact on society and the environment is also

sustainable.

Sustainability can be measured empirically or subjectively

Footprint = impact / activities

Environmental Footprint

Measures a company’s resource consumption of inputs such as energy, feedstock, water,

land use, etc.

Measures any harm to the environment brought about by pollution emissions.

Measures resource consumption and pollution emissions in either qualitative, quantitative or

replacement terms.

Together, these comprise the organisation’s environmental footprint.

A target may be set to reduce the footprint and a variance shown.

Not all do this and so this makes voluntary adoption controversial

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Sustainable development

The development that meets the needs of the present without compromising the ability of
future generations to meet their own needs.

Energy, land use, natural resources and waste emissions etc should be consumed at the
same rate they can be renewed

Sustainability affects every level of organisation, from the local neighborhood to the entire
planet.

It is the long term maintenance of systems according to environmental, economic and social
considerations.

Full cost accounting

This means calculating the total cost of company activities, including environmental,
economic and social costs

TBL (Triple bottom line) accounting

TBL accounting means expanding the normal financial reporting framework of a company to

include environmental and social performance.

The concept is also explained using the triple ‘P’ headings of ‘People, Planet and Profit’

The principle of TBL reporting is that true performance should be measured in terms of a

balance between economic (profits), environmental (planet) and social (people) factors; with

no one factor growing at the expense of the others.

The contention is that a corporation that accommodates the pressures of all the three factors

in its strategic investment decisions will enhance shareholder value, as long as the benefits

that accrue from producing such a report exceeds the costs of producing it.

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 Syllabus B4d. Environmental Reporting

What is Environmental Reporting

Perhaps businesses should only report on things that are required under laws, accounting

standards or listing rules?

But maybe there's more - maybe businesses should be a bit more cool and groovy and

become ‘citizens’ of society?

After all businesses benefit from society and so should give something back - be responsible

for society just like humans are.

This includes companies taking responsibility for its environmental impacts using

environmental reporting

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Ok what goes into this sexy Environment Report?

Basically the environmental impact of the organisation

They can be split as follows:

Direct Impacts

The environmental effects of Manufacturing and Distributing

Indirect Impacts

The environmental impacts of the supply chain

So basically the company records, measures, analyses and then REPORTS on....

Types of Environmental Impact

Consumption - Inputs

Energy and world resources

Emissions - outputs

Pollution and by-products

72
Problems with Environmental Reporting

See above where we say a company should report on direct and indirect impacts?

Well the indirect is a nightmare!

Imagine a bank - it gives loans to companies so theoretically it would have to report on the

impact on the environment that those companies cause - as they've been caused indirectly

by the bank too!

Narrative or Numbers?

Narrative

can be used to convey objectives, explanations, aspirations, reasons for failure against

previous years’ targets, management discussion, addressing specific stakeholder concerns,

etc.

Numbers

can be used for emission or pollution amounts (perhaps in tonnes or cubic metres),

resources consumed (perhaps kWh, tonnes, litres), land use (in hectares, square metres,

etc) and similar

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Guidelines for Environmental Reporting

Generally it is voluntary

• So theoretically adopt any approach to environmental reporting is ok, but in practice, a

number of voluntary reporting frameworks have been adopted - in particular the Global

Reporting Initiative (or GRI)

Some companies now openly say they report their voluntary information under GRI

Others base their reporting on GRI guidelines without saying explicitly that they do so

(perhaps wishing to adopt its provisions selectively)

Where does an environmental report go?

• Many possible places...

In the Annual Report

In ‘stand alone’ reports

On company websites

In advertising or in promotional media

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Advantages and Purposes of Environmental Reporting

These include:

A way to how their accountability to society and to future generations

To strengthen a company’s accountability to its shareholders

To demonstrate their responsiveness to certain issues that may threaten the perception of

their ethics

To gain, maintain or restore the perception of legitimacy after a company commits an

environmental error

A convenient place to all about (and re-assure investors) environmental risks and the ways

that they are being managed or mitigated.

The systems and the knowledge they generate could have the potential to save costs and

increase operational efficiency

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 Syllabus B4e. Environmental Accounting Systems

Environmental Accounting Systems

EMAS

EMAS compliance is based on ISO 14000 recognition – although many organisations

comply with both standards

EMAS focuses on the standard of reporting and auditing of that reported information.

Many companies refer to the standards in their CSR reports

ISO 14000

ISO 14000 focuses on internal systems although it also provides assurance to stakeholders

of good environmental management.

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 Syllabus B5. The Board Of Directors

Syllabus B5a. Board Of Directors

The board of directors

Roles and Responsibilities

1. Provide entrepreneurial leadership

2. Represent company view and account to the public

3. Determine the company’s mission and purpose

4. Select and appoint the CEO, chairman and other board members
chariman: the leader of the entire BOD

5. Establish appropriate internal controls

6. Ensure that the necessary financial and human resources are in place

7. Ensure that its obligations to its shareholders and other stakeholders are understood and

met

8. Set the company's strategic aims

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In the UK listed companies have to state in their accounts that they comply with the

following regulations:

1. Separate MD & chairman

2. Minimum 50% non executive directors

(NEDs)

3. Independent chairperson

4. Maximum one-year notice period

5. Independent NEDs (three-year contract, no share options)

Unitary Board

This is the single board structure with sub-committees.

This is where all directors, including managing directors, departmental directors and NEDs

all have equal legal and executive status in law.

This does not mean that all are equal in terms of the organisational hierarchy, but that all are

responsible and can be held accountable for board decisions.

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Advantages

1. NEDs are empowered, being accorded equal status to executive directors.

2. The presence of NEDs can bring independence, experience and expertise

3. Board accountability is enhanced as all directors are held equally accountable under a

‘cabinet government’ arrangement

4. Reduced likelihood of abuse of power by a small number of senior directors

5. Often larger than a tier of a two-tier board so more viewpoints are expressed and more

robustly scrutinised

6. All participants have equal legal responsibility for management of the company and

strategic performance

Disadvantages

1. A NED or independent director can not be expected to both manage and monitor

2. The time requirement on NEDs may be onerous

Two-tier boards

The board is split into multi-tiers, separating the executive from directors.

These are predominantly associated with France and Germany.

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This two-tier approach can take the form of a:

• Management or executive board

Responsible for managing the enterprise with the CEO to coordinate activity.

Responsible for the running of the business.

Composed entirely of executive directors.

• Supervisory board

Appoints, supervises and advises members of the management board.

A separate chairman coordinates the work and members are elected by shareholders at

the AGM

Has no executive function.

It reviews the company's strategy.

Advantages of 2-tier boards

Clearly management and owners separation

Clear stakeholder involvement

Separate meetings means freedom of expression

Owners control management by power of appointment

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 Syllabus B5a. Role of CEO

CEO - Chief executive officer

Role of CEO

1. To lead the company and to protect shareholder interests above all others

2. To develop and implement polices and strategies capable of delivering superior

shareholder value

3. To assume full responsibility for all aspects of the company’s operations

4. To manage the financial and physical resources of the company, monitor results, and
ensure that effective operational and risk controls are in place

5. To oversee the management team, co-ordinating the interface between the board and
the other employees in the company, and assisting in the appointment of directors to the
board

6. Communicating effectively with significant stakeholders including the company’s

shareholders, suppliers, customers and state authorities

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 Syllabus B5a. Role of the Chairman

Roles of the chairman in corporate governance

Roles and Responsibilities

1. Provide leadership to the board

The chairman is responsible for ensuring the board’s effectiveness for shareholders, by
setting the agenda and ensuring meetings occur regularly

2. The chairman represents the company to investors and other outside stakeholders/
constituents.

3. Effective communication with shareholders

The ‘public face’ of the organisation So, the chairman’s roles include communication with
shareholders.

This occurs in a statutory sense in the annual report and at annual and extraordinary
general meetings.

4. Finally, the co-ordinating of NEDs and facilitating good relationships between them and
executives

5. Ensuring the board receives accurate and timely information

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 - Segregation of duty leading to improved governance
- Chairman able to challenge CEO
- Other directors / employees can communication with Chairman
if they have concerns relating to CEO
- Higher shareholder confidence as Chairman is normally a NED
Benefits of separation of roles of Chair & CEO

1. Frees up the chief executive to fully concentrate on the management of the organisation

2. Allows chair to represent shareholders’ interests

3. Removes the risks of ‘unfettered powers’ in one individual

4. Reduces the risk of a conflict of interest in a single person being responsible for
company performance whilst also reporting on that performance to markets

5. Chairman provides a conduit for the concerns of non-executive directors

6. Ensures the CEO is responsible to someone named directly

day-to-day running of the organization

7. Agrees with most best practice codes

Importance of the chairman’s statement

An important and usually voluntary item, typically at the very beginning of an annual report.

Conveys important strategic messages

Allows chairman to inform shareholders about issues Legal rights and responsibilities of
Directors (Breach of responsibility can leave director open to criminal prosecution)

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 Syllabus B5d. Director’s Service Contract

Director’s service contract

This should Include:

• key dates

• duties

• remuneration details

• termination provisions (notice

• constraints

• other ‘ordinary’ employment terms

Director’s Induction & CPD

Induction

Depends on their background

It is important, for effective participation in board strategy development, not only for the
board to get to know the new director, but also for the director to build relationships with the
existing board and employees below board level.

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Induction Process

Highly tailored to the individual but will include the following

1. Company structure

2. Company values

3. Company strategy

4. Markets and key players

5. Day to day job details

6. Reporting lines

7. Information about Board operations

It can be given as a presentation by other directors or as an induction pack also

Objectives of CPD

1. Maintain sufficient skills and ability

2. To communicate challenges and changes within the business environment

3. Improve board effectiveness

4. Support personal development of directors

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 Syllabus B5a. Conflicts of Interest

Conflict and disclosure of interests

Key areas

• Directors contracting with their own company (However, the articles may allow if
disclosed)

• Substantial property transactions: These need approval

• Loans to directors: generally prohibited

Insider dealing/trading

Here a director uses information (not known publicly) which if publicly available would affect
the share price

Trading in own shares with this knowledge is fraud

Directors are often in possession of market-sensitive information ahead of its publication and
they would therefore know if the current share price is under or over-valued given what they
know about forthcoming events.

If, for example, they are made aware of a higher than expected performance, it would be
classed as insider dealing to buy company shares before that information was published.

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Why is insider trading unethical and often illegal?

Directors must act primarily in the interests of shareholders.

If insider dealing is allowed, then it is likely that some decisions would have a short-term
effect which would not be of the best long-term value for shareholders.

This can become particularly important at times of takeovers where inside information could
mean big profits for the director and not necessarily in the longer term interests of the
shareholder

There is also the potential damage that insider trading does to the reputation and integrity of
the capital markets in general which could put off investors who would have no such access
to privileged information and who would perceive that such market distortions might increase
the risk and variability of returns beyond what they should be.

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 Syllabus B5g. Director's removal

There are 3 main methods

Retire by Rotation

At AGM, every 3 years

Longest serving director retires first

Means a nice phased retirement of directors

Directors can be replaced in an orderly manner

Termination

1. Death

2. Resignation

3. Not seeking re-election (see above)

4. Bankruptcy

5. Disciplinary procedures

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Disqualification

The reasons can be:

• Wrongful trading - allowing the company to trade while knowing its insolvent

• Not keeping proper accounting records

• Failing to prepare & file accounts. 3+ defaults in filing documents in 5 years

• Failing to send tax returns and pay tax

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 Syllabus B5c. NEDs

Non Executive Directors (NEDs)

*familiar with the concept

NEDs have no executive (managerial) responsibilities.

The key role is to reduce the conflict of interest between management (executive directors)
and shareholders by providing the balance to the board.

NEDs bring an independent viewpoint as they are not full time employees.

Roles and Responsibilities

The Higgs Report (2003) described the function of non-executive directors (NEDs) in terms
of four distinct roles.

1. Strategy role

NEDs are full members and thus should contribute to strategy. They may challenge any
aspect of strategy they see fit, and offer advice

2. Scrutiny role

NEDs should hold executive directors to account for decisions taken.They should
represent the shareholders’ interests

3. Risk role

NEDs should ensure the company adequate internal controls and risk management
systems

This is often informed by prescribed codes (such as Turnbull) but some industries, such
as chemicals, have other systems in place, some of which fall under International
Organisation for Standardisation (ISO) standards.

4. People role

NEDs should oversee issues on appointments and remuneration, but might also involve
contractual or disciplinary issues.

Independence

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The Code states as a principle that the board should include a balance of NEDs and
executives.

The board should ensure any NED is truly independent in character and judgement by:

• not being an employee of the company within the last 5 years

• not having a material business relationship with the company in the last 3 years

• not receiving any remuneration except a director’s fee

fixed amount

• not having any family ties with the firm

• not holding cross directorships with other directors

Cross directorships

When two (or more) directors sit on the boards of the other.

In most cases, each director’s ‘second’ board appointment is likely to be non-executive.

This can compromise the independence of the directors involved. For example, a director
deciding the salary of a colleague who, in turn, may play a part in deciding his own salary

It is for this reason the cross directorships are explicitly forbidden by many corporate
governance codes

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 work closely on behalf of
shareholders
Advantages of NEDs

The main advantages of bringing NEDs onto a board are as follows:

1. Monitoring to reduce the excesses of executives.

2. External expertise

3. Perception: Company is perceived more trustworthy

4. Communication: improvement in communication between shareholders interests and the

company.

5. Independent view
for listed companies
6. compliance with corporate governance code

Disadvantages of NEDs

voluntary directors; may not give sufficient time to business

1. Lack of trust can affect board operations

2. Quality: there may not be many appropriately qualified NEDs around

3. Liability: Poor remuneration and liability in law might reduce potential NEDs further

4. lack independence

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 Syllabus B5a. Frameworks for assessing the performance of boards

Frameworks for assessing the performance of boards

Appraisal of the board's performance is an important control over it.

Aimed at:

• improving board effectiveness,

• maximising strengths and

• tackling weaknesses.

The UK Corporate Governance Code recommends that performance of the board, its
committees and individual directors should be formally assessed once a year.

Ideally the assessment should be by an external third party who can bring objectivity to the
process.

The appraisal of the board should include:

1. A review of the board’s systems (conduct of meetings, work of committees, quality of

written documentation)

2. Performance measurement in terms of the standards it has established, financial criteria,

and non- financial criteria relating to individual directors

3. Assessment of the board’s role in the organisation (dealing with problems,

communicating with stakeholders)

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 Syllabus B5e. Diversity on boards of directors

Diversity on boards of directors

Definition of Board Diversity

• means having a range of many people that are different from each other.

• factors like age, race, gender, educational background and professional qualifications of
the directors to make the board less homogenous.

In implementing policies on board diversity, both the company’s chairman and the
nomination committee play a significant role.

• The chairman, being the leader of the board, has to facilitate new members joining the
team and to encourage open discussions and exchanges of information during formal
and informal meetings.

• The nomination committee should give consideration to diversity and establish a formal
recruitment policy concerning the diversity of board members with reference to the
competencies required for the board, its business nature as well as its strategies.

The committee members have to carefully analyse what the board lacks in skills and
expertise and advertise board positions periodically.

Benefits of Board Diversity

1. More effective decision making.

2. Better utilisation of the talent pool (not only male involved, also woman).

3. Enhancement of corporate reputation and investor relations.

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 Syllabus B5f. Board Committees

Board committees
More specialized and focused
More time can be spent by committees as full board has limited time
Board can focus more on strategic and business matters
Importance of committees Higher involvement by NEDs
Increase shareholder confidence
Many companies operate a series of board sub-committees responsible for supervising
specific aspects of governance.

frequently meet as much as they need

• Reduces board workload

• Use inherent expertise

• Communicates to shareholders that directors take these issues seriously. assigned duties
terms of reference: mandatory or
activity which needs to be done
• Communicates to stakeholders the importance of remuneration and risk.
all these committees are within the board

ex. board: 15명으로 구성, 15명으로 nomination, risk,

audit, remuneration 분배
Nominations committee

Advises on:

1. The balance between executives and NEDs

2. The appropriate number and type of NEDs on the board.

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hiring and firing, training of directors

Nominations committee - Roles Majority NEDs

The nominations committee is usually made up of NEDs.

It establishes the skills, knowledge and experience possessed by current board

Notes any gaps that will need to be filled

Looks at continuity and succession planning, especially among the most senior members of

the board.

Is responsible for recommending the appointments of new directors to the board

- More focused and specialized

- More time can be spent
- Board can focus more on strategic matters
Risk committee -Roles Majority NEDs
- Higher involvement of NEDs
- Higher shareholder confidence
Considered best practice by most corporate governance codes

Helps Investor confidence

Should be made up of NEDs

Requires good information systems to be in place

Reviews effectiveness of internal controls regarding risk

Is responsible for overseeing risk management

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salary, bonus and perks(benefits) of directors

Remuneration Committee - Roles 100% NEDs

Determine remunerations policy, acting on behalf of shareholders but benefitting both

shareholders and the other board members of the board

Ensure that each director is fairly but responsibly rewarded for their individual contribution in

terms of levels or pay and the components of each director’s package.

It is likely that discussions of this type will take place for each individual director and will take

into account issues including market conditions, retention needs, long-term strategy and

market rates for a given job.

Reports to the shareholders on the outcomes of their decisions, usually in the corporate

governance section of the annual report

Be compliant with relevant laws or codes of best practice.

Is responsible for advising on executive director remuneration policy

Audit Committee - roles 100% NEDs

at least one member should be financial expert
to enhance audit quality

to build confidence in the integrity of financial reporting

to create the right environment for quality auditing

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Audit Committee - responsibilities
whistleblowing arrangement
to create an environment that accommodates an open discussion in a culture of integrity,

respect and transparency between management and auditors

to oversee the work of the auditors

to understand the audit strategy, be satisfied that it addresses the major audit risks

to make sure the auditors exercise appropriate professional skepticism.

Audit Committee - the purpose

The Audit Committee shall assist the Board of Directors in:

the oversight of the integrity of the financial statements of the Company,

the effectiveness of the internal control over financial reporting,

the independent registered public accounting firm’s qualifications and independence,

the performance of the Company’s internal audit function and independent registered public

accounting firms, and

the Company’s compliance with legal and regulatory requirements

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 Syllabus B5g. Director's Remuneration

Director's Remuneration

The purpose of directors' remuneration is:

• to attract and retain individuals

• motivate them to achieve performance goals

Components of a rewards package

These include:

1. Basic salary , which is paid regardless of performance;

It recognises the basic market value of a director. (Not linked to performance in the short
run but year-to-year changes in it may be linked to some performance measures)

2. Short and long-term bonuses and incentive plans which are payable based on pre-
agreed performance targets being met;

3. Share schemes

which may be linked to other bonus schemes and provide options to the executive to
purchase predetermined numbers of shares at a given favourable price;

4. Pension and termination benefits including a pre-agreed pension value after an agreed
number of years’ service and any ‘golden parachute’ benefits when leaving;

5. Pension contributions

are paid by most responsible employers, but separate directors’ schemes may be made
available at higher contribution rates than other employees.

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6. Other benefits in kind such as cars, health insurance, use of company property, etc.

Balanced package

This is needed for the following reasons:

• A reduction of agency costs

These are the costs the principals incur in monitoring the actions of agents acting on

their behalf.

The main way of doing this is to ensure that executive reward packages are aligned with

the interests of principals (shareholders) so that directors are rewarded for meeting

targets that further the interests of shareholders.

• A reward package that only rewards accomplishments in line with shareholder value

substantially decreases agency costs and when a shareholder might own shares in

many companies, such a ‘self-policing’ agency mechanism is clearly of benefit.

Typically, such reward packages involve a bonus element based on specific financial

targets in line with enhanced company (and hence shareholder) value.

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 Syllabus B5h. General principles of remuneration

General principles of remuneration

Links to strategy

Suitable and appropriate remuneration packages have to be paid to directors in order to

attract and retain the most suitable candidates.

These packages should be structured to:

• ensure that they are paid well

• ensure that they achieve shareholders' best interests as well as their own personal

interests

• ensure that there are links to the company's strategy

• ensure that they remain motivated

• ensure that there are links to strategic goals and targets such as:

1. cost of capital,

2. return on equity,

3. economic value added,

4. market share,

5. revenue and

6. profit growth

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Links to labour market conditions.

A basic salary is paid to directors in line with their terms and conditions, and is not related to

any other conditions.

This salary is calculated by taking into consideration the experience of the director, and what

other companies are willing to pay which ultimately dictates the current market conditions.

Remuneration packages should be set by a remuneration committee consisting of

independent non-executive directors to ensure that packages are equitable, and appropriate

according to performance and in line with the organisations remuneration policy.

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 Syllabus B6. Public sector governance

Syllabus B6a. What is the 'Public Sector’?

What is the 'Public Sector’?

These deliver public goods and services, without using ‘for profit’ businesses. Often
operated by the state.

A state has a government, a legislature, a judiciary and a secretariat (or administration)

The state’s secretariat or administration is by far the largest of the four ‘organs’ and is
responsible for carrying out government policy, typically including education, health,
defence, foreign affairs, etc

Public Sector organisations are funded by revenues from the state (mainly taxes) and they
exist to deliver public services that cannot (or shouldn’t) be provided by the private sector

Often the public sector is very large, employing thousands or even millions of people.

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 Syllabus B6d. Agency in the Public Sector

Agency in the Public Sector

Public sector organisations (agents) work on behalf of taxpayers and those that use the
services (principals e.g.pupils in a school, patients in a hospital, etc).

Funders/principals (tax payers and service users) are sometimes the same people (i.e.
taxpayers placing their children in state school) but sometimes they are not, and this can
give rise to disagreements on how much is spent and on what particular provisions.
In general, however, public sector organisations emphasise different types of objectives to
the private sector.

Whereas private companies tend to seek to optimise their competitive positions, public
sector organisations tend to be concerned with social purposes and delivering their services
efficiently, effectively and with good value for money.

A common way of understanding the general objectives of public sector organisations is the
three Es:

Economy, Efficiency and Effectiveness

Economy represents value for money and delivering the required service on budget, on time
and within other resource constraints.

Efficiency An efficient organisation delivers more for a given level of resource input than an
inefficient one.

Effectiveness describes the extent to which the organisation delivers what it is intended to
deliver.

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 Syllabus B6a. Types of public sector organisations

Types of public sector organisations

Forms of Organisation

The term ‘third sector’ (after private and public) is charitable and non-governmental
organisations.

These don’t exist primarily to make a profit nor to deliver a service on behalf of the state.

They exist primarily to provide a set of benefits that cannot easily be provided by either
profit-making businesses nor the public sector.

Organisations delivering international medical aid are a good example of non-governmental

organisations (NGOs).

Well-known NGOs such as Medicins sans Frontiers (‘doctors without borders’ in English) are
large and well-structured organisations, delivering important medical aid in war zones and
the like.

They are often mainly privately funded (e.g. by benevolent individuals)

NGOs and charities may have an executive and non-executive board, but these are subject
to a higher board of trustees whose role it is to ensure that the NGO or charity operates in
line with its stated purpose

105
Here, the agency relationship is between the NGO (agent) and its donors (principal).

When donors give to NGOs or charities, it is important for them to be reassured that their
donation will be responsibly used for its intended purpose and the board of trustees help to
ensure that this is what happens.

Sometimes governments may help fund an NGO but give it effective autonomy in its
decision making

These organisations are sometimes referred to as QuANGOs – quasi-autonomous non-

governmental organisations.

QuANGOs are sometimes accused of being unaccountable for their decisions because they
only weakly report to the government (and the taxpayers) who fund their decisions.

QuANGOs can be politically awkward and, accordingly, their use in the public sector
changes over time.

Lobbying and Lobby Groups

These campaign to influence government policy, they ‘lobby’ politicians to try to get them to
vote in the legislature in favour of their particular interest.

These ‘lobby groups’ are legal, but some argue against them as the best funded will be the
most likely to be heard, and so may act against the public interest

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Stakeholders in the Public Sector

Public sector bodies have a complicated model of how they add value.

Taxation is mandatory and may be paid against the wishes of the taxpayer.

People need to feel fairly treated and not being over-exploited nor badly served.

Because there are so many claims to balance, then, the stakeholder pressures on a
government are often very difficult to understand.

Some stakeholder claims are recognised by some but not by others, and this can make for a
very complex situation indeed when it comes to deciding which stakeholder claims to
recognise and which to reduce in weight or ignore.

Some stakeholders have a very weak voice, while others have no effective voice at all in
order to express their claim.

Part of the debate in politics is the extent to which these weaker stakeholders are
represented and how their assumed needs are met.

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Types of Public sector organisations

• At the national level

National government is divided into central government departments (e.g. a foreign

office, a defence department, a health service, etc)

These departments are led by a political minister from the governing political party.

This is important in democratic countries because the policies adopted by these

departments affect many people and it is important that they are subject to political
change if the electorate changes a government at an election (this being a part of the
social contract between the government and the governed).

National government policy is configured and coordinated centrally to ensure that

strategic policies are pursued and that departments work together to ensure this.

The head of government (not to be confused with the head of state) is responsible for
national government policy and in a democracy, he or she can be re-elected or defeated
based on his or her performance in the role.

• Below national level (‘subnational’)

Some countries are organised into regional authorities, with some powers devolved
down to these subnational bodies, as they are best handled by local people

For example, roads, utilities, local schools etc

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• Above national level (‘supranational’)

These are a little more complicated.

National governments sometimes come together for a shared purpose and form
supranational bodies

These bring tension though, as each individual nation is subject to pressure from its own
people (eg. EU and UN)

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 Syllabus B6b. Leadership & Strategy for Public Sector Organisations

Leadership & Strategy for Public Sector Organisations

Strategic Objectives

While most private sector organisations are independent in that they are ‘stand alone’
companies answerable to their shareholders, most public sector organisations are part of a
larger public sector structure.

An army cannot act alone, it is funded and controlled by government

Each public sector organisation must still be strategically effective in carrying out
government policy.

They must also be efficient and there’s an emphasis on value for money and service
delivery.

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 Syllabus B6c. Governance Arrangements

Governance Arrangements

There is no single way in which public sector organisations are governed.

Accountability is gained in part by having a system or reporting and oversight of one body
over others.

The oversight body may be a board of governors, a council of reference or a board of

trustees, an oversight board or similar.

In each case, it holds the management to account, acting in the interests of service funders
(usually taxpayers)

Oversight body roles include:

Ensure compliance with regulations

Ensure it meets any performance targets

Monitor performance against budget

Make senior appointments to the public sector body

111
There is an increasing move in some situations to run some public services along similar

lines to private companies.

This means they may have an executive board and also some non-executive membership

on the board also.

The contestable nature of public sector policy

Many wonder if public sector organisations are operated properly and even if the power of

the state is so big that perhaps they shouldn’t exist at all

Some governments prefer a larger state sector, while others prefer more to be achieved in

the private sector and less by government.

As governments change, some public sector organisations grow in size and become more

important, and others become small and less important.

One upshot of this is privatisation.

Taking a public sector service and allowing it to be provided by the private sector, hopefully

leading to better value to the customer.

Opponents of privatisation argue that some strategic services, such as utilities, water, etc,

are too important to be subject to the market forces of private enterprise.

Privatised businesses are often subject to a great deal of internal change including changes

in culture, structure, and governance.

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 Syllabus C: Strategy
Syllabus C1. Concept of Strategy

Syllabus C1a. What is Strategy?

What is Strategy?

The Strategic Position

What is strategy?

Long Term Direction

• This “long term” will depend on the different organisations and the different industries.

• It is not the same for all.

• However, it will be at least a year and is difficult to change once the path has been
chosen.

• The direction will depend on the desired position within their environment. Niche?
Traditional?

• This, in turn, will depend on the external conditions of the organisation

Gives an Advantage to the stakeholders

Meaning it builds upon what the organisation is good at and utilises its strengths.

However, this all must be in a direction that is agreeable and acceptable to its stakeholders.

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Their influence is very important in deciding upon strategy.

This, therefore, is looking within, rather than outside as above, the organisation.

Let’s now quickly look at some words you need to get used to from the very beginning…

• Strategic Fit

Tailoring the strategy to take advantage of the environment’s opportunities

• Strategic stretch

Stretching competencies to create new opportunities

eg. Apple - computers to music to phones to iPads to TVs?

• Strategic architecture

Logistics of buying and servicing - Ikea buildings and processes, Amazon ease of
purchase

Strategies require:

1. Major resource control

2. Operational changes - different markets and cultures

3. Beliefs of those with most influence

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 Syllabus C1a. Vocabulary of Strategy

Just a little section to get you used to some terms..

Terms and Meanings

• Mission

Main Purpose - must be in line with stakeholders' values

• Vision

is the organisation's view of where it sees itself going in the long-term

• Goal

A general aim

• Objective

Quantification of a Goal

• Core Competencies

Resources which give a competitive advantage

• Strategy

Long term direction

• Strategic Architecture

Combination of Resources

• Control

Monitoring of Actions

115
Hierarchy of goal structure for strategy development

1. Mission

2. Vision

3. Goals

4. Objectives

5. Key Performance Indicators

116
 Syllabus C1a. Strategic fit & Stretch

Strategic fit & Stretch

Strategic fit (environment led)

Managers trying to develop strategies by identifying opportunities in the environment, and

adapting their resources to take advantage

It is trying to meet the market needs.

Eg. FirstIntuition opening up in London and Bristol

Those locations are very attractive for ACCA providers.

However, there is little evidence to suggest that companies operating in attractive markets

perform better than those which seem less attractive

Strategic “stretch” (resource led)

In fact, success was the result of managers identifying strategies on the basis of “stretching”

competencies to provide advantages

“Stretching” is using resources to yield new opportunities eg aCOWtancy.com

A small business might try and change the “rules of the game” to suit its own competencies

eg Apple 10 years ago

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 Syllabus C1a. 3 Levels of Strategy

The purpose and scope of business to meet owners’

expectations

There are 3 levels...

• Corporate

This is the top level - and involves decisions such as whether to continue with the

division

Corporate strategy is concerned with:

• Decisions to enter new markets

• Complex decisions

• Relations with external stakeholders

• Examples

How many countries should RCA open up in? What about IKEA?

Why is there no Apple store in Malta yet, there is in Belfast?

Should Samsung concentrate on phones? Should Google create computer hardware?

Heavily influenced by shareholders and the stock market - in fact, this could be the

mission statement of the company

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• Strategic Business Unit

Part of the organisation with its own, individual external market

How is this different to a division?

iPads may be a division at Apple but the strategy for selling them may be different in

China compared to UK. These distinct markets require different strategies so are

different SBUs

An SBU in the public sector is when there’s a distinct client group

It is a unit for strategy making purposes only.

Corporate strategy = whole organisation

SBU = distinct market

1. Industry status
2. market share%
3. Profit margin %
SBU Strategy 4. BCG assessment
5. SW of subsidies

How to compete in a particular market - look at:

1. Competitive advantage

2. Create new opportunities in the market

3. Meet customer needs

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Operational

How the business components (resources, processes and people) deliver the Corporate and

SBU strategy direction

Eg. Apple stores are meticulously planned and their function is not just to sell

products there. They are to convey the ethos of the business as a whole in physical

terms.

The integration of operational decisions and strategy is vital therefore

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 Syllabus C1b. Strategic Management

Dealing with NON-ROUTINE situations with

organisation wide implications

This can be problematic for many managers who struggle to see beyond their specific area -

eg Accountants tend to see things in financial terms only

Concepts rather than detailed analysis

It has 3 parts:

1. Strategic Analysis (Position) Macro / Micro / Internal Factors

2. Strategic Choice (Courses of Action)

3. Strategy implementation (Managing the Change)

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Now look at this diagram:

It is not linear, as all 3 parts are interlinked.

E.g. A choice may only be possible after some implementation

E.g. Strategy analysis is ongoing so overlaps with implementation

So, please do not see these as 3 separate neat & tidy steps

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 Syllabus C1b. Strategic Analysis

This is understanding where the organisation stands in

its environment

It also involves:

• Understanding the internal resources and key competencies available

• Understanding the level of stakeholder influence

The sort of questions to be asked here include:

1. What changes are happening in the environment?

2. How will they affect us?

3. Do we have any special advantages?

4. Can we make new opportunities with what we currently have?

5. How will any changes be viewed by the stakeholders?

So it is basically looking at what the key influences are now (and near future), and what

opportunities do our current resources and the environmental changes offer us

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Let’s look at that last paragraph in a bit more detail and break it down…

• Environment (External)

The organisation lives in a complex PESTEL and cultural world. Some organisations are

more affected than others - look at historical effects and potential changes

These changes offer both OPPORTUNITIES and THREATS (though it’s impossible to list

and analyse each and every one)

Internal Factors
a. Human resources
• Resources and Key Competencies (Internal) b. Financial resouce
c. IT / Brand
Resources + Key Competencies = Strategic Capability

This can be broken down into STRENGTHS and WEAKNESSES (or competitive

advantages and disadvantages)

e.g. Management, Financial Structure, PPE, Products

• Core Competencies

Skills/Know-how that others would find difficult to imitate (eg Tutors)

An understanding of these may lead to new opportunities

All of the above are not just to be ‘fitted in’ to the current opportunities the environment

provides but also ‘stretched’ to create new ones

• Influences

Corporate governance and cultural aspects are to be considered here, especially in

terms of which stakeholder is to be taken most notice of (Think of Mendelow)

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 Syllabus C1b. Strategic Choice

Understanding the bases guiding future strategy

Strategic Choice (Courses of Action)

• Understanding how strategy options are generated

• Understanding how the options are evaluated

Identifying the bases

• Look at stakeholder influence

• Look at the competitive advantages

Generating options

• 3 options:

1. Which geographical areas to concentrate upon?

2. How to structure the business?

3. Organic or acquisition growth?

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The key point here is that the most obvious ‘next step’ for a business might not necessarily

be the best and so creating options is worthwhile

Evaluating the options

• Which builds on STRENGTHS?

Which overcomes WEAKNESSES?

Which takes advantage of OPPORTUNITIES while minimising THREATS

Does it “fit” the current environment?

Can resources be ‘stretched’ for the new option?

Acceptable to stakeholders?

• Ultimately there is unlikely to be a clear winner and so much judgement is required.

Neither is the process likely to be totally objective with manager managers having vested

interests

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 Syllabus C1b. Strategy implementation

Strategy implementation (Managing the Change)

These are

1. Strategy into action by the structure of the organisation

2. Strategy into action by the planning of resources

3. Strategy into action by the management of the change

All of the above components need to be integrated so that they become core competencies
themselves (which others find difficult to match)

Typical Questions

Who is responsible?

What organisation structure changes are needed?

Which management systems need to change?

What information systems are needed to monitor progress?

What are the KEY tasks?

How much re-training is required?

Are new staff required?

Managing change also requires overcoming resistance to change and dealing with routine
matters

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 Syllabus C1b. Strategy in different contexts

Strategy in different contexts

Small Business

Limited number of markets and limited number of products

Scope of Operation = less of a strategic issue

Analysis and research = no departments, all performed by the owners often

Competitive strategy = VERY important

Strategy choice = often limited (depends greatly on owner) but

financing issues will become key

Multinationals

Diverse products and geography

Issues of structure and control = very important (Does HQ add or detract value?)

At SBU level - very similar to small business above

How to allocate resources = very important

Co-ordination of operations is a big strategic issue

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Manufacturing and Service

Competitive strategy for a service firm = wider aspects of the organisation

e.g. Swiftness of service, ambience, staff attitude etc

Competitive advantage of a manufacturing firm = the product itself (though many customers
believe products to be similar so again the differentiation comes from the wider aspects of
the organisation)

Nationalised Companies

Strategy influenced greatly from external sources

e.g. Government

Greater tendency towards centralised control and reporting

Public Service Organisations (eg Health and Bus Services)

Often struggle to create surpluses to re-invest

This can lead to mediocrity of service

Allocation of resource becomes very important

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 Syllabus C1b. The 3 Lenses of Strategy

The 3 Lenses of Strategy

Strategy as Design

This is where strategy comes about as part of a rational, logical and planned (designed)
process

Suited to a hierarchical structure where strategy is delivered from the top down

Strategy as Experience

This is where strategy is said to come from the culture of an organisation, future strategies

come from past experience

Here, strategies come about by adapting the current strategy.

They will be incremental and the result of compromise between managers

They will be heavily influenced by the company culture and its history, “it’s the way we have

always done things and has been successful so far”

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Strategy as Ideas

This is where strategy is said to come from ideas that pop up at different levels of the

organisation and at different times, not in a logical or planned out manner

Many different ideas will compete with each other here. The development of these ideas

should be allowed to flourish and so not too much management control is required

It is what is known as an “emergent strategy”

Using the Lenses

Looking through one lens only can be short-sighted and miss potential opportunities and

threats

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 Syllabus C2. Environmental Issues

Syllabus C2a. PESTEL Analysis

Introduction to Understanding the Environment

Well this brings up 3 difficulties:

1. There’s so much going on that even identifying the influences still may not paint an
overall picture of the important influences

2. Speed of change in these influences is growing ever more rapid

3. Managers are just people

They oversimplify - by concentrating on what has historically been a key influence

So frameworks have been developed to try and cope with the complexity and challenge

natural managerial thinking

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Country / Macro Env

PESTEL Analysis

The basic idea here is that this forces management to look at all aspects of the environment

surrounding them - to help them understand their position within it - and what opportunities

and threats may soon occur

• Political

Tax policy; Foreign trade regs; Government stability

• Economic

Business cycles; GNP trend; Interest rates; Money supply; Inflation; Unemployment;

Disposable Income

• Sociocultural

Demographics; Income distribution; Social mobility; Lifestyles; Consumerism; Education

levels

• Technological

Research spending; Government focus; New discoveries; Obsolescence rates

• Ecological Earth

Environmental protection laws; Using up of raw materials; cutting edge e.g. genetically

modified goods

• Legal Patent / trademark / copyright

Monopoly laws; Employment law

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Limitations:

This framework identifies the factors in the categories.

However it’s pretty useless as just a list, so models later on in the course are used to inform

and guide analysis.

It cannot quantify effects.

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 Syllabus C2b. Strategic Drift

Strategic drift

is a departure from the strategic plan over time by a range of small actions moving away

from the original desired outcome

Strategic drift particularly affects organisations which have experienced a long period of

relative continuity during which strategy has remained relatively unchanged

Here are some ways it can happen:

• The organisation takes planned steps to change ahead of the market and develop a

competitive advantage.

However, change in the market speeds up, and the firm is left behind.

• Managers look to expand into new markets, but using the same strategies, if not

successful, strategy development loses direction, further damaging performance.

• Eventually transformational change is required if the demise of the organisation is to be

avoided.

Transformational change tends to occur when performance has fallen off significantly, i.e.

in times of crisis.

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So, overall it is important to realise why strategic drift occurs.

Managers, faced with the complexities of steering an organisation, tend to look for solutions

based on the current ways of doing and seeing things, grounded in the existing

organisational culture and this can lead to the wrong decisions being made

The realisation of performance problems is often followed by a period of flux where no clear

direction is pursued - this may itself be followed by transformational change, in which there

is a (too late) fundamental change in strategic direction

The challenge for managers is to stand apart from their own experience and organisational

culture so that they are able to recognise the emerging strategic issues which they face.

New strategies might require actions outside the scope of the existing culture.

Thus people within the organisation are required to substantially change their core

assumptions and their ways of doing things.

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 Syllabus C2c. Drivers of change

Drivers of change

Drivers for change can be either internal or external, but are specific to the context in which

the organisation operates. Here we look at the external

The idea is that you look at the environment using PESTEL, and in the exam there will be

some fairly obvious key drivers - such as an impending recession or technology going out of

date

The drivers must be strategic to the future of the whole organisation, not just specific

functions or departments. Localised priorities are often found to be in conflict with the overall

best interests of the organisation.

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 Syllabus C2d. Porters Diamond

Framework 2: PORTER’s DIAMOND

This framework is particularly important in GLOBAL competition contexts

This model suggests there are inherent reasons why some nations & some industries are

more competitive than others

For firm strategy it also includes:

Local rivalry can really push the industry in that nation

“High status” industries eg Investment banking in UK can lead to a competitive advantage

How has the Diamond been used?

1. National Level

Encouragement of competition by governments, rather than being protected from outside

competition

Governments trying to foster high standards amongst its population

2. Organisational Level

Building on their countries advantages eg Benetton in Italy

138
Criticisms of the Diamond

• More relevant to developed nations

• Does not consider multinational companies

139
In the Exam

Be careful of companies who do well locally - due to the local conditions - this may well not

transfer abroad if that is the strategy

Also, if you are a company competing in an industry which has no local advantages, be

careful of competitors growing in countries where they have a natural advantage

The examiner will make it quite clear when he wants you to use this as he will be explicitly

giving you the local resources / structure / supporting industries / local demand

All you have to do, then, is plug them into the model

It is a fairly specialised model and so won’t be as prominent in the exam as, say, the 5 forces

model

Learn more list

Silicon Valley in London?

Good example of the diamond in action?

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 Syllabus C2e. Scenario Planning

Scenario Planning

The Use of Scenarios

After identifying the different factors and drivers, they can be usefully built into scenarios

Scenario Planning

Particularly useful when preparing a long term view (minimum 5 years) with:

• Few Key influences

• High uncertainty surrounding them

eg Oil Industry (raw material availability, price and demand)

• This will result in a limited number of logically consistent, but different scenarios to be

compared

Benefits

Sensitivity analysis of different strategies (what happens if…)

Challenges the status quo - promoting more innovative approaches

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How are scenarios prepared?

Step 1

Identify high impact, high uncertainty key Factors (PESTEL analysis) - keep the numbers low

Step 2

Identify Different Possible futures in each factor

Step 3

Build scenarios of plausible configurations

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External Environment: country, industry

Country environment: MACRO, general, PESTEL

Industry environment: MICRO, market-place, competitive, PORTER 5 FORCES

Syllabus C3. Competitive Forces

Syllabus C3a. Porter's 5 Forces

Porter's 5 Forces

Porter proposed this as a means of examining the competition at the SBU level

(if this was performed at a more general level the variety of influences would be so big, it

would reduce the value of the analysis)

Bargaining power of customers
Bargaining power of suppliers
threat of new entrants
threat of competition
threat of substitute product

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Porter's 5 Forces

• Threat of Entry If Barrier is high, threat is low.

This becomes a problem to a company when:

Patents, Govt approvals, Govt license, Franchise

1. No economies of scale exist currently

2. Little capital is required to set up

3. Competitors expect very little retaliation

4. There are few Legal restraints to get into the industry

5. No differentiation of your own product

• These barriers to entry differ in different markets, in the exam you need to look for:

What barriers exist & how powerful are they

• Power of Buyers / Customers High or Low

This is a problem to the company when:

1. Suppliers are small and many (customers have lots of choice)

2. Many alternative suppliers (we have a lack of differentiation)

3. Switching suppliers is cheap and easy

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• Power of Suppliers

This is a problem to the company when:

1. There are few suppliers (Not much choice where to buy from)

2. Switching is expensive and difficult

3. The supplier has an excellent brand

4. Customers are fragmented

• Some organisations (eg RCA) do not supply tangible goods but a service.

The availability of skilled staff is therefore crucial and a strong differentiator

A big problem in creating a strategy is how the power can be enhanced and make sure

that in the “buyer-seller” relationship both win…

Alternatives
• Threat of Substitutes

Higher when:

1. Substitution of Product easy (eg Email v postal service)

2. Substitution of Need easy (Phone made ipod unnecessary for some)

3. Generic substitution of Need (Car v Holiday)

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• Key points to look for in the exam:

• Does the substitute make our product obsolete?

• Does the substitute bring a higher perceived benefit?

• Can the buyer easily switch to the substitute?

• Can the risk of substitution be reduced by building in “switching costs”

I read an interview with the head of Evernote about making its product free and then
charging for a premium service if required.

His thoughts were counter-intuitive but backs up the switching costs theory - he said that to
grow the number of users who transfer to the premium package - you need to make the free
package even better!

(Mailchimp did a similar thing and reported equal success in their premium service takeup)

The idea is that the free service becomes so useful that “switching” to another provider is
unthinkable as you have used this one so long and have spent time organising your account
(think facebook).

Therefore switching costs are now very high (if only in terms of time) and so now when you
need something more you look to that brands premium service rather than elsewhere

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Competitive Rivalry

Is the rivalry going to intensify and how can it be influenced?

A problem to the company when:

market share

1. The competition is of similar size

2. There are more global customers in market

3. There are high fixed costs (thus making turnover vital and can lead to price wars)

4. Extra capacity only available in large increments

5. There are high exit barriers (eg specialised plant bought or redundancy costs)

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 Syllabus C3b. Industry, Sector and Convergence

Types of Industry

Type Explanation Example

Fragmented Small firms to small portions of market Dry Cleaners; Hairdressers
Emerging Just starting to develop Space travel
Mature Latter stages of lifecycle Car manufacturers
Declining Less firms, less sales Coal mining
Global Worldwide marketplace Professional footballers

Convergence

This is where 2 or more industries come together and serve the same marketplace

When this happens, there is a huge impact on the industry

Apple went from producing computers, then to iPods then to iPhones.

In the latter they effectively converged the phone, mobile computing and music sales
industry together in some aspects

Apple are now seemingly headed in the direction of Televisions, this could have an
enormous effect not only on the TV manufacturers but also the broadcasters, as different
industries converge

In doing so - new markets emerge also eg The app store and the ability to “rent” TV and
music.

The renting of music is still an emerging industry and one which looks set to dominate the
marketplace

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1. Demand - led Convergence

Customers bring the industries together. eg Designers and developers.

Here the geek and the stylish are merging into one - as this is what the customer wants.

He doesn’t want to deal with 2 separate people when creating his website

2. Supply - led Convergence

Suppliers bring the industries together.

This happens a lot in the technology industries (see Apple example earlier) as they are

aware of the possibilities before the consumer

Convergence of Markets

This is increasing worldwide, consumer needs are becoming more similar.

Not only that they are changing in line with each other (across nations).

Consumers then become global consumers and may look for global suppliers

This means that brands, marketing etc can all be developed globally, with cost advantages

in doing so

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Cost Advantages of Globalisation

The obvious economies of scale where large volume, standardised products are required

Efficiencies from getting the lowest global cost suppliers (however think of recent move back

from outsourcing customer service to highly skilled, cheap labour in India)

Government Policy towards globalisation

Technical standardisation between products due to freer markets and trade between

countries, such as in the airline industry

Some countries actively encourage global operators into their markets eg The gaming

industry in Malta

150
 Syllabus C3b. The Influence of Strategic Groups & Market Segmentation

Strategic Group Analysis & Competition

This identifies firms with similar strategic characteristics e.g.

1. Product and geography diversity

2. Distribution channels

3. Marketing effort

4. Quality of product

5. Cost position

6. Pricing policy

7. Ownership structure

8. Size

9. Relationship to influential groups (e.g. Government)

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Why is this useful?

Well it is only useful when there are many competitors, but it helps in the following ways:

1. Helps identify direct competitors

2. On what basis the competitive rivalry will happen

3. Helps analysis of whether / if can move to other strategic group

4. Might identify opportunities elsewhere

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Market Segmentation Analysis

1. Geographical area

2. Quality preferences

3. Function

4. Consumer or business customer?

5. Social status

6. Age

7. Life-style

This type of analysis can show “gaps in the market” or “strategic spaces”. Once these have
been identified, then analysis into an amended product can be conducted

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 Syllabus C3cd. Value Chain

Competitive advantage

Competitive advantage or the competitiveness of an organisation can be achieved by the

way in which it organises and performs its activities.

Value activities are the activities by which an organisation creates value in its products.

A Value chain describes the activities of the organisation that add value to purchased inputs.

Primary activities are those involved in the production of goods or service. Support services

supply assistance.

The linkages are the relationships between activities. Managing the value chain, which

includes relationships with suppliers, can be a source of strategic advantage over

competitors in the industry.

154
The best way to demonstrate this process is through the example of a restaurant.

• A restaurant has to buy food, cook it and then serve it to customers.

• Customers purchase value.

A customer compares your product with similar competitors.

• The business creates value by ensuring their product (food, effective service etc) is

either more efficient or that they are providing a unique product or service.

Porter developed his value chain to determine whether and how a firm's activities contribute

towards its competitive advantage.

Activity Comments
Inbound logistics receiving, handling and storing inputs to the production
system, warehousing, transport, inventory control etc
Operations convert resources into final product. people are also a
resource in service industries
Outbound logistics storing the product & distributing products. packaging,
testing, delivery etc
Marketing & sales information customers about sales, persuading them
to buy, advertising, promotions etc
After sales service installing products, repair, upgrading, spare parts etc
Procurement buying the resources inputs to the primary activities
Technology product design, improving processes and/or resource
Development utilisation
Human resource recruiting, training, development and rewarding people
management
Firm infrastructure planning, finance, quality control, porter believes this
can be of great strategic importance for an organisation

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 Syllabus C3c. Value Chain Analysis

Value Chain Analysis

Looks at the activities of a firm to see those which form a competitive strength

Primary Activities

• Inbound

This is the receiving and storage of goods

• Operations

This transforms the goods or service

• Outbound

The distribution of the product to the customer

• Marketing and Sales

• Customer Service

Area Function Example

Inbound Receiving, storing and taking it to the Stock control, Transport,
Logistics product Materials handling
Operations Transform inputs into the product or service Packaging, machining,
assembly, testing
Outbound Collection, storage and distribution of Warehousing, transport
Logistics product to customer
Marketing How users are made aware of product and Sales admin, advertising
and Sales able to purchase it
Service Enhances or maintains value of the product Installation, repair, training

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Support Activities

These support the primary activities above..

Procurement

The purchasing of goods

Human Resources

Recruitment, training and rewarding of staff

Infrastructure

Systems and routines including Quality control

Area Function Example

Procurement Acquiring inputs into primary Buying raw materials
activities
Technology Key technologies (including ‘know R&D, product design, process
Deployment how’) for the product / process / development, raw material
resource improvements
Human Across all primary acts. Determines Recruiting, training, developing
Resource whether firm is rigid or innovative and rewarding staff
Management
Infrastructure Structures, routines, systems (again Quality control
determines rigid or innovative)

It is rare for 1 company to do all the value activities itself. Normally specialisation occurs and
the company is just a part of a wider value system

In fact much of the value is created in the supply and distribution channels

Management should look at adding more value at each stage of the value chain

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How to Add Value

1. More features

2. Less features but more user friendly

3. Making a purchase easier

4. Promotion of brand

5. Speed of delivery

6. Reliable service

7. Innovation

Using Value Chain Analysis

Creating value for customers ultimately leads to creating value for shareholders

In your exam the model is used to provide a strategic assessment of performance

• Assess each link in the chain by asking yourself the following:

How (if any) is value added here?

Is the value greater than those created by the competition?

Have added value techniques failed?

If there are no core competencies in the one area then consider outsourcing

Learn more list

People Tree

Where ethics is a resource

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 Syllabus C3d. Value Network

Value Network

As well as managing its own value chain, a firm can get a competitive advantage by
managing its relationships with the value chains of its suppliers and customers too

So, an organisation's value chain is not just internal but also connected to others externally -
in what we call a value network

'The value network is the set of inter-organisational links and relationships that are
necessary to create a product or service.’ Johnson et al, 2017)

Its not just a supply chain - the VALUE Network emphasises on the VALUE-creating ability of
the supply chain processes.

A Restaurant

A great chef needs great ingredients (supply chain). So the ingredient grower adds value

Large organisations (think 5 forces) can exercise power over suppliers through their

bargaining power

But it's not just all about driving down the price - relationships in the value network need to

be managed carefully in order to promote innovation and create knowledge between the

organisations.

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 Syllabus C3e. Opportunities & Threats

Opportunities & Threats

SWOT analysis

S = Internal resource STRENGTHS

W = Internal resource WEAKNESSES

O = Environmental OPPORTUNITIES to increase competitive advantage

T = Environmental THREATS to decrease your competitive advantage

Notice how S&W are internal; O&T are external

Here we are concentrating on the opportunities and threats in the competitive environment

TOWS matrix

All of the factors influencing the current and future position of the organisation is divided into:

1. External and internal to the organisation,

2. Having negative and positive impact on the organisation.

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The intersection of above distinctions gives four categories of factors:

1. External and positive (opportunities)

2. External and negative (threats)

3. Internal and positive (strengths)

4. Internal and negative (weaknesses)

Strengths Weaknesses
Opportunities S/O W/O
Threats S/T W/T

SO - using your strengths to take advantage of opportunities - this may be expected to

produce good short-term results, while

WO - minimising weaknesses to take advantage of opportunities is likely to take much

longer to show results.

ST (using strengths to overcome threats) and WT (minimising weaknesses to reduce

threats) strategies are more probably relevant to the medium term.

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How can they be identified?

1. Look for changes in the environment

2. Look for strategic spaces (gaps in the market)

3. Use the PESTEL framework to ensure you’ve searched for O&T in the full environment

After the identification, the next step is to

Consider the competition

Think of how the 5 forces may change

Think of which area of the lifecycle the market is in - is it about to change area?

Is there an opportunity for a new market segment?

162
 Syllabus C3e. Lifecycle and Competition

Lifecycle and Competition

Lifecycle

1. At the Intro stage = Few Competitors

2. At the Growth stage = Fight for market share is strong

3. At the Maturity stage = The weakest competitors die /Price-cutting for volume then

emphasis on low costs

4. At the Decline stage = The exit of some competitors

163
Lifecycle Model & Costing implications

At each phase, the sales and costs spent will be different, both in terms of volume and price

Stage Cost Type

Developme R&D and set-up
nt
Introduction Marketing and Advertising
Growth Costs to increase capacity; Learning effect and Economies of Scale;
Working capital increases
Maturity Marketing and product enhancement
Decline Restructuring costs

164
The product lifecycle will help:

1. Decide when to enter / leave market

2. New products - see costs and sales over all its life

3. Existing products - assess where it is in the lifecycle and what the future prospects are

• Cycle of Competition

This again tries to help understand competitors behaviour

“New initiative - copied and bettered by competition expected”

Effect

In a growing market - prices fall and quality improves

In the maturity phase - lower prices only at expense of quality (so lower quality)

In the decline phase - lower prices to the point of no profitability

165
 Syllabus C4. The Internal Resources, Capabilities &
Competences of An Organisation

Syllabus C4a. Resources & Competencies

The internal resources, capabilities and competences of

an organisation

Resources - machinery, money, manpower etc

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SCA = Sustainable competitive advantage

Strategic Capability

Using core competences to create a competitive advantage

Competitive advantage comes from the correct management of

competences and resources

• Resources

1. Threshold Resources

Without these, an entity can not survive in the market

2. Unique Resources

Competitors don’t have these and would find it difficult to acquire them.

Therefore they can form a competitive advantage

However, be careful as these can disappear over time (eg Lose key employee,

patent expires)

167
• Competencies

1. Threshold Competencies

The ability to provide a threshold product. Same competencies as competitors (or v

ery easy to imitate)

2. Core Competencies

Ability to meet CSFs and so give competitive advantage

3. Sustainable Core Competencies

Keeping the core competencies long enough to achieve strategic objectives.

So must be difficult to imitate

• Organisations should expect real costs per unit to decline over time - thus they must

attempt to continue to produce value for money

Learn more list

Hole & Cornerstone

Using a passion as a competitive advantage

168
 Syllabus C4a. Effective cost management and control systems

Cost Efficiency and Strategic Capability

Cost Efficiency

The level of resources needed to create value

Costs can be lowered by:

1. Economies of scale

2. Economies of scope (producing more products with the same materials)

3. Process design

4. Experience

Organisations should expect real costs per unit to decline over time - thus they must attempt

to continue to produce value for money

169
 Syllabus C4b. Capabilities required to sustain competitive advantage

Capabilities required to sustain competitive advantage

Competitive advantage

1. Creates value that customers are willing to pay more for

2. Creates same value as competitor but at lower cost

Capabilities

The co-ordinating of resources and competencies to create competitive advantage. They are

unique to each business

Dynamic capabilities

Create new capabilities by adapting and innovating

170
 Syllabus C4b. New product strategies

New Product Strategies

With the passing of the industrial age, and into a knowledge, technology led one - new

products can be created quicker than ever before and reach more people quicker than ever

before

The tools for doing so are not only cheap but often free

The effect of this is to lower entry barriers to existing industries and markets

With processes (and products) there is a temptation to keep adding new features, processes

and products - often to the detriment of existing ones

New products and processes need to be well planned - with consideration on when to

introduce new products, how best to extend the life of mature ones and when to abandon

those in decline.

Different Strategies

Leader strategy

This means being at the cutting edge of new innovation and product. It means getting ‘first
mover advantage’

Many now believe that first mover advantage is over-estimated

It costs money and has lots of risk attached - Large R&D activity

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Follower strategy

Alternatively some wait for others to innovate and then pounce to create something similar
once they know there’s a market - although of course a competitor will now have the market
share to begin with

It does mean far less R&D - and less risk

A follower might have to license certain technologies from a leader (as is the case with many
consumer electronics companies). However, research indicates that this can be a more
profitable strategy than being an innovator, especially when the follower is able to learn from
the leader's mistakes.

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 Syllabus C4c. Corporate knowledge and Strategic Capability

Corporate knowledge and Strategic Capability

Know how

‘Know how’ can form a competitive advantage, if it cannot be easily replicated. It comes from
a combo of unique resources and core competences eg

1. Experience of industry

2. Employee knowledge

3. Management of people to encourage innovation

4. Management of IT systems

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 Syllabus C4d. Analysing Strengths and Weaknesses

Analysing Strengths and Weaknesses

This can be done in 3 ways:

1. ‘Value chain Analysis

2. Capability Profile

- An assessment of the key processes needed to consistently add value

3. SWOT analysis

- Management need a thorough understanding of the resources to perform a SWOT

analysis

Management need a thorough understanding of the resources to perform a SWOT analysis

Preparing a SWOT analysis in the exam

SW - concerned with the core competencies

OT - concerned with environmental factors

In the exam , simply think “strategically” and write out the 4 lists from information in the case.

Then you need to interpret it. This involves ranking the list in terms of priority.

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Valuing Resources

The resources could then be valued using the VIRO approach

Value (does the resource provide a competitive advantage)

Imitable? How costly to imitate it

Rarity - how unique is the resource

Organisation - does the organisation utilise the resource fully

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 Syllabus C5. Strategic Choices

Syllabus C5a. SAF Model

Johnson & Scholes SAF Model

A successful strategy needs to be:

1. Suitable (fit)

2. Acceptable (to stakeholders)

3. Feasible (resources available)

These 3 tests can be applied to any strategy decision!

Suitable Acceptable Feasible

Uses strengths Effect on shareholder M - word model (see
wealth below)
Overcomes weaknesses Cost / benefit
Meet objectives (profit, more Effect on gearing
control etc)

M achinery - sufficient spare capacity?

M anagement - Sufficient skills?
M oney - How much needed? Cashflows likely?
M anpower - Amount and skills of employees needed?
M arkets - Current brand strong enough or new one required? What share is critical?
M aterials - Quality? New suppliers needed?
M ake-up - Does the org structure need changing?
M oo-able - Does the new strategy moo like a heifer - sorry got carried away..

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 Corporate Parenting & Portfolio

Syllabus C5b. Diversity of Products And Markets

Diversity of Products and Markets

A successful strategy needs to be:

Many large businesses consist of a corporate parent and a number of Subsidiaries /

branches etc

So, often a corporate parent has no direct contact with the buyers or competitors, it only

manages the overall scope of the organisation in terms of:

• Diversity of products and markets

• International and geographic diversity

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Diversity of Products and Markets

The corporate parent controls product and market diversification because of:

1. Synergies in marketing, operating, NCA investments and using common corporate

management skills

2. Increased market power via a high margin business subsidising a low margin one,

enabling a price advantage and achieve dominance to recover these earlier losses.

3. The environment (maybe through new technologies available) wants new products so

diversification here protects existing shareholder value

4. Risk spreading (across more products) although shareholders can manage their own risk

exposure better themselves by diversifying their own portfolios.

Be careful though, the expectations of powerful stakeholders can lead to inappropriate

strategies generally. The pressure for growth can lead to ill-considered diversification.

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 Syllabus C5b. International Expansion

Globalisation

This means huge numbers of suppliers exporting to, or trading in, a wide variety of places.

However, the existence of global markets should not be taken for

granted in terms of all products and services, as:

• Some services are still subject to trade restrictions

• Immigration: There is a disparity in skills between different countries and restrictions on

immigration

• The market for some goods is much more globalised than for others.

(i) Upmarket luxury goods may not be required or afforded by people in developing

nations.

(ii) Other goods are needed almost everywhere e.g..Oil

Here are some types of global business:

1. Exporting - Simply expands your current market and is relatively low risk

2. Overseas branches - This is the next step, often, when turnover is large enough.

3. Overseas production - maybe for cheaper labour and it reduces exporting costs.

4. Multi-national Companies - fully functional organisations being set up overseas. This

reduces exchange rate and political risk but economies of scale may be lost

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So globalisation integrates learning, skills and competences to achieve global efficiencies

while retaining local responsiveness.

International Expansion

Why expand abroad?

1. Economies of scale can be achieved more easily

2. Markets are converging - enabling a standard product to be sold in many markets

3. Avoiding currency risk by setting up businesses abroad, thereby matching income and

expenses in the same currency

4. Using home countries natural competitive advantage (Porters Diamond) and transferring

skills abroad

5. To compete with other players following an international strategy

6. To overcome import/export regulations

So these are some of the reasons why businesses should look to expand abroad, though of

course this does not guarantee success.

A lot of thought has to go into how to expand.

Should you open up a direct subsidiary or go into a joint venture with a local business,

should you license or franchise your goods etc

Equally thought needs to be given to the local market. What works well in one country may

not in another and so a product/service may need to be altered in some way - though again

not always, many standard products also sell well in many different countries and cultures

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How to Expand Abroad

Strategy
International Scale Standard product made in selected countries. Thus getting
Operations economies of scale and minimising distribution costs. Head office
probably in home country
International Value is added in the different countries. Therefore may be branded
Diversity differently there. Local variations made. No attempt at global
recognition
Globalisation Standard product and brand name, but produced in the various
different countries. Nothing centralised

So, which is best?

Neither, probably a mix. The aim is to minimise the costs of variation, while maximizing the

economies of scale

Multinationals v Global companies

Multinational Global
Strategy For each foreign market Worldwide strategies
separately
Product Adapted for each market Standard with minimal variations
s
Marketin Adapted to each culture Uniform with minimal variations
g
Locatio Based on individual potential Based on ability to contribute to global
ns profitability strategy

Culture Often that of the head office Globalised. Management from different
country countries

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 Syllabus C5c. The 4 Ps

Much business strategy is based on the marketing

approach.

The approach needs to appeal to customer needs such as:

1. Quality

2. Design

3. Availability

4. Ease of purchase

Different types (consumer, commercial customers & government) of customer have different
needs

The Marketing Mix (4Ps)

1. Promotion - Including direct sales

This will depend on market segmentation to an extent.

The company will decide on whether it is just pushing its features out to the customer
through advertising, or whether it is trying to get more indirect promotion by creating a
great product that customers come to you (what is known as ‘pull’ (by the customer)
promotion)

2. Product - Design & quality; Delivery & service

Customers are segmented according to their needs, so products can be developed to

meet those needs. The closer the needs are met, the higher quality the product.

Augmenting the product is a way of meeting these needs, or creating new needs.

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3. Place - The channel of distribution

This is all about convenience to the customer. How easy is it to buy the product.
Obviously the internet helps here, but many products people like to actually go and
browse or trial

4. Price - including discounts

This affected by costs, economy and competition.

It also depends on where you position your product (high or low end), or where the
product is in its lifecycle.

Market penetration for example would mean a lower cost.

There are also practical issues such as loss leadership.

3 more P’s are sometimes added to the mix (particularly for services):

1. People

2. Processes

3. Physical Evidence

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 Syllabus C5c. Porter's Generic Strategy

Porter’s Generic Strategies

This deals with HOW to change your competitive edge and gives 3

possible options:

• Cost Leadership

This means being the cheapest across the range of products and can be achieved

through:

1. Cheapest suppliers

2. Economies of Scale

3. Technology use

• The problem here is that only 1 company can be the cost leader and this is very difficult

to continually achieve and maintain threshold competencies

• Differentiate your Product

This can be achieved through:

1. Brand building

2. More features

3. Less features (but great usability)

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 4. Ease of ordering

• The problem here is that companies copy and become even better very quickly

• Focus on a niche area

This is where you concentrate on one particular market segment and focus all your

activities upon them.

You become very well known in that area, and are the natural “goto” choice.

The problem here is that growth beyond this niche is difficult

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 Syllabus C5c. Lock-in Strategy

Lock in Strategy

The idea behind this is that when a customer purchases once from the

company they are effectively “locked in” to buying from them in the

future

• Eg Microsoft Office package

• Eg Apple iTunes

It often means being the ‘industry standard’

These type of strategies are now less of a stronghold as they once were.

Only a few years ago the Microsoft “Windows” operating system would have been a great

example but it is now quickly losing its grip on the market.

The same can be said of iTunes for Apple

Another form of lock in is the purchase of an item with a long UEL.

This effectively ensures that all repairs and servicing is through that company too

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Evernote

The idea here is that customers become locked in, using the product for free.

They have no desire to use another similar system because all their old usage is all in the

Evernote system.

Similar to Microsoft Office and Apple i-tunes etc

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 Syllabus C5d. BCG matrix

Boston Consulting Group Matrix

This allows a company to select the best strategy for SBUs whilst also staying in line with

overall corporate strategy.

The objective of the matrix is to assist with the allocation of funds to different products or

business units.

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Market Growth

Above 10% = high

Below 10% = low

Market Share

Sales as % of biggest competitors' sales

Weaknesses of the BCG

• Assumes that a small market share is not a sustainable situation - Porsche might

disagree!

• There are other factors to consider apart from market size and share - such as strength

of the competition, brand strength etc

• Difficult to calculate exactly what the market size and share are

• High and low market share is difficult to define

• Growth rates around 10% become problematic - fall below or inch above and suggested

treatments are massively different

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 growth model
Syllabus C5e. Ansoff matrix

Strategic Choice

Ok so we've looked at the environment - and called this strategic position (or strategic

analysis).

This will almost always Question 1 part a)

Now our attention turns to Strategic Choice

This will tend to be question 1b) or c)

So, due to our studies so far, we now understand our environment and our SWOT.

So what should we do now - what options do we have that maximise our

strengths & opportunities and minimise our weaknesses and threats?

In the exam something will probably be going wrong, or things are happening in the

environment that mean we need to change somehow

Now this causes us a problem.

In Question 1a) we will have been looking at the environment USING THE CASE given to us

- and just slotting the info into maybe PESTEL or 5 FORCES and saying why they are

important

Here, though things are completely different - the examiner is now saying SUGGEST a

strategic option - which means you need to think of something yourselves (eek!)

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Well before you run off and hide in the corner, I have some good news for you..

Ansoff has created a really useful model to help you in the exam.....

So to grow, the company must:

1. sell more in its existing markets (try to make its existing markets bigger)

2. sell new products in its existing markets

3. sell existing products in new markets or new market segments (for example in other

countries)

4. sell new products in new markets

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These are strategic directions that Ansoff described in his growth sector matrix above

Although you won't have to do all of these in the exam (often you don't need any model at
all), I thought I'd show you how useful Ansoff is by showing where all the other models in this
section fit into it..

1. Market Penetration

A sensible choice in a growing market. This would mean a bigger potential demand as

time goes by.

Equally, not so good in a declining / mature market

How to do it

1. Persuade existing customers to buy more, through more use and marketing

2. Persuade customers who have not bought your product before to buy it now.

3. Maybe by advertising or special promotional offers.

4. Persuade customers to switch from competitors.

5. (notice how 1 and 2 increase total demand whereas 3 just takes a bigger share)

2. Market Development

How to do it

• Start selling in new geographical markets (through regional, national or international

expansion).

• Offer slightly differentiated versions of existing products, or by making them available

through different distribution channels.

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3. Product Development

Why choose this strategy?

• You have a strong brand and can extend the goodwill to new products.

• You have a strong research and development department or a strong product design

team.

• To respond to a new product by a major competitor

• To respond to changing customer needs / tastes or just making use of new technologies

now available

4. Diversification

• Concentric diversification

(also called related or horizontal diversification), means that the new product-market

area is related in some way to the entity’s existing products and markets

• Conglomerate diversification

which means that the new product-market area is not related in any way to the

entity’s existing products and markets.

These could both be achieved by (most likely) acquiring existing companies abroad

or at least entering into JVs and franchises etc or it could also be done by simple

organic growth - though this would be far harder and slower (though the returns may

be greater)

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 Syllabus C5f. Strategy Development

This can be done INTERNALLY, through

ACQUISITIONS or via an ALLIANCE

Internal Development

Often called 'Organic growth'

1. Build on company's core competencies

2. Suits a Risk-averse culture

3. Easier to Control & Manage

4. Slow

5. Growth restricted by own competencies

6. Better for growth at home rather than abroad)

Acquisition & Mergers

1. Fast to new markets

2. Gains new competencies

3. High risk due to initial costs

4. Funding problems of initial costs

5. Problems with cultural fit

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Strategic Alliances

2+ businesses share resources to pursue a strategy

1. No large initial costs

2. No cultural fit problems

3. Specialise on each businesses own competencies

Types of STRATEGIC ALLIANCE

• Joint Venture

A new organisation is set up

Both venturers put in resources

Formal & slow

• Licence agreement

Allow others to use your resources in a new market

Less Control

If successful the other venturer may then develop their own and thus not need the

licence

Needs little initial costs

Needs trust and cope ration

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 Syllabus D: Risk
Syllabus D1. Identification, Assessment & Measurement Of
Risk

Syllabus D1b. Risk in the context of corporate governance

Risk

This is present when future events occur with measurable probability

Risk and Corporate Governance

One link between risk and corporate governance is the shareholders' concerns about the
relationship between the level of risks and the returns achieved.

Another is the link between directors' remuneration and risks taken.

If remuneration does not link directly with risk levels, but does link with turnover and profits
achieved, directors could decide that the company should bear risk levels that are higher
than shareholders deem desirable.

It has therefore been necessary to find other ways of ensuring that directors pay sufficient
attention to risk management and do not take excessive risks.

Corporate governance guidelines require directors to:

• Establish appropriate control mechanisms for dealing with the risks the organisation
faces

• Monitor risks themselves by regular review and a wider annual review

• Disclose their risk management processes in the accounts

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 Syllabus D1b. Risk Management Systems

Management responsibilities in risk management

The Risk Manager is responsible to Senior Management for the

following functions:

1. To identify and quantify the organisation’s exposures to accidental loss.

2. To adopt proper financial protection measures through risk transfer (to outside parties),

risk avoidance, and risk retention programs.

3. To develop and update a complete system for recording, monitoring, and communicating

the organisation’s Risk Management program components

4. To develop and implement loss prevention/loss retention programs.

5. To establish Risk Management policies and procedures

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 Syllabus D1c. Risk Management Process

Risk and the risk management process

- Commitment from top management (Board)
- Create a formal Risk Committee at Board level
5 step process: - Risk Assessment
- Staff training
- Appoint Risk manager (for larger companies)
1. Identify Risk - Risk audits (for larger companies)

Make list of potential risks continually.

Identify risks facing the company - through consultation with stakeholders

2. Decide on acceptable risk

Decide on acceptable risk - and the loss of return/ extra costs associated with reduced
risks

3. Analyse Risk

Prioritise according to threat/likelihood.

Assess the likelihood of the risk occurring - management attention obviously on the
higher probability risks

4. Plan for Risk

Look at how impact of these risks can be minimised - through consultation with affected
parties.

Avoid or make contingency plans (TARA)

5. Monitor Risk

Assess risks continually.

Understand the costs involved in the internal controls set up to manage these risks - and
weighed against the benefits

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 Why do all this?

To ensure best use is made of opportunities

Risks are opportunities to be siezed

Can help enhance shareholder value

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 Syllabus D1d. Distinguish Between Strategic & Operational Risks

Identifying Risks

Management must be aware of potential risks potential impact

They change as the business changes

So this stage is particularly important for those in turbulent environments

Uncertainty can come from any of the political, economic, natural, socio-demographic or

technological contexts in which the organisation operates.

Categories of risk

• Strategic risks

Refers to the positioning of the company in its environment.

Typically affect the whole of an organisation and so are managed at board level

• Operational risks

Refers to potential losses arising from the normal business operations.

Are managed at risk management level and can be managed and mitigated by internal

controls.

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• Financial risks

= are those arising from a range of financial measures.

The most common financial risks are those arising from financial structure (gearing),

interest rate risk, liquidity

• Business risks

The risk that the business won't meet its objectives.

If the company operates in a rapidly changing industry, it probably faces significant

business risk.

• Reputation risk

Any kind of deterioration in the way in which the organisation is perceived

When the disappointed stakeholder has contractual power over the organisation, the

cost of the reputation risk may be material.

• Market risk

Those arising from any of the markets that a company operates in, such as where the

business gets its inputs, where it sells its products and where it gets its finance/capital

Market risk reflects interest rate risk, currency risk, and other price risks

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• Entrepreneurial risk

The risk associated with any new business venture

In Ansoff terms, it is expressed the unknowns of the market reception

It also refers to the skills of the entrepreneurs themselves.

Entrepreneurial risk is necessary because it is from taking these risks that business
opportunities arise.

• Credit risk

Credit risk is the possibility of losses due to non-payment by creditors.

compliance
• Legal, or litigation risk

arises from the possibility of legal action being taken against an organisation

• Technology risk

arises from the possibility that technological change will occur

• Environmental risk

arises from changes to the environment over which an organisation has no direct
control,

e.g. global warming, or occurrences for which the organisation might be responsible,

e.g. oil spillages and other pollution.

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• Business probity risk

related to the governance and ethics of the organisation.

• Derivatives risk

due to the use of underperforming financial instruments

• Fiscal risks

risk that the new taxes and limits on expenses allowable for taxation purposes will
change.

• Health and safety risk

Health and safety risks include loss of employees' time because of injury and the risks of
having to pay compensation or legal costs because of breaches.

Health and safety risks can arise from:

Lack of health and safety policy

Lack of emergency procedures

• Liquidity risk

If a business suddenly finds that it is unable to cover or renew its short-term liabilities,
there will be a danger of insolvency if it cannot pay its debts

However current liabilities are often a cheap method of finance (trade payables do not
usually carry an interest cost).

Businesses may therefore consider that, in the interest of higher profits, it is worth
accepting some risk of insolvency by increasing current liabilities, taking the maximum
credit possible from suppliers.

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 Syllabus D1e. Risk Appetite

Risk Appetite

Risk appetite describes the willingness of an entity to become exposed to an unrealised loss
(risk).

It is usually understood to mean the position taken with regard to two notional preferences:

1. Risk aversion

2. Risk seeking.

Both preferences are associated with different levels of returns:

those that are risk-seeking favour higher risks and higher returns with the converse being
true for the risk averse.

Risk-averse entities will tend to be cautious about accepting risk, preferring to avoid risk, to
share it or to reduce it.

In exchange, they are willing to accept a lower level of return.

Those with an appetite for risk will tend to accept and seek out risk, recognising risk to be
associated with higher net returns.

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 Syllabus D1f. Changing risk assessments

Changing risk assessments

The belief that risks do not change very much is only true in static environments.

In reality, the changeability of risks depends upon the organisation’s place on a continuum

between highly dynamic and completely static.

Risk assessment is a dynamic management activity because of changes in the

organisational environment and because of changes in the activities and operations of the

organisation which interact with that environment.

Examples:

1. A new product launch

The new product will obviously introduce a new risk that was not present prior to the new
product.

It may be a potential liability from the use of the product or a potential loss from the
materials used in its production.

2. A change in legislation

Changes in the environment might include changes in any of the PEST (political,
economic, social, technological) or any industry level change such as a change in the
competitive behaviour of suppliers, buyers or competitors.

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In either case, new risks can be introduced, existing ones can become more likely or have a

higher impact, or the opposite (they may disappear or become less important).

The best way of initiating a change management risk assessment is by dividing all the things

that come under the scope of the change management program into three groups:

1) Items that remain the same after the change

Examples of this category include patents, building and machinery, key personnel, and

other capital assets.

Such items normally do not pose any risks during the change management process.

2) Items poised to change

This includes assets that have no value to the company’s core business.

This includes outdated equipment, space that is standing idle, underused positions in the

company, redundant processes, and even redundant staff.

Replacing or eliminating such items either reduce expenses or enhances revenue flow.

Risk assessment for this second list need to focus on:

ensuring such items are really not needed for the company’s core processes

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3) Items that could go either way

The major scope of risk assessment lies in this group of items, to determine whether

possible changes in such items pose a risk to the organisation.

The best approach towards risk-assessment for items in this third list is through effecting a

trade-off.

For instance, curtailing the assembly line might curtail expenses and lead to better operating

efficiency, but it might come as loss of morale to staff and loss of prestige owing to running a

reduced set up.

Risk assessment entails comparing the benefits of efficiency with the losses owing to loss of

morale and prestige.

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 Syllabus D1g. Recognise & Analyse The Sector or Industry Specific Nature

Industry specific nature of many business risks

Industry-specific risks are the risks of unexpected changes to a business's cash flows from

events or changing circumstances in the industry or sector in which the business operates.

Unexpected changes can arise for example due to:

• new technology

• a change in the law

• a rise or fall in the price of a key commodity.

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 Syllabus D1h. Assess The Severity And Probability Of Risk

Risk assessment

Risk assessment is the process of evaluating the importance of a risk by making an estimate

of two variables:

1. The probability of the risk event being realised

Probability refers to the likelihood of the risk materialising and is expressed either as a

percentage or as a proportion of one (e.g. a 0.5 risk is considered to be 50% likely).

2. The impact that the risk would have if it were realised

The impact refers to the value of the loss if the risk event were to materialise.

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The estimated values of these two variables can be plotted on a risk assessment ‘map’,

where the two axes are impact and probability (see below).

Then, different risk management strategies can be assigned depending

upon the area of the map the risk is plotted in.

• ACCEPT (LOW - LOW)

Risks assessed at low probability and low impact can be accepted or tolerated

• TRANSFER (HIGH - LOW)

Those with high impact but low probability are often transferred or shared.

Insure risk or implement contingency plans.

Reduction of severity of risk will minimise insurance premiums.

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• MONITOR (LOW - HIGH)

Risks with low impact but high probability are typically reduced

• AVOID (HIGH - HIGH)

Those with high impact and high probability are typically avoided.

Take immediate action to reduce severity and frequency of losses, e.g. charging higher

prices to customers or ultimately abandoning activities.

• Board Evaluation of risk

Depends on:

• Risk appetite of company

• Maximum risk a business can take (capacity)

• Risk that can’t be managed (residual risk)

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 Syllabus D1i. Explain And Assess Alarp

Risk Attitudes

Risk Attitudes / Appetite

The overall risk strategy determines the overall approach to risk.

1. Risk Appetite

This determines how risks will be managed.

Some will be risk averse and some will be risk seekers, younger companies often need

to be risk seekers and more established companies risk averse

2. Risk Capacity

Risk capacity indicates how much risk the organisation can accept.

The overall strategy of an organisation will therefore be affected by risk strategy, risk

appetite and risk capacity.

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Risk is a good thing because…

Makes a business more competitive

Prevents just “following the leader”

Comes with rewards

ALARP

(As low as reasonable practicable)

• A risk is more acceptable when it is low (and less acceptable when it is high).

Risks cannot be completely eliminated, so each risk is managed so as to be as low as is

reasonably practicable because we can never say that a risk has a zero value.

For example, It would be financially and operationally impracticable to completely

eliminate health and safety risks

This does not mean becoming complacent, so we maintain a number of controls that

should reduce the probability of the risks materialising,

Risk awareness

describes the ability of an investor to recognise and measure the risk associated with a

given investment.

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 Syllabus D1j. Explain And Evaluate The Concepts Of Related And Correlated Risk Factors

Related and correlated

Related risks

These are risks that vary because of the presence of another risk.

This means they do not exist independently and they are likely to rise and fall in importance

along with the related one.

Risk correlation is a particular example of related risk.

Positively Correlated

• Risks are positively correlated if one will fall with the reduction of the other and increase

with the rise of the other.

Negatively correlated

• They would be negatively correlated if one rose as the other fell.

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Example

Often environmental and reputation risks are positively correlated - the more attention spent

on how the business interacts with the environment means their environmental risk is lower

and also their reputation risk

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 Syllabus D2. Managing, Monitoring and Mitigating Risk

Syllabus D2a. Risk Manager

Risk management committee

Risk management committee Role

1. To agree the risk management

2. Review risk reports from affected department

Provide board guidance on emerging risks

Work with the audit committee on designing and monitoring internal controls

3. Monitor overall exposure and specific risks. Strategic risk monitoring could occur

frequently

4. Assess the effectiveness of risk management systems

Roles of a risk manager

1. Providing overall leadership, vision and direction, involving the establishment of risk

management (RM) policies

2. Seeking opportunities for improvement of systems.

3. Developing and promoting RM competences

4. Reporting on the above to management and risk committee

5. Ensuring compliance with relevant codes, regulations, statutes

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Arguments against Risk management

1. Cost

2. Disruption to normal organisational practices

3. ‘STOP ’ errors - where a practice has been stopped when it should have been allowed to

proceed

4. Slowing the seizing of new business opportunities

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 Syllabus D2b. Heat Maps

Heat Maps

A heat map visualises risks

It gives a big picture, holistic view to share while making decisions about the likelihood and

impact of risks

In the heat map, values are represented by colours:

They can be SIMPLE (qualitative only: 3x3)

They can be VERY COMPLEX (both qualitative and quantitative: 5x5)

visual representation

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It is important to get approved terminology for the percentages, metrics, definitions, and

terms so that everyone in the organisation understands what they are and how they are

used in the risk assessment process.

This common language is an added benefit in the communication process of assessing

risks.

What benefits do Risk Heat Maps provide ?

1. A visual, big picture, holistic view to share while making strategic decisions

2. Improved management of risks and governance of the risk management process

3. Increased focus on the risk appetite and risk tolerance of the company

4. More precision in the risk assessment process

5. Identification of gaps in the risk management and control process

6. Greater integration of risk management across the enterprise and embedding of risk

management in operations.

Questions to consider when implementing a Risk Heat Map

How much risk are we willing to accept?

What constitutes a material risk to our company?

What is the range of acceptable variance from our key performance and operating metrics?

219
How will we define our terms to evaluate the likelihood of risk events and the impact that

they might have on our business, so that we can map our potential risk events to our heat

map?

220
 Syllabus D2b. Risk Registers

Risk Register
Risk | Impact | Likelihood | Priority | Mitigation Action | Owner | Next Review

A risk register is a tool that helps you track issues and address them as they arise.

It records the details of all identified risks - plus plans for dealing with those risks

So basically it identifies risks along with their severity and the actions and steps to be taken

to mitigate the risk.

The risk register database can be viewed by project managers as a management tool for

monitoring the risk management processes within the project. It is the responsibility of the

project manager to ensure that the risk register is updated whenever necessary. The task of

updating the risk register is usually delegated to the project control function.

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 Syllabus D2c. Embedded Risk

Embedded risk

It is important to embed awareness at all levels to reduce the costs of risk

In practical terms, embedding means introducing a taken-for-grantedness of risk awareness

into the culture of an organisation

Culture, defined in Handy’s terms as ‘the way we do things round here’ underpins all risk

management activity as it defines attitudes, actions and beliefs.

How?

Introduce risk controls into the process of work and the environment in which it takes place.

So that people assume such measures to be non-negotiable components of their work

experience.

Risk management becomes unquestioned, taken for granted, built into the corporate mission

and culture and may be used as part of the reward system.

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 Syllabus D2d. Diversification of Risks

Diversification of risks

Risk diversification is designed to spread risk and return.

Risk diversification involves creating a portfolio of different risks based on a number of

events, which, if some turn out well others turn out badly.

Diversification can be used to manage risks in a variety of ways:

• Having a mix of higher and lower risk investments, products, markets and geographical

locations.

• Having a mix of equity and debt finance, of short and long-term debt, and of fixed and

variable interest debt

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 Syllabus D2e. TARA

Risk response

Risk Planning and Control strategies

TARA
There are four strategies for managing risk and these can be undertaken in sequence. It is
sometimes called the TARA framework.

1. Transfer

This means passing the risk on to another party which, in practice means an insurer or a
business partner such as a supplier or a customer

2. Avoid

This means asking whether or not the organisation needs to engage in the activity where
the risk is.

If it is decided that the risk cannot be transferred nor avoided, it might be asked whether
or not something can be done to reduce the risk.

3. Reduce

This means diversifying the risk or re-engineering a process to bring about the reduction.

It can also include Risk sharing.

This involves finding a party that is willing to enter into a partnership so that the risks of a
venture might be spread

4. Retain Acceptance

This means believing there to be no other feasible option. Such retention should be
accepted when the risk and return characteristics are clearly known

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 Syllabus D2f. Policies And Techniques To Mitigate Risks

Policies and techniques to mitigate risks

Often risks can be avoided in part, or reduced, but not avoided altogether.

This is true of many business risks, where the risks of launching a new product can be
reduced by market research or advertising.

Policies and techniques

Risk policies

Are agreed at very senior levels of the organisation, by the board, risk committee or risk
manager

Risk mitigation techniques

Will be applied at various levels in the organisation by operational managers and staff.

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 Syllabus D2f. Risk attitudes

Risk attitudes

The overall risk strategy determines the overall approach to risk.

Risk appetite determines how risks will be managed.

Risk capacity indicates how much risk the organisation can accept.

The overall strategy of an organisation will therefore be affected by risk strategy, risk
appetite and risk capacity.

Some will be risk averse and some will be risk seekers, younger companies often need to be
risk seekers and more established companies risk averse

Risk is a good thing because…

• Makes a business more competitive

• Prevents just “following the leader”

• Comes with rewards

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 Syllabus E: Technology And Data Analytics
Syllabus E1. Cloud And Mobile Technology

Syllabus E1a. The Need To Explore Opportunities For Adopting New Technologies

New Technologies

Emerging technologies represent opportunities - to get ahead of the competition.

Technologies such as:

Cloud and mobile computing

Big data and data analytics

Early adopters get ahead of competitors

Market share is increased as they learn the potential benefits of the new technology before
others

Efficiency

Both in terms of speed of processes but also in understanding and meeting client's needs

Quantity of data

New technology both helps capture more data, but also store it and analyse it for growth

Everyone benefits potentially

Better performance, profits and efficiencies (even for not profit orgs)

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 Syllabus E1b. Discuss Key Benefits And Risks Of Cloud And Mobile Computing

Mobile Technology

Mobile technology includes: laptops, tablets, smartphones, GPS technologies etc

They help communication eg. Wi-Fi, Bluetooth

So it helps organisations communicate internally and externally

The rise in the amount of data generated and transferred between parties using mobile
technologies does however heighten the need for improved data protection.

Benefits of Mobile Technology

1. Working away from the office

2. Makes it easier for organisational stakeholders to interact with the organisation.

Eg. Paying online

Risks of using Mobile Technology

1. Expense of the latest devices (in case of smaller organisations).

2. Obsolescence very quickly

3. Potential unauthorised individuals gaining access to organisational data, ie hacking

To mitigate such risks:

Firewalls, Passwords,Training

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 과거: all companies had their own servers
server: big computer in which all your softwares and data are stored
having physical servers on their premises

Cloud Computing (third-party provider)

This is storing data in servers operated by cloud-based service providers.

Allowing on-demand access

Benefits of Cloud Computing

Significant savings in IT operation cost

1. Cost effective
Eliminate heavy investment in IT equipment
(Than in house data handling)

2. Greater flexibility

(data storage and management faster than establishing the technology in-house)

3. Data accessible anywhere

(where there is internet connectivity)

Small firms can benefit a lot as they cannot afford to invest in fixed IT infrastructure
4. Cloud computing is available to both very large organisations and smaller entities.

5. Higher level of storage capacity

6. Higher technical standards (e.g. higher security, regular backups, etc.)

Risks of Cloud Computing

0. High reliance on cloud provider, internet connectivity
1. Give up control of data to an external party

(risk of disaster event) Loss of direct control

2. Data held by the service provider may be stolen, lost or corrupted.

external party has gained an access to confidential firm’s data

3. Service provider's own staff may interfere with data

4. Failure to keep up payments may lead to a loss of access or even the deletion of data.

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 Syllabus E1c. Cloud As An Alternative To Owned Hardware And Software Technology

Cloud As An Alternative To Owned Hardware And

Software Technology

Organisations with excellent IT staff may prefer to retain data storage and data management
in-house.

Particularly if risk averse - with complex data compliance requirements

SMEs lacking IT expertise and resources may go for a cloud-based approach

Other factors to consider

24 hours support agreed? May mean you want to go to cloud (others too expensive)

Heavily customised data needs may mean you need more in-house than generic cloud

resources

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 Syllabus E2. Big Data And Data Analytics

Syllabus E2a. Information Technology & Data Analysis in Organisation Strategy

Growth In Organisational Data

The huge growth in data, analysed well, can help organisations understand the complexity of

their environment.

Helping them respond quickly to opportunities and threats and vitally gain new insights into

what customers want.

Data comes from:

1. Social Media

2. Internet usage

3. Internet of things

4. Search engine data

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 Syllabus E2b. Big Data

Big Data

Big data is a broad term for data sets so large or complex that traditional data processing

applications are inadequate. Challenges include analysis, capture, data curation, search,

sharing, storage, transfer, visualisation, and information privacy

This big data is then used to help businesses analyse their customers, their buying patterns
etc

It can also help in recruitment and marketing and many other areas

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 Syllabus E2b. Big data - The 3 V's

Big Data

Big data is an emerging technology that has implications across all business departments.

It involves the collection and analysis of a large amount of data to find trends, understand
customer needs and help organisations to focus resources more effectively.

The 3 V's

Big data has a role to play in information management

Gartner’s 3Vs definition of "Big Data":

1. Volume

The quantity of data now being produced is being driven by social media and
transactional-based data sets recorded by large organisations.

For example, data captured from in-store loyalty cards.

2. Velocity

Velocity refers to the speed at which 'real time' data is being streamed into the organisation.

To make data meaningful it needs to be processed in a reasonable time frame.

3. Variety

Modern data takes many different forms.

Structured data may take the form of numerical data whereas unstructured data may be
in the format of email or video.

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 Syllabus E2c. Data For Decisions About New Product Developments, Marketing And Pricing

New Product Development, Marketing And Pricing

- Deeper insight into data
- Better marketing and pricing strategies
- Improved customer service and relationship
New product development decisions include:
- Increased competitiveness
- Development of customized / personalized products
Potential costs and benefits of new products? - New source of revenue

Improve existing or create new products?

Any new skills needed to create the product?

Marketing decisions include:

How to promote goods?

What channels of marketing to be used?

What features to have?

Will processes need to change?

Competitor response?

Pricing decisions include:

Elasticity of demand?

Cashflow effect of prices?

Does price fit with overall strategy?

Competition prices?

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 Syllabus E3. Principles of e-business

Syllabus E3ab. Meaning & Scope of e-business

The Meaning of e-business

e-Business

Using internet technologies for key business processes

e-commerce

Electronic information exchanges between the company and its external stakeholders

• B2B (business to business) - e.g. Supermarkets systems automatically placing orders

when stocks are low

• B2C (Business to Consumer) - Selling over the internet (aCOWtancy.com)

• C2B - Groupon - consumers together buying from a business
• C2C - Ebay

Scope

Technology has helped rigid functional and divisional structures to be replaced by matrix and
network systems.

New work patterns have emerged that encourage flexi-working and other family friendly
measures. Many business processes are now automated.

Enterprise Resource Planning Solutions (ERP Systems) are now widely available providing
management with information that is available almost instantaneously.

Whilst Information Technology may be in fact used as a core competency, it needs to be

applied judiciously to suit the specific business needs

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The impact of IT on each of Porter’s five forces:

1. Rivalry

Use IT to reduce the effects of tough competition

Eg.Tour Operators can compare their price competitiveness by accessing the web-sites
of other providers on the internet accordingly.

2. Threat of new Entrants

Sophisticated IT applications are expensive & slow to develop whilst being

technologically challenging. On the other hand, IT reduces distribution costs for other
industries.

Eg MP3 has created a seismic shift in the music industry by penetrating at a very low
cost into an on-line distribution channel compared to its brick and mortar competitors

3. Supplier Power

Increased access to different suppliers decreases the power of the suppliers

4. Customer Powers

Increased knowledge of the market through the Internet has increased the bargaining
power of consumers

5. Threat of Substitutes

Using computer-aided design & manufacture to develop new products first

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 Syllabus E3ab. Why (and barriers to) e-business adoption

Why adopt e-business

1. Cost
It can often be less costly - think of the cost of producing online courses compared to
offline

2. Increased Sales
The internet is worldwide and 24/7. Of course not all businesses can benefit from this -
think of a local 2nd hand car business

3. Better Information
Comparison websites and collating info from your customers

4. Increased Visibility
aCOWtancy.com is run from Lincoln, England but is known throughout the world within
its industry

5. Enhanced Customer Service

Many services run technical help through their websites but even through Twitter.
Fast, real-time and personal service

6. Better Marketing
It reaches more people and a website can help create the brand. Serious? Friendly?
Fun? etc

7. Market Penetration
Low cost and no need to have a physical presence opens up a whole new market to
many businesses

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Barriers to Adoption

• Technophobia
Some business owners are wary of what they have never had experience of previously.
This comes to the fore with e-business

• Security Concerns
The website could be hacked and access to private information
Hardware cost
S/W license cost
• Set-up costs Website development
Increasing IT staff
Some websites can be costly indeed to set up Integration
(trust me iwith
know!)
current systems

• No e-business opportunities
Some business areas just don't really work online - eg restaurants

• No in house IT
Although this can be overcome by outsourcing

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 Syllabus E3ab. How IT improves customer relations

The Impact of eBusiness on Customer Relationships

Tie in/Switching Costs:

The consumer may need to learn how to use the technology and so incur some learning

costs in the process.

Moreover, some consumers may further be required to purchase a specific application in

order to be in a position to make use of services made available through an ebusiness

channel.

Such factors raise the switching costs incurred by the customer to move from one service

provider to another;

Disintermediation:

eBusiness can do away with the middleman who would otherwise be required to act as a

broker between the buyer and the seller.

Eg. on-line purchase of airline tickets & hotel accommodation

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Reintermediation:

Where alternative services are offered through a single gateway.

Eg. eBay, Expedia, and Travel Supermarket amongst others.

A key advantage of using these intermediaries is the possibility to access a wealth of

information on price and quality criteria for products and services that may be acquired and

compare these in accordance with the customer’s specific requirements;

Faster and Cheaper two way communication:

The RCA website was designed by a dude in downtown Brooklyn, New York. The site was

coded by William from Malta.

aCOWtancy was developed in London, UK. The illustrator lives in Israel, and the customers

come from all over the world

Communication between all parties is frequent and immediate

Development of User Communities:

Want to know how good your new Jaguar car might be?

There will be a forum and website dedicated to in the internet

Recommendations from user communities are indeed a powerful tool that may be used by

the organisations using ebusiness models since prospective customers are viewing an

independent opinion on the overall quality and value for money of the product and/or service

acquired from the seller.

Similarly a negative opinion is bound to put off a sale to a prospective buyer - think of user

reviews on Amazon

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Easier tracking of consumer patterns:

eBusiness Systems retain a trail of all transactions carried out by consumers over the

internet thereby making it easier for organisations to collect and analyse consumer patterns

in the process;

Enhanced Customisation:

Increased interactivity and easier tracking of consumer patterns creates the right framework

for segmenting the market and developing dynamic e-business applications which customise

the presentation, type and level of information and services posted on the portal.

E-business is just exchanging information in real-time, using the internet. The world wide

web allows for more potential customers and suppliers

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 Syllabus E3ab. e-business models

E-business is just exchanging information in real-time,

using the internet.

Tie in/Switching Costs:

The world wide web allows for more potential customers and suppliers

The main models, my little moo-friends, are as follows..

• e-shopping

The one we all love and know well - Think Amazon. If you need more explanation of this
- then please call 1990 as it is where you belong..

• e-auction

Nice and straightforward, think e-bay

• Freemium

This is the model on which acowtancy is built. A free trial, or free sections of the site are
made available but those who enjoy the site or want more from the site then you need to
pay for premium access.

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• Free

This works on advertising. The content is yours for free, but you become the product that
is being sold. Your attention is sold to advertisers. Think facebook

• (Dis) Intermediation

This has already been referred to in the previous section

It is where you either cut out the middle man and sell direct to your customer (e-
shopping). Or you become a middle man on purpose - you do all the hard work on behalf
of the customer and take a commission. Think comparison price websites

• New intermediary companies

With the huge amount of websites and products available - there is now a new breed of
businesses online which create more structure and organisation - filtering the web for a
particular product

Think of asos.com, or ‘best deals’ sites such as ‘last-minute.com’

• ’e-procurement’

This is business-to-business purchasing, by linking up the computer systems of

companies with those of their main suppliers.

• Advertising

Companies advertise their products or services on search engines such as Google, or on

the websites of other companies.

Companies with popular, high-traffic websites can sell advertising space and earn
revenue for their business in this way.

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 • Marketing

Marketing messages an be sent by e-mail to potential customers (although this form of

marketing is affected by the very large number of ‘spam’ marketing e-mails).

• Customer relationships

Good customer relationships can be created by providing real time support, user forums

and FAQ (frequently asked questions) pages.

Big data can also be used to analyse customer interests and preferences

Disadvantages (Threats) of Big Data

- Data security / leakage
- Data storage and management issues (hardware and software)
- Costly
- Legal issues / regulations

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 “how e-marketing can be used to attract and retain”

Search Engine Optimization Syllabus E3cde. e-Marketing

Websites
Emails
Social Media
Online discounts
Blogs
Link on related websites
Online news letters e-Marketing

e-marketing media includes websites, search engines, advertising on others sites, banner

adverts, posting on popular blogs, free downloadable materials, social media

Social media can be great for offering immediate support.

Posting on popular blogs means giving great advice and thus building up a strong reputation

within the industry

Free material could be in the form of a FREEMIUM model - like aCOWtancy.com where a

high quality product is offered at no costs - building trust with future customers

More traditional push advertising is available in google (including Search engine

optimisation) as well as on others sites

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The impact of e-business on the marketing mix for products and services

is outlined below:

• Product

A wider range of products is made available.

An opportunity to provide customised offerings is further created particularly as a result

of increased knowledge of the specific needs of the customer.

• Price

Lower costs are incurred due to process automation which could in turn result in lower

prices.

Although, direct comparison with others puts further pressure to lower prices

The web also offers the option of "differential" pricing - where different prices can be

charged in different parts of the world

• Promotion

Opportunity are created to use other Web-sites to promote an organisation’s own web-

site.

Search Engine Optimisation has become a key Promotional tool.

246
• Place

Elimination of the middle man and wider reach across a far reaching geographic base.

Has enabled direct delivery of knowledge based products over the internet.

• People/ Participants

Automation, reduces the need for front line personnel to generate sales.

On the other, increased customer support is required.

• Processes

Business Processes are pushed down to the consumer.

Whilst business cost is reduced, this creates consumer frustration

• Physical Evidence

A Web-site provides a first impression and hence becomes an ambassador for the

company which it represents.

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Elements of eMarketing

eMarketing forms a critical part of downstream supply chain management systems.

The key elements of eMarketing comprise the following:

• Interactivity:

This is the extent to which the website promotes a two way communication channel

between the customer and the supplier.

This comes in many forms: forums, emails, polls, online chat, webinars etc

In the exam, you will often have to think of ways of making the site more interactive (the

pull side of marketing).

Think of getting communication with the customer, or getting them to trial a product, or

giving feedback, or getting them to ask a question if they so wish (eBay does this for

example)

• Intelligence:

This is the extent to which customer information can be collected to form meaningful

patterns & analysis;

Every business can track who has been on their website, where they come from, how

long they stayed etc.

Furthermore, sign up forms also give an opportunity for more information to be gathered

Additionally there are online polls etc

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• Individualisation:

This is the extent to which a web-site content is customised to the specific need of the

customer;

Think of personalised content only being shown, with filters being applied so you only get

shown what you're interested in

Also recommendations can be made using complex algorithms.

Think Amazon and how they recommend books etc for you based on past purchases

This form of relevant after sales service is vital

• Integration:

Think here of booking something on the website and it is immediately updated on the

organisation’s back end systems;

So, think of booking a seat on a course and immediately it is reserved and confirmation

emails sent out and materials ordered for you etc

• Industry Structure:

This is the extent and potential opportunities for disintermediation and reintermediation;

Think of how the music industry has been transformed - artists can now sell directly to

their fans, or iTunes / Spotify can be incredible middle men allowing easy and immediate

downloads of music

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• Independence of Location:

Basically businesses are not restricted to their own locality anymore. It is not called the

world-wide web for nothing you know

Be careful here though for some businesses, the internet doesn't help them.

E.g. Your local newsagent

eBranding

A Brand is a representation of the values, quality & positioning of an organisation’s products

and services as compared to those of its competitors.

eBranding is the process through which an organisation’s products and services are

effectively positioning on the on-line market place.

There are choices that need to be made available for organisations on how to apply

ebranding initiatives. These are:

• Retain the same Branding

On the Web-Site to that being applied to its brick and mortar business. In this case the

ebrand replicates the physical brand.

Airmalta uses the same brand for the sale of air tickets both over the counter as well as

over the internet.

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• Offer a Slightly Amended Product:

This is normally the case for information products.

For example, the Times of Malta offers additional interactivity functionalities to its on-line

electronic version as compared to its paper version;

• Form a partnership with an existing brand:

Such partnerships enable the sharing of costs and resources necessary to build the

strength of the eBrand.

This is particularly commonplace in the case where electronic payments need to be

channelled through the internet whereby companies partner up with brands such as

Paypal to give the consumer comfort on the security and reliability of the transactions

processed on-line.

• Develop an entirely new brand:

This may be necessary in the case of product or service offerings which target a completely

separate market than that which is originally targeted in the brick and mortar business.

This technique is commonly used by Insurance Companies that may offer Insurance Policies

over the internet using a different brand name.

Learn more list

Lost my Name

A beautiful example of Individualisation

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 Syllabus E3e. IT and the Supply Chain

Supply Chain problems and how e-business can help

Problems of Supply Change

Management How e-business can help
Keeping manufacture & Less paperwork by EDI of orders, invoices & delivery
distribution costs low notes.

Reduced stockholding through shared information

Forecasting Demand Sharing knowledge of demand with suppliers using

Efficient Customer Response (ECR)

Failure to deliver on time Supplier becomes responsible via vendor managed

inventory

Failure to deliver correct product Less human error - less humans involved!
High Inventory Costs Less inventory due to better understanding of demand
Product development speed Online marketplaces gives more info about suppliers
and components

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 Syllabus E4. IT Systems Security And Control

Syllabus E4abcd. The Basic Hardware And Software Infrastructure

The basic hardware and software infrastructure

This will be clear as to what is needed in the exam - just make sure your recommendations

are relevant

For example - most businesses will need a website where sales can be made and linked to

stock and accounts

Furthermore - software solutions such as secure file retrieval systems like dropbox etc will

help processes - but the point is just use common sense and relate it to the scenario

Infrastructure Required

A company needs computer hardware & software, data and communication networks.

The company website is located on a ‘server’ which gives it access to the internet.

The company will also need a database management system, which are used to display and

locate the information on the website.

The company will also probably have a customer relationship management system (CRM)

which basically holds information about all dealings with the customer

Content and customer information is held on data files.

The communication network is provided by the internet.

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Websites

Every website has a unique address (URL) eg aCOWtancy.com

This allows other internet users to locate and access the website

The URL has to be registered as a domain name to ensure it is unique.

Designing a website for e-commerce

Design is vital - think of the rise in Apple computers and hardware

There is a whole industry built around not only design but also user experience.

This is as important as the content.

Users need to feel comfortable with the site.

Design helps build the brand - it needs to be continually updated and aware of latest trends.

It should be designed with security in mind, and also with providing reassurance to users

that it is a secure site.

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 Syllabus E4abcd. Information Technology Controls

Information Technology Controls

These can be split into general controls and application controls

General controls:

As the name suggests these apply to all IT applications and are not specific

Examples

1. Back-up procedures, anti-virus software and firewalls

2. The process of purchasing hardware & software acquisition and their maintenance

3. Physical access controls (to servers etc) as well as passwords etc

protect hardware DATA / SOFTWARE

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 Application Controls:

These are SPECIFIC controls over a particular process (eg. Sales orders, wages etc)

Examples

1. Range tests which reject data outside the given range (e.g. Enter your phone number but

there’s too many/few digits and it will highlight the error)

2. Numerical sequence checks to ensure that all accountable documents have been

processed

3. Drop down menus which constrain choices and ensure only allowable entries can be

made

4. Batch total checks

Again here this just takes common sense from the scenario to ensure all the obvious

controls are in place - don’t try and be too clever.

Think passwords, laptop security overnight etc - overall use the scenario

- Logical access controls (passwords)

- Backup
- Firewall
- Audit trail, system logs
- Anti virus
- Segregation of duties

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 Syllabus E4abcd. Controls for Information Systems

Just do the quiz and learn by doing!

https://www.acowtancy.com/textbook/acca-sbl/e4-it-systems-security-and-control/controls-for-information-

systems/quiz

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Why IT security is important?
- Business disruption
- Reputational issues
- Loss of customers
- Legal cases by customers
- Regulatory fines Syllabus E4c. Cyber Security
- Incorrect decision making based on erroneous data

The Rise Of Cybersecurity

This the protection of systems, networks and data in cyberspace.

Cyberspace is the term used to describe the environment in which communication over IT
networks takes place.

'cyber attacks' are on the up so orgs need to ensure they've got controls

IT systems nowadays are often linked to supply chains - using the cloud. This gives hackers
opportunities.

Security failures can have a huge effect on reputation. Every stakeholder wants to feel their
data is safe with the organization

Promoting Cybersecurity in Organisations

1. Making cybersecurity issues easier to understand for EVERYONE. Keep language

simple. Everyone has a role to play

2. Employing a Chief Information Security Officer to help communicate the threats

3. Ensure there's accountability for cybersecurity matters within the organisation

4. All board members play an active role in promoting cybersecurity

5. Learn from past security breaches.

6. Determine the organisation's tolerance to cyber risks - it might be that additional funding

is required to enhance the cybersecurity features of the organisation's lT/IS

infrastructure.

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 Syllabus F: Organisational Control And Audit
Syllabus F1. Management and Internal Control Systems

Syllabus F1acde. Objectives of Internal Control

General objectives of internal control

To ensure the orderly and efficient conduct of business in respect of systems being in place

and fully implemented.

To safeguard the assets of the business. Assets include tangibles and intangibles

To prevent and detect fraud

To ensure the completeness and accuracy of accounting records.

To ensure the timely preparation of financial information

Internal controls can be at the strategic or operational level.

• At the strategic level, controls are aimed at ensuring that the organisation ‘does the right

things’;

• at the operational level, controls are aimed at ensuring that the organisation ‘does things

right’.

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 Syllabus F1acde. Internal Control Failure

Internal Control Failure

Typical causes of internal control failure are:

1. Poor judgement in decision-making

2. Human error

3. Control processes being deliberately circumvented

4. Management overriding controls

5. The occurrence of unforeseeable circumstances

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 Syllabus F1acde. Internal Controls Importance

Internal Controls Importance

Importance of internal control

1. Underpins investor confidence

2. Risks would not be known about and managed without adequate internal control

3. Helps to manage quality

4. Provides management with information on internal operations and compliance

5. Helps expose and improve underperforming internal operations

6. Provides information for internal and external reporting

However, internal control systems are only as good as the people using them.

No system is infallible

Responsibility for internal control is not simply an executive management role.

Though they should set the tone

All employees have some responsibility for monitoring and maintaining internal controls

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 Syllabus F1acde. Effective Systems of Internal Control

Effective systems of Internal Control

These are:

• Principles of internal control embedded within the organisation’s structures, procedures

and culture.

• Capable of responding quickly to evolving risks.

Any change in the risk profile or environment of the organisation will necessitate a

change in the system

• Include procedures for reporting failures immediately to appropriate levels of

management

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 Syllabus F1acde. Important Components of control systems

Important Components of control systems

Internal control consists of the following five interrelated components:

1. Control Environment

Control environment is the attitude toward internal control and maintained by the

management and the employees of an organisation.

The organisation structure and accountability relationships are key factors in the control

environment.

Elements of the Control Environment

• Ethical Values and Integrity

• Management’s Operating Style and Philosophy

• Competence

• Morale

• Supportive Attitude

• Mission

• Structure

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2. Communication

Communication is the exchange of useful information between and among people and

organisations to support decisions and coordinate activities.

Communication also takes place with outside parties such as customers, suppliers and

regulators.

Elements of Communication

• Timeliness

• Sufficient but not excessive detail

• Appropriate to user

• Clear and open horizontal and vertical

3. Assessing and Managing Risk

Risks are events that threaten the accomplishment of objectives.

Risk assessment is the process of identifying, evaluating and determining how to

manage these events.

At every level within an organisation there are both internal and external risks.

Ideally, management should seek to prevent these risks.

However, sometimes management cannot prevent the risk from occurring.

In such cases, management should decide whether to accept the risk, reduce the risk to

acceptable levels, or avoid the risk.

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Assessing Risk (Ask the questions…)

What can go wrong?

What is the worst thing that could happen?

What is the worst thing that has happened?

Are there new goals and legislation?

Are there staffing changes?

Impact – Is generally beyond the organisation’s control in the short-to-medium term.

Likelihood – Is the main focus of an organisation’s internal control

What are the possible risks in your area of operations and what is the likely impact of each?

265
4. Control Activities

Control activities are tools - both manual and automated - that help prevent or reduce the

risks.

Management should establish control activities to effectively and efficiently accomplish

the organisation's objectives and mission.

Examples of Control Activities

• Documentation

• Approval and Authorisation

• Verification

• Supervision

• Separation of Duties

• Safeguarding Assets

• Reporting

• Computer Systems Controls

o Backup

o Input Controls

o Output Controls

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5. Monitoring

Monitoring is the review of an organisation's activities and transactions to assess the

quality of performance over time and to determine whether controls are effective.

For monitoring to be most effective, all employees need to understand the organisation's

mission, objectives, and responsibilities and risk tolerance levels.

Major Areas for Monitoring

• Control Activities

• Mission

• Control Environment

• Communication

• Risks and Opportunities

• Results

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 Syllabus F1b. Internal Controls & Risk Management

Internal controls cannot eliminate risk, but they can

minimise it.

Internal controls help:

1. Safeguard the assets of the company

2. Prevent and detect fraud

3. Safeguard the investment of the shareholders

They are designed to minimise the risk of fraud and error

and will include such procedures as:

• Carrying out regular reconciliations on key ledgers

• Keeping assets under lock and key

• Passwords and computer system security

268
 Syllabus F1b. Need For Adequate Information

Need for adequate information

In order for risks to be controlled, it is imperative that there be a sound communication

process that captures information and then provides information to all who have need of it.

Since controlling risk is the responsibility of all managers and department heads, information

about identified risks and the means of controlling those risks needs to be communicated to

all who are responsible for mitigating those risks.

Information about the policies and procedures to be followed by employees should flow

down through the organisation.

It is also important that the communication system allows for information to flow in all

directions throughout the organisation to lessen the chance of misunderstandings.

Information about daily activities may flow across the organisation from employees who

develop the information to those who need the information.

Problems may be identified at the lower levels of the organisation (by rank-and-file

employees); if the information is not allowed to flow back up to those who are responsible for

making corrections, managers will not receive needed information on time.

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 Syllabus F2. Audit and Compliance

Syllabus F2abcde. Internal Audit - What and When

Internal Audit - What and When

Internal Audit assurance function

What is Internal audit?

• Internal audit is a management control, where all other controls are reviewed

• Sometimes it is a statutory requirement for listed: mandatory

• Codes of corporate governance strongly suggest it

• The department is normally under the control of a chief internal auditor who reports to

the audit committee.

When is internal audit needed?

Intangible benefits..
1. Large, diverse and complex organisation

2. Large number of employees

3. Cost benefit analysis required

consideration

4. Changes in organisational structure

5. Changes in key risks

6. Problems with existing internal control High frequency of breaches or frauds

7. Increased number of unexplained events

270
 Syllabus F2abcde. Importance of auditor’s independence

Importance of, auditor independence

Auditor independence refers to the independence of the internal or external auditor from

those who may have a financial interest in the business being audited, e.g. the Finance

Director.

Independence requires integrity and an objective approach to the audit process.

The concept requires the auditor to carry out his or her work freely and in an objective

manner, as to ensure financial rigour is applied to the business.

Without this the whole process is flawed and would be worthless to the user (shareholder)

271
 Syllabus F2abcde. Nature and sources of risks to auditor independence

Nature and sources of risks to auditor independence

There are various resources of risks associated with auditor independence.

The risks are that independence will be compromised by self-interest, self-review, being in

an advocacy position, over-familiarity, or intimidation.

Actual threats need to be considered, and so do situations that might be perceived as

threats.

These threats are risks to the auditor.

Such as being over familiar with the client and thus losing some professional scepticism or

having a financial interest in the company doing well and thus losing your independence

Auditor capture can be seen as the problem of auditors becoming too closely dependent /

influenced / sympathetic / empathetic to the client’s needs and thus losing their independent

attitude of mind and hence their professional scepticism

272
 Syllabus F2abcde. Importance of compliance

Importance of compliance

Compliance is all about ensuring that the organisation is adhering to rules, regulations, laws,

codes of practice, guidelines and principles

The internal audit function is fundamentally concerned with evaluating an organisation’s

management of risk.

The risk of not complying with any rules and regulations in their industry for example - thus

leading to fines or reputation loss or worse

All organisations face risks.

For example, risks to the organisation’s reputation if it treats customers incorrectly, health

and safety risks, risks of supplier failure, risks associated with market failure, IT risks and

financial risks to name some key areas.

Internal audit can ensure that we not only comply but also that we are able to understand

and force the risks before they cause non-compliance

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 Syllabus F2abcde. IA and Effective Internal Controls

IA and Effective Internal Controls

Role of internal audit in ensuring effective internal controls

Internal audit underpins the effectiveness of internal controls by performing several key

tasks:

1. Reviews and reports on controls

The controls put in place for the key risks that the company faces in its operations are

reviewed.

This will involve ensuring that the control (i.e. mitigation measure) is capable of

controlling the risk should it materialise.

This is the traditional view of internal audit. A key part of this role is to review the design

and effectiveness of internal controls.

2. Follow up Visits

Many organisations also require internal audit staff to conduct follow-up visits to ensure

that any weaknesses or failures have been addressed since their report was first

submitted.

This ensures that staff take the visit seriously and must implement the findings.

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3. Examine Information

Internal audit may also involve an examination of financial and operating information to

ensure its accuracy, timeliness and adequacy.

In the production of internal management reports, for example, internal audit may be

involved in ensuring that the information in the report is correctly measured and

accurate.

Internal audit needs to be aware of the implications of providing incomplete or partial

information for decision-making.

4. Compliance to standards checks (Internal variance analysis)

It will typically undertake reviews of operations for compliance against standards.

Standard performance measures will have an allowed variance or tolerance and internal

audit will measure actual performance against this standard.

Internal compliance is essential in all internal control systems.

Examples might include safety performance, cost performance or the measurement of a

key environmental emission against a target amount (which would then be used as part

of a key internal environmental control).

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5. Compliance with regulations

Internal audit is used to review internal systems and controls for compliance with

relevant regulations and externally-imposed targets.

Often assumed to be of more importance in rules-based jurisdictions such as the United

States, many industries have upper and lower limits on key indicators and it is the role of

internal audit to measure against these and report as necessary.

In financial services, banking, oil and gas, etc, legal compliance targets are often placed

on companies and compliance data is required periodically by governments.

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 Syllabus F2abcde. Audit Committee & Internal Control

Audit Committee & Internal Control

Who is in the Audit Committee?

Entirely NEDs (at least three in larger companies), of whom at least one has had recent and

relevant financial experience

What is its Key roles?

1. Oversight

2. Assessment

3. Review

of other functions and systems in the company.

What is the Most important areas for attention regarding IC?

• Monitoring the adequacy of internal controls involves analysing the controls already in

place to establish whether they are capable of mitigating risks

• To check for compliance with relevant regulation and codes

• Playing a more supervisory role if necessary, for example reviewing major expenses and

transactions for reasonableness

• Checking for fraud

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 Syllabus F2abcde. Audit Committee and External Audit

Audit Committee & External Audit

Audit committee must oversee the relationship between external auditors and the company

Key roles

So the role is to OVERSEE the external audit relationship, I want you to therefore visualise

windscreen wipers when you think of audit committee and external audit.

Visualise the committee as windscreen wipers - helping the external auditors to see things

more clearly.

This will help you understand their key role in this respect:

W ork plan of auditors is reviewed

I independence is maintained

P rep are for the audit

E engagement terms approved

R ecommend and review audits and their work

S election process involvement

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 Syllabus F2abcde. Audit Committee and Internal Audit

Audit Committee & Internal Audit

As part of the overseeing internal controls the audit committee must also oversee the

internal audit function

This time I want you to appreciate the difference between how an audit committee would

deal with an external auditor compared to an internal one.

To make that distinction clear for your memory - understand that the internal audit

department work for the same company as the committee.

They share the same goals therefore. In fact picture the internal auditor as one man only.

After all the head of IA is in fact appointed by the audit committee.

Remember though that he works for the same company as the audit committee.

So they like him. In fact they often say “We are Him!”.

This will help you memorise those key roles..

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Key roles

W ork plan reviewed

E ffectiveness assessed

A ccountable for the Internal Controls

R ecommendations are actioned

E fficiency of IA ensured

H ead of IA appointed

I ndependence preserved

M onitor IA

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 Syllabus F3. Internal Control And Management Reporting

Syllabus F3a. Need to report on internal controls

Need to report on internal controls

When an Internal Auditor reports to senior management that important risks have been

evaluated and highlighting where improvements are necessary, they help senior

management to demonstrate that they are managing the organisation effectively on behalf of

their stakeholders.

This enables the management team to report complete and accurate information to the

shareholders.

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 Syllabus F3b. Internal control and reporting

Internal control and reporting

The United States Securities and Exchange Commission (SEC)

guidelines are to disclose in the annual report as follows:

• A statement of management’s responsibility for establishing and maintaining adequate

internal control over financial reporting for the company.

This will always include the nature and extent of involvement by the chairman and chief

executive, but may also specify the other members of the board involved in the internal

controls over financial reporting.

The purpose is for shareholders to be clear about who is accountable for the controls.

• A statement identifying the framework used by management to evaluate the

effectiveness of this internal control.

• Management’s assessment of the effectiveness of this internal control as at the end of

the company’s most recent fiscal year.

This may involve reporting on rates of compliance, failures, costs, resources committed

and outputs (if measurable) achieved.

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 Syllabus F3c. Internal controls and Information

Internal controls and Information

Timely and meaningful internal controls underpins the effective functioning of any

organisation.

Organisational leaders use financial and non-financial information to manage and direct their

operations, while external stakeholders—investors, suppliers, creditors, banks, and

regulators use it to make investment decisions, to undertake transactions with organisations

with confidence, and to exercise regulatory oversight.

Financial statements capture much of the information that organisations prepare, publish,

and use.

And while it’s becoming more important to report other, non-financial information that

stakeholders find relevant to their decision making, financial statements prepared in

accordance with internationally accepted financial reporting standards are a crucial tool for

the effective functioning of markets.

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 Syllabus G: Finance in Planning and Decision-
Making
Syllabus G1. Finance Function

Syllabus G1a. Financial Objectives and Business Strategy

Financial Obiectives And Business Strategy

Organisations must consider the following financial aspects when developing their business

strategy:

• Financial Risk
• Financial Return
• Funding

Financial Risk

The risk critical financial obligations not met

It looks at Gearing. High gearing (debt compared to equity) means higher interest payments
and hence higher risk

It also looks at Liquidity — enough cash to meet short term obligations

Financial Return

Investors want a return. Not-for-profits want value for money

Methods to calculate return include ROCE, NPV, IRR and Payback (all are assumed
knowledge in this paper)

Funding

Funding decisions help to manage risk.

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The funding model may vary over time

Launch Growth Maturity Decline

Business Risk Very High High Medium / Low Low

Finance Risk Try to keep low Try to keep low Increased Can be high

Funding Venture Capital Equity Debt and Equity Debt

Dividends Nil Very low High High

285
 Syllabus G1bc. IT and the Finance Function & Alternative Structures

The Finance Function

Impact of Technology on Finance Functions and Professionals

1. Big Data

Technology allows analysis of large amounts of financial data very quickly

2. Cloud Computing

Using the Cloud based means no in-house hardware and maintenance and often simpler

interfaces, mobile access and built-in analytics.

3. Predictive Analytics

Using data to predict future trends

Other technologies include secure payment and Blockchain.

So finance professionals need to ensure they understand technology advances and how

they can impact / help the organisation

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Finance Function Structure

Outsourcing

Outsourcing routine processing can bring economies of scale and efficiency, but also loss of

control.

Strong controls are needed with fraud and misstatement in accounts. Professional firms can

review controls

Shared or Global Business services

An alternative approach which keeps some of the benefits of outsourcing while mitigating

some of the risks

This in-house function provides finance support to all functions within the business, even if

they are separate subsidiaries or based in different countries.

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Syllabus G2. Financial Analysis & Decision-Making Techniques

Syllabus G2a. Determine The Overall Investment Requirements Of The Organisation

Financing Requirements

There are three types of decision relevant to the financial requirements of the business:

1. Investment Decisions

Identify opportunities and decide which ones should be invested in

2. Financing Decision

How should the organisation be financed in the short and long term?

3. Dividend Decision

How much to pay out as dividends to shareholders

These are interrelated...

How much you invest leads to finance needed and hence how much dividends to give away

So cashflow forecasts are needed and things like sensitivity analysis in forecasts to see how

finances would change as variables such as demand, inflation etc change

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 SFA Framework
Syllabus G2b. Suitability, Feasibility And Acceptability Of Finance

when we plan to “ACQUIRE” another company

Sources of Finance

Suitable, Acceptable and Feasible?

Sources of finance can be evaluated using the SAF model:

1. Suitability EXTERNAL factors Home country, Target country, Target company

Is this type of finance appropriate for its use?

Eg. Long term finance is usually appropriate for long term, non current assets

2. Acceptability FINANCIALS of target company

shareholder acceptance,
Will stakeholders be happy with this type of financing? cultural differences, financial
projections
Eg. Risk-averse shareholders might not like high levels of debt.

Human resource / expertise

3. Feasibility INTERNAL factors Financial resource
Technology & Brand
Can the additional finance be raised? Will banks lend? Will shareholders invest more?

Method Advantages Disadvantages

Operating No change in ownership May not be sufficient - restricts
cashflows dividends
Equity Long term May dilute control
Debt No dilution of control Issue costs; Gearing can increase
Good for budgeting overall costs
Overdraft Easy to set up; No effect on May be called in immediately
gearing

289
 Syllabus G2b. Initial Coin Offerings

Initial Coin Offerings

ICOs are a type of crowdfunding or crowd investing tool conducted entirely on the
blockchain.

Originally, new projects were funded by pre-selling coins to investors.

Entrepreneurs present a whitepaper of the business model and the technical specifications
of a project before the ICO.

They lay out a timeline for the project and set a target budget where they describe the future
funds spending (marketing, R&D, etc.) as well as coin distribution (how many coins are they
going to keep for themselves, token supply, etc.).

During the crowdfunding campaign, investors purchase coins/tokens with already

established cryptocurrencies like Bitcoin and Ethereum.

As opposed to traditional crowdfunding where the investment is considered to be a donation

or a pre-buy of a product, ICOs give the supporters the possibility of a return of investment
when selling their coin later at a possibly higher price.

ICOs are similar to IPOs only if the token represents a stake in the project.

ICOs could be seen as a mix between a donation, investment or risk capital.

290
 Syllabus G2c. NPV

Net Present Value method

This method is examined regularly

What it does is looks at all the projected future CASH inflows and outflows.

Obviously we hope the inflows are more than the outflows. If they are this is called a positive
NPV

However, it also introduces the concept of the “time value” of money.

The idea that money coming in today is worth more than the same amount of money coming
in in 5 years time. To do this we “discount down” all future cash flows.

This “discounting” takes into account not only the time value of money but also the required
return of our share and debt holders.

This means that if we have a positive NPV (even after discounting the future cash flows)
then the return beats not only the time value of money but it also beats what the
shareholders and debt holders require.

So they will be happy and the company value (and hence share price) will rise by the +NPV
amount (divided by the number of shares)

291
So, let’s look at how we calculate NPVs in an exam..

NPV Proforma

0 1 2 3 4
Sales x x x x
Costs (x) (x) (x) (x)
Profit x x x x

Tax (x) (x) (x) (x)

Capital Expense (x)
Scrap x
WDA x x x x
Working capital (x) (x) (x) x x
Total Cashflows (x) x x x x
Discount Factors 1 0.9 0.8 0.7 0.6
Total Cashflows (x) x x x x

The Tax Effect

Tax on operating profits

Simply calculate the net profit figure (sales less costs in table) and multiply by the tax rate.

This is normally 30%.

Remember it is normally payable one year later. For example tax on year 1 profits is paid in
year 2 (and so goes in the NPV in yr 2)

WDAs

• These REDUCE your tax bill!

They are the tax relief on your capital purchases.

These are normally 25% writing down allowances on plant & machinery

292
Calculation technique for WDA

Calculate the amount of capital allowance claimed in each year

Make a balancing adjustment in the year the asset is sold

by calculating the total tax relief that should have been given ((Cost - RV) x 30%) less tax
benefits already allowed in step 1

• Illustration

Year 0 Buy plant 100

Year 4 Sell plant 20

25% Reducing balance; Tax 30%;

• Answer

Year 1 WDA 100 x 25% = 25 Tax benefit 7.5

Year 2 WDA 75 x 25% = 18.75 Tax benefit 5.625

Year 3 WDA 56.25 x 25% = 14 Tax benefit 4.2

• Year 4 Total tax relief should be (100-20) x 30% = 24. Less benefits relieved so far (7.5 +
5.625 + 4.2) = 6.675

Balancing Allowance = Tax benefit 6.675

Working Capital

Think of this as like float in a restaurant. Each night in the restaurant represents a year.

293
So, lets say a float of 100 is needed at the start of the night (T0).

Then the following night an extra 20 is required, the following night 30 more & the final night
10 less

At the end of the project it all comes back to the owner.

T0 T1 T2 T3 T4

Working capital -100 -20 -30 10 140

So the technique is for WC is….:

Always start at T0

Just account for increase or decrease

Final year it all comes back as income

The working capital line should always total zero

294
 Syllabus G2c. Internal Rate of Return

Internal Rate of Return

The IRR is essentially the discount rate where the initial cash out (the investment) is equal to
the PV of the cash in.

So, it is the discount rate where the NPV = 0

It is actual return on the investment (%).

Consequently, to work out the IRR we need to do trial and error NPV calculations, using
different discount rates, to try and find the discount rate where the NPV = 0.

The good news is you only need to do 2 NPV calculations and then apply this formula:

Where..

L = Lower discount rate

H = Higher discount rate

NPV L = NPV @ lower rate

NPV H = NPV @ higher rate

If the IRR is higher than the cost of capital, the project should be accepted.

295
Illustration

If a project had an NPV of 50,000 when discounted at 10%, and -10,000 when discounted at
15% - what is the IRR?

Answer

10 + (50,000/60,000) x 5% = 14.17%

If you have a positive NPV, increase the discount rate to get a smaller NPV.

If you have a negative NPV, decrease the discount rate to get a bigger NPV.

Little Tricks

• If all the cashflows are the same

This is an annuity - simply take the Initial Cost / annual inflow - this gives you the
cumulative discount factor (annuity factor).

• Then go to the annuity table and look for this figure (in the row for the number of years
the project is for) - the column in which the figure is found is the IRR!

• If the cashflows are the same and go on forever

• This is a perpetuity - simply take the Annual inflow / Initial cost and turn it into a
percentage. That’s the IRR! Done.

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Advantages of IRR

1. Considers the time value of money

2. Easily understood percentage

3. Uses cash not profits

4. Considers whole life of project

5. Increases shareholders wealth

Disadvantages of IRR

1. Does not produce an absolute figure (percentage only)

2. Interpolation of the formula means it is only an estimate

3. Fairly complicated to calculate

4. Non conventional cashflows can produce multiple IRRs

Interpreting the IRR

• The IRR provides a decision rule for investment appraisal, but also provides information

about the riskiness of a project – i.e. the sensitivity of its returns.

• The project will only continue to have a positive NPV whilst the firm’s cost of capital is

lower than the IRR.

• A project with a positive NPV at 14% but an IRR of 15% for example, is clearly sensitive

to:

- an increase in the cost of finance

- an increase in investors’ perception of the potential risks

- any alteration to the estimates used in the NPV appraisal.

297
 Syllabus G2c. Accounting Rate of Return

Return on capital employed (ROCE)

Note:

Right, first thing you need to remember about this is that this is the ONLY investment
appraisal technique which uses profits and not cash in the F9 exam.

This is a drawback of the method - as profits can be manipulated

The second thing to understand is that it has 2 names - ROCE (return on capital employed)
and ARR (Accounting rate of return)

Finally - there are 2 methods of calculating it:

1. Simple Method

This percentage is compared to the target return you would like to get.

Clearly it has to be higher than say the interest rate on the loan you used to buy the
capital item.

More correctly it has to be higher than the company’s cost of capital (more of that later)

2. Average Method

The average investment is the average value it would be in the SFP over the length of
the project

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Illustration of 'average investment'

Cost 400 Residual Value 100

Average Investment = 400 + 100 / 2 = 250

Illustration

RCA are considering expanding their business into Canada by buying up a local college over
there.

The local college purchase will cost £500,000 and a further £300,000 to make the premises
sexy

Cashflow profits (ie not including depreciation) from the college over the next 5 years are
expected to be:

Year Cash Profits (£)

1 100,000
2 120,000
3 180,000
4 250,000
5 350,000

The sexiness of the premises will have disappeared by the end of the 5 years and so sadly
have a zero resale value. This will make RCA sad and so they expect to sell up in order to
buy a funky new college somewhere else. When they sell they hope to get £400,000 for the
college

Required

Calculate the ROCE of this investment (using the average investment method)

Solution

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Total profits = Cash - Depreciation

Depreciation = Cost - Residual value

So, Total profits = 1,000,000 - (500+300-400) = 600,000

Therefore Average profits = 600,000 / 5 = 120,000

Average Investment = (Cost + RV)/2

= (800+400) / 2 = 600,000

ARR = Average Profits / Average Investment = 120,000 / 600,000 = 0.2 = 20%

Points about ROCE

This is used when company’s are more interested in PROFITABILITY than liquidity

Unlike the other capital budgeting methods that we have discussed, the simple rate of return
method does not focus on cash flows. Rather, it focuses on accounting net operating
income.

If a cost reduction project is involved, formula / Equation becomes:

(Cost savings − Depreciation on new equipment) / Initial investment*

*The investment should be reduced by any salvage from the sale of old equipment.

300
So how useful is this method?

The most damaging criticism of the accounting rate of return method is that it does not
consider the time value of money. The simple rate of return method considers a dollar
received 10 years from now as just as valuable as a dollar received today. Thus, the
accounting rate of return method can be misleading if the alternatives being considered have
different cash flow patterns.

Additionally, many projects do not have constant incremental revenues and expenses over
their useful lives. As a result the simple rate of return will fluctuate from year to year, with the
possibility that a project may appear to be desirable in some years and undesirable in other
years. In contrast, the net present value method provides a single number that summarised
all of the cash flows over the entire useful life of the project.

In summary the benefits are:

1. Fairly simple

2. Understandable percentage figure

Drawbacks

It disregards the project life and when the cash flows actually come in.

It focuses on profits not liquidity.

It uses accounting profits (which can be manipulated) rather than cash.

There is no mention of the actual gain made (just a percentage figure)

301
 Syllabus G2d. Decision trees

Decision trees

Decision trees and multi-stage decision problems

A decision tree is a diagram showing several possible courses of action and possible events
and the potential outcomes for each course of action.

Each alternative course of action or event is represented by a branch, which leads to

subsidiary branches for further courses of action or possible events.

In the exam, you will not have to draw decision trees but it will be important that you can
understand and interpret them.

Look at this example - you start from the right and work to the left

302
So, Look at F

F = (1,500,000 x 0.95 + 600,000 x 0.05) = 1,455,000

E = 1,455,000 - 550,000 = 905,000

B = 905,000 x .8 = 724,000

A = 724,000 - 50,000 survey = 674,000

Now lets go again from the right

1,500,000 x 0.75 + 600,000 x 0.25 = 1,275,000 - 550,000 (large premises) = 725,000

Now again from the right

1,500,000 x 0.6 + 600,000 x 0.4 = 1,140,000 - 300,000 (small premises) = 840,000

From the above - compare the final figures and you can see the small premises is probably
the best option

Note:

A square is used to represent a decision point. At a decision point, the decision maker has a
choice of which course of action he wishes to undertake.

A circle is used as an outcome point. The branches from the circle are always subject to
probabilities.

303
 Syllabus G2d. Risk and Strategy

Dealing with risk in decision-making

Risk refers to the situation where probabilities can be assigned to a range of expected
outcomes arising from an investment project and the likelihood of each outcome occurring
can therefore be quantified.

For example, based on past experience, a sales team may estimate it has a 60% chance of
winning a particular contract

Expected Values (EV)

The likelihood that an event will occur is known as its probability. This is normally
expressed in decimal form with a value between 0 and 1.

A value of 0 denotes a nil likelihood of occurrence whereas a value of 1 signifies absolute

certainty.

A probability of 0.4 means that the event is expected to occur four times out of ten.

The total of the probabilities for events that can possibly occur must sum up to 1.0.

An expected value is computed by multiplying the value of each possible outcome by the
probability of that outcome, and summing the results.

EV = ∑px

Where p = probability of the outcome

x = the possible outcome

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Advantages and disadvantages of EVs

Advantages:

1. Takes risk into account by considering the probability of each possible outcome and
using this information to calculate an expected value.

2. The information is reduced to a single number resulting in easier decisions.

3. Calculations are relatively simple.

Disadvantages:

1. The probabilities used are usually very subjective

2. The EV is merely a weighted average and therefore has little meaning for a one-off
project

3. The EV gives no indication of the dispersion of possible outcomes about the EV, i.e. the
risk

4. The EV may not correspond to any of the actual possible outcomes

Decision trees and Strategy decision problems

Large corporations have to handle uncertain future scenarios.

But, with things changing so quickly, plans need to be made for a variety of outcomes to
remain competitive.

It might be better to rely on quantitative techniques to verify expertise and experience, rather
than just "gut feeling"

Decision analysis techniques help companies solve complex problems, as well as evaluate a
potential project’s financial value.

Decision trees allow for the probability of multiple scenarios and determine the potential
impact of each.

This process gives a quantifiable value to the choices presented by future scenarios.

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By quantifying the uncertainty, decision trees allow decision makers to model a variety of
outcomes at multiple levels and react appropriately.

The process works by assigning probabilities based on managers’ experience and judgment.

When used as a strategic planning tool, decision trees can help to allocate resources and
decide when to scale up or delay investment.

• For example (see above)

a company estimates that next year’s demand for a new product has a 30% chance of
being high, a 40% chance of being fair and a 30% chance of being low.

The product costs $3 million to bring to market.

Based on the costs associated with bringing the product to market, returns are positive in
this scenario if the demand is high or fair, but negative if the demand is low.

In this example, the three scenarios result in a 30% chance of $7 million in cash flow, a 40%
chance of $2 million and a 30% chance of $6 million.

Based on those probabilities, the project’s expected value is $1.1 million in positive cash
flow.

By calculating investment costs and comparing them to potential returns based on the
likelihood of demand for the product, the company can pick the highest-value alternative.

Based on the alternatives in this scenario, the company should introduce their new product
next year for a better chance of success.

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This example, while valid, is simplistic. In a real decision tree, most organizations would
include several layers reflecting probabilities that explore a variety of “what ifs” for each
choice.

While the example deals with a product launch, the same method can be used to explore the
consequences and subconsequences of security investments intended to prevent terrorist
attacks and the resulting costs.

It can also be applied to natural disasters or other failures.

By assigning a quantifiable value to potential outcomes, decision trees help organisations

make good decisions to navigate uncertain future scenarios.

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 Syllabus G2d. Make or Buy Decisions

A key consideration here is spare capacity

If Spare production capacity is available

So here we have spare room to MAKE more products, therefore...

• Production resources may be idle (if the component is purchased from outside)

• Fixed costs are irrelevant (because we won't need any extra fixed costs)

• So just consider the variable costs of MAKING compared to the purchase cost of
BUYING

Decision

1. Buy

If buying price < the variable costs of making

2. Make

If buying price > variable costs of making

No spare capacity available?

So we need to buy more space or stop making something to create space

Stopping making something to create capacity causes lost contribution

So compare the contribution lost + extra costs of MAKING to the purchase price of BUYING

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Decision

1. Buy

if relevant costs of making > Purchase price

2. Make

if relevant costs of making < Purchase price

Illustration

Craft Ltd makes four components A, B, C, and D and the associated annual costs are as
follows:

A B C D
Production volume (units) 1,500 3,000 5,000 7,000

Unit variable costs $ $ $ $

Direct Materials 4 4 5 5
Direct Labour 8 8 6 6
Variable production overheads 2 1 4 5
Total 14 13 15 16

Fixed costs directly attributable are: 3,000 6,000 10,000 7,000

The unit prices of an external supplier are: 12 16 20 24

Determine whether any of the components should be bought in from the external supplier.

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Solution

A B C D
Costs if Made 14 13 15 16
Costs if Bought (12) (16) (20) (24)
Savings per unit Bought 2 (3) (5) (8)
Number of units 1,500 3,000 5,000 7,000

Total Savings if Bought 3,000 (9,000) (25,000) (56,000)

Plus Direct Fixed Costs Saved 3,000 6,000 10,000 7,000

Total Saving 6,000 (3,000) (15,000) (49,000)

Therefore only buy in component A as this is the only one which makes a saving if bought in

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 Syllabus G2d. Accept or Decline contracts

Accept or Decline contracts

A business should identify the incremental cash flows associated with a new one-off

contract/project.

Illustration

The managing director of Q Limited is considering undertaking a one-off contract.

She has asked her inexperienced accountant to advise on what costs are likely to be

incurred so that she can price at a profit. The following schedule has been prepared:

Costs for special order

Direct wages $28,500
General overheads $4,000
Machine depreciation $2,300
Materials $34,000

Total $68,800

Notes

Direct wages comprise the wages of two employees, particularly skilled in the labour

process for this job.

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They could be transferred from another department to undertake the work on the special

order.

They are fully occupied in their usual department and sub-contracting staff would have to be

brought in to undertake the work left behind.

Sub-contracting costs would be $32,000 for the period of the work.

Other sub-contractors who are skilled in the special order techniques are also available to

work on the special order.

The costs associated with this would amount to $31,300.

General overheads comprise an apportionment of $3,000 plus an estimate of $1,000

incremental overheads.

Machine depreciation represents the normal period cost, based on the duration of the

contract. It is anticipated that $500 will be incurred in additional machine maintenance costs.

Materials represent the purchase costs of 7,500kg bought some time ago.

The materials are no longer used and are unlikely to be wanted in the future except for the

special order.

The complete stock of materials (amounting to 10,000kg), or part thereof, could be sold for

$4.20 per kg.

The replacement cost of material used would be $33,375.

Required:

Produce a revised costing schedule for the special project based on relevant costing

principles. Fully explain and justify each of the costs included in the costing schedule.

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Direct Wages

1. Option 1:

Take the workers from their usual departments at a cost of $32,000 to replace them there

2. Option 2:

Hire sub-contractors at a cost of $31,300

Therefore choose sub contractors

• General Overheads

General fixed overheads will have to paid anyway

We are only interested in 'extra' fixed costs which here are $1,000

• Machine Depreciation

We are only interested in the relevant cashflows - depreciation is not a cashflow

There are extra maintenance costs though with the new contract of $500

• Materials

The amount already in stock is a past sunk cost.

We are only interested in future incremental costs

The replacement cost is not a future cost either (as we have the stock already and is not
to be used elsewhere)

The only relevant future cost is the fact we cannot sell it in the future (as we would as we
are not using it)

This cost is 7,500 x $4.20 = $31,500

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• Overdraft Interest

This is a future incremental cost if the contract is taken

$20,000 x 3/12 x 18% = $900

Item Cost
Direct wages 31,300
Overheads 1,000
Maintenance 500
Materials 31,500
Interest 900

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 Syllabus G2d. Close or Continue

Closure or continuation decisions

Here you need to look at:

• The loss in revenue from closing down the operation, and

• The saving in costs from closing down (= avoidable costs).

This basically means look at its contribution - so make sure all the costs are direct -
otherwise they wont be saved

Illustration

The management of Oh no It's all going wrong!

Co is considering the closure of one of its operations (department 2) and the financial
accountant has submitted the following report.

Department 1 2 3 Total
Sales (units) 10,000 5,000 15,000 30,000
Sales ($) 150,000 92,000 158,000 400,000
Direct material 75,000 75,000 50,000 200,000
Direct labour 25,000 25,000 10,000 60,000
Production overhead 5,000 2,500 7,500 15,000

Gross profit 45,000 -10,500 90,500 125,000

Expenses -15,000 -9,200 -15,800 -40,000

Net profit ($) 30,000 -19,700 74,700 85,000

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In addition to the information supplied above, you are told that:

Production overheads of $15,000 have been apportioned to the three departments on the

basis of unit sales volume

Expenses are head office overhead, apportioned to departments on sales value.

As management accountant, you further ascertain that, on a cost driver basis:

Half of the so-called direct labour is fixed and cannot be readily allocated.

Prepare a report for management including a restatement of the financial position in terms

of contribution made by each department and making a clear recommendation.

1 2 3 Total
Sales 150,000 92,000 158,000 400,000
Direct Materials (75,000) (75,000) (50,000) (200,000)
Direct Labour (12,500) (12,500) (5,000) (30,000)
Production Overheads (5,000) (2,500) (7,500) (15,000)

Contribution 57,500 2,000 95,500 155,000

As Department 2 makes a positive contribution it should not be closed down

Shut down decisions

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• Loss of contribution from the segment

• Savings in specific fixed costs from closure

• Penalties resulting from the closure, e.g. redundancy, compensation to customers

• Alternative use for resources released

• Knock-on impact, e.g. loss leaders cancelled - products that got customers into the store

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Syllabus G2. Adjusting For Risk And Uncertainty In Investment
Appraisal

Syllabus G2d. Risk & Uncertainty basics

Risk & Uncertainty basics

Risk

This is present when future events occur with measurable probability

Uncertainty

This is present when the likelihood of future events is incalculable

Risk & Uncertainty

• Risk refers to the situation where probabilities can be assigned to a range of expected

outcomes arising from an investment project and the likelihood of each outcome

occurring can therefore be quantified

• Uncertainty refers to the situation where probabilities cannot be assigned to expected

outcomes. Investment project risk therefore increases with increasing variability of

returns, while uncertainty increases with increasing project life

The analysis so far has assumed that all of the future cash flows are known with certainty.

However, future cash flows are often uncertain or difficult to estimate.

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A number of techniques are available for handling this complication. Some of these

techniques are quite technical involving computer simulations or advanced mathematical

skills and are beyond the scope of F9.

However, we can provide some very useful information to managers without getting too

technical.

So there are 4 techniques we are going to look at:

1. Sensitivity Analysis

2. Probability Analysis

3. Simulation

4. Adjusted Payback

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 Syllabus G2d. Sensitivity Analysis

Change required to make NPV=0

Sensitivity analysis shows us which item is critical to the success of the project

The one which has to change the least to make the net present value no longer positive

Only one variable is considered at a time

Managers should then look at the assumptions behind this key item

Also focus on it in order to increase the likelihood that the project will deliver positive NPV

The calculation boyeeeeeeee

• The smaller the percentage, the more sensitive the decision to go ahead is to the change
in the variable

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Illustration

ACCA colleges are considering a project which will cost them an initial 10,000

The cashflows expected for the 2 year duration are 10,000pa.

The variable costs are 1,000pa

Cost of capital 10%

Calculate the sensitivity analysis of all variables

Solution

PV of project as a whole: Investment appraisal

Year 0 1 2
Investment (10,000)
Costs (1,000) (1,000)
Sales 10,000 10,000
Discount Factor 1 0.909 0.826
Discounted Cashflows (10,000) 8,181 7,434

So the NPV as a whole is 5,615

Sensitivity of Initial Investment

5,615 / 10,000 = 56%

Sensitivity of Costs

5,615 / (909 + 826) = 323%

Sensitivity of Sales

5,615 / (9,090 + 8,260) = 32%

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Weakness of Sensitivity Analysis

Each variable must change in isolation

Yet they are often interdependent upon each other

It does not take into account probabilities of change occurring

Some factors management may not control

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 Syllabus G2d. Probability analysis

Probability analysis

This is the assessment of the separate probabilities of a number of specified outcomes of an

investment project.

For example, a range of expected market conditions could be formulated and the probability
of each market condition arising in each of several future years could be assessed.

The NPVs arising from these combinations could then be assessed and linked to their joint
probabilities.

The expected net present value (ENPV) could be calculated, together with the probability of
the worst-case scenario and the probability of a negative net present value.

In this way, the downside risk of the investment could be determined and incorporated into
the investment decision.

The term ‘probability’ refers to the likelihood or chance that a certain event will occur, with
potential values ranging from 0 (the event will not occur) to
1 (the event will definitely occur).

For example, the probability of a tail occurring when tossing a coin is 0.5, and the probability
when rolling a dice that it will show a four is 1/6 (0.166).

The total of all the probabilities from all the possible outcomes must equal 1, ie some
outcome must occur

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Calculating an EV
Formula

∑px

P = probability and X = Value of outcome

It finds the the long run average outcome rather than the most likely outcome

Illustration

A new product cashflows will depend on whether a substitute comes onto the market or not

• Chance of substitute coming in 30%

NPV if substitute comes along (10,000)

NPV with no substitute 20,000

• Solution

0.3 x (10,000) = (3,000)

0.7 x 20,000 = 14,000

EV = 11,000

Limitations of Probability Analysis

Expected values are more useful for repeat decisions rather than one-off activities, as they
are based on averages.

They illustrate what the average outcome would be if an activity was repeated a large
number of times.

A long term rather than short term average

For example the EV of throwing a dice is 3.5!

And the average family in the UK has 2.4 children, now Ive never thrown a 3.5 nor met
anyone with 2.4 children.

These are just long term averages, whereas in reality outcomes only occure once

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 Syllabus G2d. Simulation

Simulation

This looks at many variables all changing at once

Illustration

Variable costs 4 5 6
Probability 30% 50% 20%
Cumulative probability 30% 80% 100%
Random number range 0-29 30-79 80-99

The random numbers represent the probability. So, 30 numbers are given to the 30% range,
50 to the 50% range etc.

A random number is generated - say 48

So NPV based on a variable cost of 5 is generated

This is repeated many times for all variables until we have a probability distribution

Advantages

1. Includes all possible outcomes

2. Easily understood

3. Wide variety of applications

Disadvantages

1. Model can become complex and expensive to set up

2. Probability distributions difficult to formulate

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 Syllabus G2d. Adjusted Payback

Simulation

This incorporates risk into the payback method we looked at earlier in

the course
financial projection: futuristic
based on some assumptions
2 Methods
(very logical, accurate, realistic, possible)

Add payback to NPV - Only projects with +ve NPV and payback within specified time chosen

Discount cashflows used in payback with a risk adjusted discount rate

Illustration of method 2

Year Cashflow
0 (1,700)
1 500
2 500
3 600
4 900
5 500

Calculate discounted payback at a rate of 12%

Solution

Year Cashflow 12% Cashflow Cumulative

0 (1,700) 1 (1,700) (1,700)
1 500 0.893 446.5 (1,253)
2 500 0.797 398.5 (855)
3 600 0.712 427.2 (427.8)
4 900 0.636 572.4 144.6
5 500 0.567 283.5 428.1

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Discounted payback = 3 years 9 months

NPV = 428,100

Risk Adjusted Discount Rates

The discount rate should reflect:

1. Cost of debt

2. Cost of equity

The mix of the 2 above adjusted for riskiness

If a project gives additional risks then the discount factor should be altered accordingly. This
is called the risk premium

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 Syllabus G2e. Financial Reporting & Tax Implications

Financial Reporting And Tax Implications

In the SBL exam, you may need to take significant tax and FR implications into account
when evaluating or choosing between alternative strategies

This doesn't mean detailed consideration of tax and reporting issues though

Just things like significant differences in tax rates in different iurisdictions of a multinational
corporation.

Also remember debt is often tax deductible whereas equity isn't.

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 Syllabus G2f. Ratios and Strategy

Giving reasons for

variances is a MUST
Accounting Ratios

In your exam, you may be required to calculate some ratios.

This section shall only present a summary and list of ratios that could potential be used in
your exam for such purpose.

Ratios may be divided into the following categories:

• Profitability Ratios

These are measures of value added being generated by an organisation and include the
following:

ROCE Operating Profit (PBIT)/Capital Employed

Capital Equity + LT liabilities
Employed
Capital Non current assets + net current assets
Employed
Capital Total assets - current liabilities
Employed
Gross margin Gross Profit/Sales
Net Margin Net Profit/Sales
ROE Profit After Tax - Preference dividends/Shareholders’ Funds (Ordinary
shares + Reserves)
RI Profit After Tax - (Operating Assets x Cost of Capital)

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• Efficiency Ratios

These are measures of utilisation of Current & Non-current Assets of an organisation.

Efficiency Ratios consist of the following:

Asset Turnover Sales/Capital Employed

ROCE Margin X Asset Turnover
Receivables Days (Receivables Balance / Credit Sales) x 365
Payables Days (Payable Balance / Credit Purchases) x 365
Inventory Days (Inventory / Cost of Sales) x 365

• Liquidity & Gearing Ratios

Liquidity Ratios measure the extent to which an organisation is capable of converting

assets into cash and cash equivalents.

On the other hand, Gearing Ratios measure the dependence of an organisation on

external financing as against shareholder funds.

Liquidity and Gearing Ratios are outlined below:

Liquidity
Current Ratio Current Assets / Current Liabilities
Quick Ratio (Current Assets – Inventory) / Current Liabilities
Gearing
Financial Gearing Debt/Equity
Financial Gearing Debt/Debt + Equity
Operational gearing Contribution / PBIT

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• Investor's Ratios

These ratios measures return on investment generated by stakeholders. Such ratios

include:

Dividend Cover Profit After Tax / Total Dividend

Dividend Yield Dividends per share / Share price
Interest Cover PBIT / Interest
Interest yield (coupon rate / market price) x 100%
Earnings Per Share Profit After Tax and preference dividends / Number of Shares
PE Ratio Share Price / EPS

In the exam you have to act like a detective.

You have to sift through evidence and extract meaningful messages for effective business
decisions.

The starting point is often the basic accounting documents that record the progress of any
business, the Income statement & SFP

These are closely related and so need reading together.

The balance sheet is a snapshot of a business at one point in time.

The income statement is dynamic and describes the flow of money through the business
over a period of time.

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 Syllabus G3. Cost And Management Accounting

Syllabus G3abc. Budgetary Systems

Budgetary Systems

A budget is a quantitative detailed plan prepared for a specific time period. It is normally
expressed in financial terms and prepared for one year.

Forecasting is a technique used to arrive at estimates based on judgment and experience.

The main objectives for producing budgets

1. Planning

One of the key purposes of a budgeting system is to require planning to occur so that the
organisation’s objectives are achieved.

2. To Co-ordinate Activities

Budgeting is a method of bringing together the activities of all the different departments
into a common plan.

If an advertising campaign is due to take place in a company in three months’ time, it is

important that the production department know about the expected increase in sales so
that they can scale up production accordingly.

3. To Communicate Activities

The budgeting system facilitates communication within the organisation both vertically
(for example between senior and junior managers) and horizontally (for example
between different organisational functions).

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4. To establish a system of control

One of the most important purposes of a budgeting system is to facilitate cost control
through the comparison of budgeted costs and actual costs.

Variances between budgeted and actual costs can be investigated in order to determine
the reason why actual performance has differed from what was planned.

5. To motivate managers to perform well

The budgeting system can influence the behaviour of managers and employees, and
may motivate them to improve their performance if the target represented by the budget
is set at an appropriate level.

6. To evaluate performance

Managerial performance is often evaluated by the extent to which budgetary targets for
which individual managers are responsible have been achieved – responsibility
accounting.

Managerial rewards such as bonuses or performance-related pay can also be linked to

achievement of budgetary targets

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 Syllabus G3abc. Sales & Functional budgets

Budgets

A Functional budget
is a budget of income and/or expenditure which applies to a particular function.

The main functional budgets are:

• Sales budget

• Production budget

• Raw material usage budget

• Raw material purchases budget

• Labour budget

• Overheads budget

Sales Budget

A sales budget can be prepared both in units and in value

Production Budget

Budgeted production levels can be calculated as follows:

Budgeted production =

Forecast sales + closing inventory of finished goods – opening inventory of finished goods

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Illustration

A manufacturing company always carries finished goods inventory equal to 20% of the next
month’s budgeted sales. Sales for the current month are 2,000 units and are budgeted to be
2,400 units next month.

How many units will be produced in the current month?

Solution

Sales 2,000

Cl Inventory 480 (20% x [4,400)

Op Inventory (400) (20% x 2000)

2,080 units will be produced this month.

Material Budget
• Material usage budget

Material usage =

Budgeted production for each product x the quantity required to produce one unit of the
product
• Material purchases budget

Material purchases budget =

Material usage budget + closing inventory – opening inventory

Illustration

A company produces product X.

Expected production is 3,000 units.

Each unit uses 5kg of raw materials.

What is the materials usage budget?

Solution

Materials usage = Production * Quantity/unit

= 3,000 x 5

= 15,000 kg

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Labour Budget

Labour budget = no. of hours x labour rate per hour

Overhead Budget

The overhead budget will be made up of variable costs and fixed costs

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 Syllabus G3abc. Cost Accounting and Strategy

Standard Costing

A standard cost is an estimated/target cost of a product or service

Uses of Standard Costing

1. For planning, control and motivation

2. To value inventories and cost production for cost accounting purposes

3. As a control device by establishing standards (planned costs), highlighting activities that

are not conforming to plan and thus alerting management to areas which may be out of

control and in need of corrective action

Variance Analysis

Variances provide feedback to management indicating how well, or otherwise, the company

is doing.

Standard costs are essential for calculating and analysing variances.

Before any meaningful comparison can be made, the original budget should be ‘flexed’ to

the actual level of performance.

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• A flexible budget

• A flexible budget is a budget that adjusts or flexes for changes in the volume of activity.

The flexible budget is more sophisticated and useful than a fixed budget, which remains

at one amount regardless of the volume of activity.

• For example, a firm may have prepared a fixed budget at a sales level of $100,000.

Flexible budgets may be prepared at different activity levels e.g. anticipated activity

100% and also 90%, 95%, 105% and 110% activity.

• A flexed budget

• A flexed budget is a budget prepared to show the revenues, costs and profits that should

have been expected from the actual level of production and sales.

• If the flexed budget is compared with the actual results for a period, variances will be
Reasons for Variances should be explained
much more meaningful.

Consider this - you plan to make 10 products.

Each product should use 2Kg each.

Therefore the budgeted number of Kg is 20Kg

Actually 14 products were made and 25Kg used.

If the budget wasn't flexed you would compare 25Kg to the budgeted 20Kg and get an
ADVERSE variance of 5Kg.

But this is not taking into account the fact that 4 more products were made than budgeted

So we need to flex this budget..

Actual Quantity of 14 should take 2kg each = 28kg

Actual Kg used 25kg

Therefore, the usage variance is actually 3 kg FAVOURABLE

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Illustration

The budget was for 100 items at a labour cost of $200

The actual amount produced was 120 items at a labour cost of $250

Flex the budget and compare actual to budgeted

$200 / 100 x 120 = $240 (Flexed Budget)

Compare to actual = $250

$10 over budget

Reasons for Variances

• Sales Variances

Possible causes of sales variances:

1. Unplanned price increases

2. Unplanned price reduction to attract additional business

3. Unexpected fall in demand due to recession

4. Increased demand due to reduced price

5. Failure to satisfy demand due to production difficulties

• Material Variances

The direct material total variance can be subdivided into the direct material price
variance and the direct material usage variance.

Variance Favourable Adverse

Material Unforeseen discounts received Price increase
price
More care taken in purchasing Careless purchasing
Change in material standard Change in material standard
Material Material used of higher quality than Defective material
usage standard
More effective use made of material Excessive waste
Theft

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Variance Favourable Adverse
Errors in allocating material to jobs Errors in allocating material to
jobs
Stricter quality control

• Labour Variances

The total labour variance can be subdivided between labour rate variance and labour
efficiency variance.

Variance Favourable Adverse

Labour rate Use of apprentices or other workers Wage rate increase
Use of higher grade labour
Idle time The idle time variance is always Machine breakdown
adverse
Non-availability of material
Illness or injury to worker
Labour Output produced more quickly than Lost time in excess of standard
efficiency expected allowed
Errors in allocating time to jobs Errors in allocating time to jobs

• Variable Overhead Variances

The variable production overhead total variance can be subdivided into the variable

production overhead expenditure variance and the variable production overhead

efficiency variance (based on actual hours).

Variance Favourable Adverse

Variable overhead Savings in costs incurred Increase in cost of overheads
Expenditure used
More economical use of Excessive use of overheads
overheads

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Variance Favourable Adverse
Change in type of overheads Change in type of overheads
used used
Variable overhead Labour force working more Labour force working less
Efficiency efficiently efficiently
Better supervision or staff Lack of supervision
training

• Fixed Overhead Variances

Variance Favourable Adverse

Fixed overhead Savings in costs incurred Increase in cost of services
Expenditure used
Changes in prices Excessive use of services
Fixed overhead volume - Labour force working Labour force working less
Efficiency more efficiently efficiently
Lost production through strike
Fixed overhead volume - Labour force working Machine breakdown, strikes,
Capacity overtime labour shortages

When should a variance be investigated?

• When deciding which variances to investigate, the following factors should be

considered:

1. Reliability and accuracy of the figures

2. Mistakes in calculating budget figures

or in recording actual costs and revenues, could lead to a variance being reported
where no problem actually exists (the process is actually ‘in control’).

3. Materiality

The size of the variance may indicate the scale of the problem and the potential
benefits arising from its correction.

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• Possible interdependencies of variances

Sometimes a variance in one area is related to a variance in another.

For example, a favourable raw material price variance resulting from the purchase of a
lower grade of material, may cause an adverse labour efficiency variance because the
lower grade material is harder to work with.

These two variances would need to be considered jointly before making an investigation
decision.

• The inherent variability of the cost or revenue

Some costs, by nature, are quite volatile (oil prices, for example) and variances would

therefore not be surprising.

Other costs, such as labour rates, are far more stable and even a small variance may

indicate a problem.

• Adverse or favourable?

Adverse variances tend to attract most attention as they indicate problems.

However, there is an argument for the investigation of favourable variances so that a

business can learn from its successes.

• Trends in variances

One adverse variance may be caused by a random event. A series of adverse variances

usually indicates that a process is out of control.

• Controllability/probability of correction

If a cost or revenue is outside the manager’s control (such as the world market price of a

raw material) then there is little point in investigating its cause.

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 Syllabus G3abc. Effective Use of Resources

Effective Use of Resources

When there is only one scarce resource, key factor analysis can be used to solve the

problem.

Options must be ranked using contribution earned per unit of the scarce resource.

Three steps in key factor analysis

1. First find the limiting factor (bottleneck resource)

2. Rank the options using the contribution earned per unit of the scarce resource

3. Allocate resources

Assumptions

A single quantifiable objective.

In reality, there may be multiple objectives.

Each product always uses the same quantity of the scarce resource per unit.

The contribution per unit is constant. However, the selling price may have to be lowered to

sell more; discounts may be available as the quantity of materials needed increases.

Products are independent. It may not be possible to prioritise product A at the expense of

product B.

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Illustration

X Ltd manufactures 3 products for which details are as follows:

Annual Demand for Product A is 4,000, and for B & C is 6,000 each

A B C

Selling price $25 $20 $15

Materials 7 6 5
Labour (@ 75c per hr) 9 6 3
Variable overheads 3 3 3
$19 $15 $11
Contribution $6 $5 $4

There are 90,000 labour hours available.

Determine the production schedule that will yield the maximum contribution per period.

Calculate the total contribution generated at this level of production.

Hours are the limiting factor as 120,000 are needed in total (with only 90,000) available

A B C
Hours Needed per unit 12 8 4
Contribution per unit $6 $5 $4
Contribution Per hour $0.5 $0.625 $1
Ranking 3rd 2nd 1st

Product Units Hrs Total Contribution

C 6,000 4 24,000 x $1 = 24,000
B 6,000 8 48,000 x $0.625 = 30,000
A 1,500 12 18,000 x $0.5 = 9,000

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 Syllabus G3abc. Relevant Costs

Relevant costs for decision making

The costs which should be used for decision making are often referred to as "relevant
costs".

To affect a decision a cost must be:

1. Future

Past costs are irrelevant, as we cannot affect them by current decisions and they are
common to all alternatives that we may choose.

2. Incremental

' Meaning, expenditure which will be incurred or avoided as a result of making a

decision.

3. Cash flow

Expenses such as depreciation are not cash flows and are therefore not relevant.
Similarly, the book value of existing equipment is irrelevant, but the disposal value is
relevant.

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Other terms:

• Common costs

Costs which will be identical for all alternatives are irrelevant, e.g. rent or rates on a
factory would be incurred whatever products are produced.

• Sunk costs

Another name for past costs, which are always irrelevant, e.g. dedicated fixed assets,
development costs already incurred.

• Committed costs

A future cash outflow that will be incurred anyway, whatever decision is taken now, e.g.
contracts already entered into which cannot be altered.

Opportunity cost

Relevant costs may also be expressed as opportunity costs.

An opportunity cost is the benefit foregone by choosing one opportunity instead of the next
best alternative.

Example

A company is considering publishing a limited edition book bound in a special leather.

It has in stock the leather bought some years ago for $1,000.

To buy an equivalent quantity now would cost $2,000.

The company has no plans to use the leather for other purposes, although it has considered
the following possibilities:

• of using it to cover desk furnishings, in replacement for other material which could cost
$900

• of selling it if a buyer could be found (the proceeds are unlikely to exceed $800).

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In calculating the likely profit from the proposed book before deciding to go ahead with the
project, the leather would not be costed at $1,000.

The cost was incurred in the past for some reason which is no longer relevant.

The leather exists and could be used on the book without incurring any specific cost in doing
so.

In using the leather on the book, however, the company will lose the opportunities of either
disposing of it for $800 or of using it to save an outlay of $900 on desk furnishings.

The better of these alternatives, from the point of view of benefiting from the leather, is the
latter.

"Lost opportunity" cost of $900 will therefore be included in the cost of the book for decision
making purposes.

The relevant costs for decision purposes will be the sum of:

1. 'avoidable outlay costs', i.e. those costs which will be incurred only if the book project is

approved, and will be avoided if it is not

2. the opportunity cost of the leather (not represented by any outlay cost in connection to

the project)

This total is a true representation of 'economic cost'.

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The assumptions in relevant costing

• Cost behaviour patterns are known, e.g. if a department closes down, the attributable

fixed cost savings would be known.

• The amount of fixed costs, unit variable costs, sales price and sales demand are known

with certainty.

• The objective of decision making in the short run is to maximise 'satisfaction', which is

often known as 'short-term profit'.

• The information on which a decision is based is complete and reliable.

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 Syllabus G3abc. Cost accounting in strategy development

Cost accounting in strategy development

Multi Product Costing

Where units of output are not identical thence need to split costs into direct and indirect

Direct costs - are costs that can be identified with a specific product (eg labour for a garage
mechanic)

Indirect costs (overheads) are costs that cannot be identified with a specific product (eg rent
of a garage)

The direct / indirect split is NOT the same as fixed v variable

As indirect costs can’t be applied directly to a product we need to come up with a formula to
share these costs to the products - such as labour hours or actual activities (in activity based
costing)

There is no one correct method for doing this

Overhead Apportionment

Full absorption Costing

This is the total amount of resources (direct + indirect costs) used and should be used in the

following scenarios:

• Pricing & Output decisions

• Exercising control

• Assessing efficiency

• Income measurement

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If the full absorption price is charged as the sales price then the company will break even

Full costing like this may be seen as not useful because it is backward looking - it includes

information thats irrelevant to decision making (fixed costs for example)

Dealing with Overheads on a departmental basis

Indirect costs can be put into segments such as the separate departments - then each

department can share these across its own products using whichever basis it chooses

Batch Costing

Here the cost per unit can be calculated as:

Cost of the batch (indirect + direct) / Number of units in the batch

Activity Based Costing

This treats all indirect costs as being caused by ‘activities’

It is argued that this is more relevant in the modern business world where lots of things

cause costs now - not just labour hours - which was the case in old fashioned factories etc

Understanding what drives these activities leads to more relevant decision making and

better control of overheads

However it is argued that all this costs time and money to collect and record such

information and this outweighs its benefits

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 Syllabus G3abc. Linear Regression

Linear Regression

This model says how dependent one variable is on another.

For example cost (X) and volume (Y).

These variables are called the dependent and independent variables.

The Dependent variable’ value depends on the value of the other variable.

E.g. Sales may be dependent on marketing spend

You would then need to determine the strength of the relationship between these two
variables in order to forecast sales.

For example, if the marketing budget increases by 1%, how much will your sales increase?

Regression Equation

This helps us predict the variable we require.

The formula for a simple linear regression is as follows:

Y = a + bx
where:

Y is the value we are trying to forecast (dependent)

“b” is the slope of the regression,
“x” is the value of our independent value, and
“a” represents the y-intercept. (the value we are trying to
forecast when the independent value is 0)
A simpler way to picture this might be thinking of variable costs and fixed costs.

We are trying to forecast TOTAL COSTS

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So

Y = Total costs

b = Variable cost per unit

a = Fixed Costs

x = Amount of units produced

In this graph, the dots represent the actual date.

Linear regression attempts to estimate a line that best fits the data, and the equation of that
line results in the regression equation

Once a linear relationship is identified and quantified using linear regression analysis, values
for (a) and (b) are obtained and these can be used to make a forecast for the budget such
as a sales budget or cost estimate for the budgeted level of activity

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Covariance

• shows the direction of the relationship between 2 variables as well as its relative
strength.

If one variable increases and the other variable tends to also increase, then we
experience positive covariance.

If one variable increases and the other tends to decrease, then the covariance would be
negative.

Correlation

This is concerned with establishing how strong the relationship is:

1. Perfect Correlation

refers to a correlation where all pairs of values lie on a straight line and there is an exact
linear relationship between the two variables.

2. Partial Correlation

refers to a correlation where there is not an exact relationship, but low values of (x) tend
to be associated with low values of (y), and high values of (x) tend to be associated with
high values of (y).

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 They may also have low values of (x) associated with high values of (y) and vice versa
(negative correlation)

3. No Correlation

refers to a situation where the two variables seem to be completely unconnected

• Correlation Coefficient

The correlation calculation simply takes the covariance and divides it by the product of
the standard deviation of the two variables.

• The degree of correlation can be measured (r).

This gives a value of -1 and +1.

A correlation of +1 can be interpreted to suggest that both variables move perfectly

positively with each other, and a -1 implies they are perfectly negatively correlated.

•
Coefficient of Determination (r2)

This measures how good the estimated regression equation is and is designated as r2
and has the range of values between 0 and 1.

The higher the r2, the more confidence in the equation.

• Limitations of Simple Linear Regression Analysis

Assumes a linear relationship between variables;

Measures only the relationship between two variables where in reality many variables
exist;

Assumes that the historical behaviour of the data continues into the foreseeable future;

Interpolated predictions are only reliable if there is a significant correlation between the
data.

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 Syllabus G3abc. Time Series Analysis

Time Series Analysis

Any data collected over time (eg sales volumes) can be used here

Time series forecasting methods are based on the assumption that past patterns in data,
such as seasonality, can be used to forecast future data points.

Such patterns allow for more curved than linear predictions.

Let’s take a simple example.

Over the past 6 years, a particular company has noticed that on month 12 the sales are
usually 30% higher than typical monthly volumes.

Thus it makes sense to forecast that month 12 for the forthcoming year will follow a similar
pattern

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This graph shows a scenario where linear regression has predicted an increase in sales of
roughly €4M per quarter

However Time series has taken into account past trends which suggest that Q1 sales are
usually €4M below trend, Q2 are €4M above and Q3 are €4M below.

In time series analysis, the trend line itself may also be curved.

Indeed it would only be linear as the above example, if the favourable and adverse seasonal
affects cancel each other out

• Time Series Analysis Components

Time Series Analysis is made up of three main components used in different ways to
produce future forecasts:

Average

the mean of the observations over time

Trend

a gradual increase or decrease in the average over time

Seasonal influence

predictable short-term cycling behaviour due to time of day, week, month, year, season
and so on

• Forecast data might also be affected by cyclical movement (unpredictable long-term

cycling behaviour due to the business cycle or product/service lifecycle) and random
error (remaining variation that cannot be explained by the other four components)

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• Variations of time series analysis

Time Series Analysis offers 2 main variations:

Moving Averages

The forecast is based on an arithmetic average of a given number of past data points.

This should make the trend become more obvious.

Let us take a simple example by considering the following data:

Period 1 2 3 4 5 6 7 8 9 10 11 12
Sales €M 47 50 51 48 48 52 52 49 50 52 54 50

• It is difficult to immediately spot the trend as the figures appear to be constantly

increasing and decreasing.

However, a moving average (average sales from periods 1-4, 2-5, 3-6 etc) of this data
using 4 period averaging would give the following result.

Moving Average 49.00 49.25 49.75 50.00 50.25 50.75 50.75 51.25 51.50

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• Exponential Smoothing

A type of weighted moving average that allows inclusion of trends etc. This gives greater
weighting to more recent data in order to reflect the more recent trend.

An exponential smoothing (average calculated by taking 4 times the 4th period, 3 times
the 3rd period, 2 times the 2nd period and 1 times the 1st period and then dividing by a
total of 10) of the data would present a similar picture

Exponential Smoothing 49.2 48.8 49.9 50.8 50.4 50.3 50.8 52.1 51.6
0 0 0 0 0 0 0 0 0

• Advantages and Disadvantages

Advantages Disadvantages
Identifies seasonal variations Complicated
Can be non-linear ‘Seasons’ may change
Accurate Based on historical data
Less useful in the long term

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Conclusion

Linear regression is most relevant when there is a linear relationship between the variables.

On the other hand, time series analysis is most appropriate when seasonal variations
causes curved forecasts.

The reliability of a forecasting method can be established over time.

If the forecasts used, turn out to be inaccurate, management might decide to use alternative
methods of forecasting.

On the other hand, if forecasts prove to be accurate and successful, providing management
with key data for decision making, then it is more likely that management will continue to use
the same forecasting methods.

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Syllabus H: Innovation, Performance Excellence
& Change Management
Syllabus H1. Enabling Success: Organising

Syllabus H1ab. Types of Structure

Strategy Implementation - organising for success

3 Aspects:

1. Organisation Structure

2. Managing change

3. Intended and Emerging strategy

What’s the best structure to achieve the strategic objectives?

Option 1: Entrepreneurial Organisation

This works best in the early stages of a firm.

As it grows it may become inefficient to stay like this

(in fact these options are ordered in life-cycle order)

• Entrepreneur takes all the big decisions. No delegation

• No formal management structure

• Simple processes. Small number of products probably

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Option 2: Functional Organisation

Each function (production, marketing, finance etc) has its own management and staff

Option 3: Divisional Organisation

As different product-markets appear, this structure may become most appropriate

A division is simply an area of operations (geography, product or customer)

Head office delegates authority and responsibility to divisional management

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Option 4: Matrix Organisation

Where different functions need to work closely together, so horizontal relationships become

very important with dual command

Project Managers: In charge of individuals across functions

Functional Managers: Still in charge of their function

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The matrix structure should:

1. Encourage communication

2. Focus on getting the job done (not defending own position)

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 Syllabus H1ab. Span Of Control

Recent trends is towards a flatter structure

As a flatter structure is more adaptable and cheaper as managing each other does not
always add value

Tall Narrow - Organisation A

Many layers of management. Close supervision

Task specialisation
Very formal roles and job titles
Slow to adapt as info takes a long time to get from bottom to top

Wide Flat - Organisation B

Fewer managers with more subordinates each

Bosses and employees treated as equals
Team work required. More responsibilities throughout.
Task switchers and less formal roles
Rapid decision making

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 Syllabus H1ab. Generic processes

Generic processes

Control processes determine how organisations function

Some deal with inputs, some with outputs

Some involve direct management action others more indirect

Input Output
Direct manager Supervision Performance targets -
involvement Planning processes e.g. budgets and profits, KPIs
standards
Indirect manager Culture of an organisation Internal markets
invovement Employee motivation
Resources

In the public sector, control of inputs has been traditional, but there has been a move

towards targets for outputs in order to improve services.

A problem with performance targets is that it can be difficult to identify appropriate KPIs.

High-level financial KPIs, such as ROI, are well-established and present no difficulty

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 Syllabus H1ab. Internal & External Relationships

Internal

Centralisation v De-centralisation

Head office decision making v delegated decision making

Centralisation Decentralisation
Ensures corporate objectives met Better local knowledge
Better coordinated decisions Motivates managers
Easier in a crisis situation Quicker and more practical in large, complex firms

Features of a centralised organisational structure:

1. A dominating head office

2. Working from a central headquarters

External

Strategic alliances, Joint ventures, Value Networks (all seen earlier) now let’s look at a
different external relationship

Outsourcing

Common in the building industry - work carried out by a sub-contractor on your behalf
Often happens elsewhere, mostly in non-core activities e.g. Security, Payroll etc

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Reasons for Problems with
Allows firm to concentrate on core competencies Loss of control over the work
Outsource the work to an organisation whose core Managing the relationship
competency is that work
Allows specialists to work when otherwise couldn't afford Not as fully committed /
the ability to pay them full time flexible as own staff

Offshoring
This is the relocation of a business process from one country to another—typically an
operational process, such as manufacturing, or supporting processes, such as accounting.

Typically this refers to offshoring to a cheaper labour country

Shared services

This is the provision of a service by one part of an organisation is shared and the providing
department effectively becomes an internal service provider

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 Syllabus H1ab. The Virtual Organisation

These have no physical existence

They are operated by email and telephone services

e.g. A sole trader operating from home as ‘head office’

These will take on work and outsource a lot of their business e.g. Accountancy, delivery etc

Even large companies could do this

e.g. Selling other producers goods. All aspects could be outsourced

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 Syllabus H1ab. Boundary-less Organisations

Boundary-less Organisations

These are useful for non-standard work, where rapid innovation is needed

Communication between functions is virtual (not face to face).

This removes any geographical boundaries

The structure of boundary-less organisations is free-form.

There are very few hierarchies.

This leaves employees to work in groups managing their own (company wide) projects

Examples:

1. Hollow:

Management identify the core competencies, and outsource the rest.

This has the effect of reducing fixed costs (but increasing variable costs).

This fixed to variable costs is good for when times are tough and when there’s a price
war

2. Modular:

For manufacturing industries.

Outsourcing parts of the manufactured item.

This needs correct interfaces (where the parts fit together)

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 Syllabus H1ab. Mintzbergs 5 building Blocks

Whichever group is most powerful dominates the

organisation structure

The groups are...

Top Management = Strategic Apex

Normal employees of the firm = Operating Core

Management = Middle Line

Secretarial, cleaning, repairs, IT etc = Support Staff

No line management responsibilities. Produce systems manuals etc = Technostructure

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Most powerful Structure
group
Strategic Apex Entrepreneurial. Leaders give sense of direction
Operating Core Highly skilled workers with lots of influence e.g. Schools, hospitals
Middle Line Localised and divisionalised company

Remember that poor performance in a company may simply be due to having an

inappropriate structure for the environment and the strategies it follows

Mintzbergs 6 Configurations

1. Simple Structure

Entrepreneurial. Strategic apex gives direct control, little middle line, support staff or
technostructure. Owner-managers often. Flexible, quick to react

2. Machine Bureaucracy

Technostructure dominant. Controls through regulations. Slow to react to change

Needs standardisation in simple, repetitive and stable environments. Typically found in

large, mature organisations

3. Professional Bureaucracy

Operating Core dominant. Highly skilled professionals abound

Machine bureaucracy generates its own standards BUT professional bureaucracy

standards come from the outside

It's "the power of expertise"

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4. Divisionalised

Middle line dominant. Division leaders powerful and often able to restrict strategic apex
influence

The autonomy in the Professional Bureaucracy are individuals—BUT—in the

Divisionalised Form they are units in the middle line

Each division has its own structure.

Divisions are created according to markets served

5. Adhocracy

Complex and disordered. Extensive teamwork/project type work. Support staff very
important as close relationship to external suppliers can be vital. Innovation is a strength
here

No standardisation

Most suitable structure for innovative organisations which hire and give power to experts

Project managers are particularly numerous

6. Missionary

All member share a common set of beliefs. Difficult to accept change. Only suitable for
small, stable environments

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 Syllabus H1ab. Contingency Theory for Structure

Structure should be the one best suited to its size,

complexity and strategies

Mechanistic Organic
Authority delegated through formal Network control structure
structure
Manager power depends on their position Individuals decision making is due to their
in the hierarchy knowledge and skills
Bureaucratic Free flow of information
Vertical communication More horizontal communication
Specialised jobs Contributions to a common task is the job
Tasks governed by superiors Advice rather than orders given

This was created by Burns & Stalker

In B&S’s research not one structure was found to be better than another, however they did
notice that it’s ‘horses for courses’ e.g. A stable market suits a mechanistic structure and
vice-versa

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 Syllabus H1b. Offshoring, Shared & Global Business Services

Offshoring, Shared & Global Business Services

Offshoring

This is a using a foreign entity for a particular process which used to be in-hause.

Shared Service Centres

These aim to achieve significant cost reductions while improving service levels by using
standardised technology and processes.

Many large organisations centralise their IT support functions, where one IT helpdesk to
serve the entire organisation, as opposed to individual divisions or departments having their
own designated IT support.

Global Business Services

These are used by large, global organisations.

It basically brings together existing shared service and outsourcing to form a collaborative
framework in areas including finance, HR, IT and procurement.

374
 Syllabus H2. Enabling Success: Disruptive Technology

Syllabus H2b. Impact Of Disruptive Technologies Such As Fintech

Disruptive Innovation

This is innovation that does not look just to improve existing products

Rather it produces new products and markets

Large companies are often too risk averse and not aware enough to notice these and take
advantage of them

Think Spotify and the music business

A new set of industry leaders tend to take over as the whole market shifts

Bigger companies also tend to miss these technologies on purpose! They are reluctant to
'connibalise' their existing businesses by introducing something different.

Two ways in which companies can try to protect themselves from disruption are:

1. Develop a portfolio of real options (McGrath & MacMillan, 2000). These are limited
investments that keep options open, enabling them to respond quickly to opportunities.

2. Develop new venture units. These are internal units to develop new ideas which are kept
separate from the core business, often located in a different place physically, so that they
do not get 'stifled' by the organisation.

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Real-world example

FinTech

Financial technology, or FinTech, is having a maior impact on the world of finance and is
growing fast, with many predictions that it will mean extensive disruption to established
businesses in this area.

Examples of FinTech include:

• Peer-to-peer lenders replacing banks for lending and saving

• Peer-to-peer money transfer services replacing banks for money transmission and
foreign exchange

• Firms providing payment security and verification

• Financial advice driven by algorithms, offered at much lower cost than traditional
advisors

• Appbased insurance companies

Fintech

Fintech is financial technology that describes an emerging financial services sector in the
21st century.

It includes any technological innovation in the financial sector, including innovations in

financial literacy and education, retail banking, investment and even crypto-currencies like
bitcoin.

It can apply to any innovation in how people transact business, from the invention of digital
money to double-entry bookkeeping.

Since the internet revolution and the mobile internet revolution, however, financial
technology has grown explosively, and fintech, which originally referred to computer
technology applied to the back office of banks or trading firms, now describes a broad
variety of technological interventions into personal and commercial finance.

376
According to EY's Fintech Adoption Index, one-third of consumers utilize at least two or more
fintech services and those consumers are also increasingly aware of fintech as a part of their
daily lives.

Blockchain
Watch the video HERE

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 Syllabus H3. Enabling Success: Talent Management

Syllabus H3a. Talent Management

Talent Management

This means attracting, developing and retaining individuals important to success

HR should be Strategic

Managing talented individuals is a competitive advantage

The Benefits of Talent Management

Closely aligned to strategy, benefits should be:

1. The creation of a Learning Organisation

Here workers challenge assumptions and search for improvements

2. Attracting New Talent

To develop new, more competitive products/services

3. Supporting Succession Planning

As workers prepare for leadership roles

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Talent Management Activities

Maximising potential is key - this is achieved by:

1. Coaching in management and leadership

2. Attending network events

3. Communication with board level management

4. Communication with key clients

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 Syllabus H3b. POPIT: people, organisation, processes, information technology

POPIT: people, organisation, processes, information

technology

This approach looks at four elements needed to achieve successful business change

Organisation

This ensures the change is suitable in terms of the organisations’ business model, external
environment and internal capabilities

Processes

Then look at the business’ main processes and their value chain and how the chain will
affect / take advantage of them

People

This looks at employees’ roles, skills and competencies and the entire culture to again see if
the change is appropriate or the effect it will have

Information Technology

How will the change affect/require business information models and technical architecture

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 Syllabus H4. Enabling Success: Performance Excellence

Syllabus H4a. The Baldrige Model

The Baldrige Criteria

The Baldrige Criteria for Performance Excellence is a framework for improving performance
and achieve excellence.

It helps the organisation find its own strengths (and areas for improvement), and prioritises
those which sustain the organisation

It can be used by not-for-profit organisations too

The framework uses core values and concepts which are found in high-performing
organisations:

Visionary leadership

Focus on success

Ethics and transparency

Societal responsibility

Organisational learning and agility

Valuing people

Customer-focussed excellence

Delivering value and results

Management by fact: an emphasis on feedback, and a fact-based, knowledge-driven system

for improving performance and competitiveness

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Elements of the Baldrige Assessment
Organisational profile:

The organisation describes what is important to it — its operating environment, competitive

environment, key relationships.

1. Leadership
Leaders set direction and expectations. Areas looked at are:
The role of senior leadership
Governance and social responsibilities

2. Strategy
This focuses on:
Strategy development
Strategy implementation

3. Customers
Needs of customers must be met
It focuses on:
Listening to the customer
Customer engagement

4. Measurement, Analysis and Knowledge Management

Feedback (measurement) is vital
The focus here is on:
Measurement, analysis and improvement of organisational performance
Knowledge, management, information and information technology (IT)

5. Workforce
Skilled and Motivated staff are vital
'Workforce' focuses on:
Working environment
Workforce engagement

6. Operations
Efficient and effective processes are vital
'Operations' focuses on:
Work processes
Operational effectiveness

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Results (compared to other organisations, and over time)

As well as assessing each criteria individually, the framework also highlights the importance

of integration between each other in delivering results

This means excellence across the ENTIRE organisation, not the individual criteria resulting

in better financial results; satisfied,

loyal customers; improved products and services; and an engaged workforce.

The Criteria are evaluated against the following 4 Dimensions

1. Approach

How is work done? How effective are its key approaches?

2. Deployment

How consistently are key processes used in relevant parts of the organisation?

3. Learning

How improved are the key approaches?

How have these been shared?

What is the potential for innovation?

4. Integration

Are approaches aligned to needs?

Are processes / targets harmonised?

383
Results are also evaluated across 4 dimensions:

1. Levels

What is the current performance level?

2. Trends

Are results in this aspect of performance improving?

3. Comparisons

How does performance compare with others, or against benchmarks/targets?

4. Integration

Are results tracked and do they consider key stakeholder needs?

Are performance tracking results used in decision making?

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 Syllabus H4b. Empowering Organisations

Empowering Organisations

Here we look at how workers can contribute to success

So empowerment means removing anything which prevents performance improvement -

normally involving:

Investing in new technologies

Enhancing existing processes,

Developing new strategies.

Empowerment of the Workforce

Empowerment includes two key aspects:

1. Give workers freedom to decide how to do the necessary work

2. Make workers responsible for targets and quality control.

Often those at the "coal-face" understand whats wrong with a process better than seniors -

but often they don;t have the power to change the process

385
Empowerment goes hand in hand with:

Delayering

Reducing the number of management levels from bottom to top

Flexibility

Give responsibility to the people closest to the product and customer and speed up the
process

New Technology

'Knowledge workers' need less supervision

Better information systems also remove the mystique and power of managers as possessors
of knowledge and information in the organisation.

386
 Syllabus H5. Managing Strategic Change

Syllabus H5. Strategic Change

Strategic Change

Incremental Change

Needs no structural reorganisation, the entity should be able to adapt easily

Transformational Change

Big impact on the entity and its workers. Restructuring required and change management
skills

small change
Realignment does not alter the fundamental beliefs of the organisation. It is therefore easier
than transformation

Evolution can take a long time.

387
Revolution, on the other hand, is immediate and requires simultaneous action from many
change managers. It is therefore the most difficult to accomplish successfully

So Managers need to be aware of what type of change they are looking for: adaption,
reconstruction, evolution or revolution

Reasons for change

External Example Internal Example

Politics Civil war in a major export Senior New CEO with new ideas
market management
changes
Economy Euro crisis affecting export Acquisitions and Integration with a
market mergers partnering firm
Socio- Health scares DeMergers Systems will need
cultural changing
Technology New technology on market Downsizing Current systems may no
making ours obsolete longer be needed
Environment Diminishing supplies of
al energy
Legal Health and safety regulations

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 Syllabus H5. Contextual Features of Change

Contextual Features of Change

JSW argue that successfully managing change depends on context.

This context depends on the specific organisation

JSW again use the work of Balogun and Hope Hailey to consider the contextual features
that need to be taken into account in deciding how a strategic change programme should be
managed

389
There are eight contextual factors, identified by Balogun and Hope-Hailey,
which significantly influence strategic change

1. Capability

This refers to what experience there is of managing change in the organisation.

• Does the organisation have managers who have successively managed change in
the past?

• Is the workforce used to change and have they readily accepted changes in their
work practices?

Resistance

2. Readiness for change

This concerns the organisation’s attitude towards change.

• Is it likely to embrace it or oppose it?

• Are staff aware of the need for change?

If they are, how willing and motivated are they towards the change?

• How much support generally is there for the change? How much understanding is
there for the scope needed?

3. Preservation

• To what extent is it essential to maintain continuity in certain practices or preserve

specific assets?

• Do these practices and/or assets constitute invaluable resources or do they

contribute towards a valued stability or identity within an organisation?

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4. Diversity

• Is the staff group concerned diverse or relatively homogeneous in terms of its values,
norms and attitudes?

• Are there many subcultures or national cultures within the group?

• Are there different departments or divisions or is it one particular staff group?

• Are there professionals who identify more with their profession than their
organisation?

• With whom or what in the organisation do different staff groups identify – their team,
job, department, division or the whole organisation?

5. Capacity Human Resource, Financial Resource, Technology, etc.

How much cash or spare human resource is there to divert towards the change?

change manager (person implementing the change) should have sufficient power and authority to
6. Power implement decisions

• Where is power vested within the organisation?

• For this change to be successful, who are the major stakeholders within and outside
the organisation whose support must be canvassed?

• Is the unit needing to change part of a larger group or is it relatively autonomous?

7. Time

This refers to the amount of time available to implement change.

• This occasionally can be super important, for example when the company is losing
money at an alarming rate (and so needs to change quickly).

• How much time does the organisation have to achieve this change? Is it in a short
term crisis or is it concerned with long-term strategic development?

• Are stakeholders, such as the stock market, expecting short term results from the
change?

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 8. Scope of change

• Is just a small realignment or a big transformation (requiring a huge cultural change)

needed?

Then think of what action is needed (an incremental, evolutionary approach or a big
bang one)

• Realignment does not alter the fundamental beliefs of the organisation. It is,
therefore, easier than transformation

• Evolution can take a long time.

• Revolution, on the other hand, is immediate and requires simultaneous action from
many change managers. It is, therefore, the most difficult to accomplish successfully.

• So Managers need to be aware of what type of change they are looking for:
adaptation, reconstruction, evolution or revolution

slowly and gradually

Urgently or Immediately

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 Syllabus H5. Cultural web and organisational change

working the existing environment of the organization

also known as organizational culture

The Cultural Web

The Cultural Web was explored in a previous lecture and is reproduced below:

1. Identify what changes need to be made to the current paradigm.

2. Map out an organisation’s position on the various aspects outlined in the web;

3. Set out a strategy to change the various elements in the cultural web.

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The impact of change of each element on the cultural web is reproduced below:

Stories

Identify the core beliefs of the stories and extent of their pervasiveness within the
organisation; Do they show the ‘reality’ that management wants

Routines & Rituals

Do they help or hinder? To what extent can these be changed?

Gain insight on the type of message driven by training programmes;

Organisational Structures

The type of structure used Functional/Project Based; What is the level of hierarchy ;

What is the type of power structure being deployed; Is it now appropriate for the desired
change?

Control Systems

What are the key controls put in place;

What form of incentive schemes and motivation tools are being adopted; Are they
appropriate and promote the desired change?

Power Structures

What values are being enforced by the leaders; Do they fully believe in the change required?
How is power distributed across the organisation?

Symbols

What is the overall language and jargon used at the place of work? What status symbols are
associated with the organisation? What aspects of strategy that are highlighted in publicity?
Are they a barrier or help to change?

Overall

What is the dominant culture? How easy is this to change.

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 Syllabus H5. Blockages and levers of change

Blockages and levers of change

There are several requirements for change - these are called levers of change

Levers of change

1. Understanding the need for and result of change

2. Leaders committed to change

3. Effective 2 way communication to all affected

4. Leadership change qualities and skills

5. Adaption of the corporate structure (if appropriate)

6. Reward systems amended so in line with change requirements

7. CSFs and KPIs altered as necessary

8. Educating and training of employees

Blockages to change

These come from:

1. What Individuals want for themselves

2. their habits and customs

3. relationships between those involved

4. vested interests

5. organisation structure

6. entity's policies

7. resources available

8. regulations

9. events happening

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 Syllabus H5. The style of leadership and strategic change

Kotter and Schlesinger identified 6 methods of dealing

with resistance to change:

Education and Communication

Raising awareness and providing knowledge on the reasons, main outcomes and underlying
benefits of the change process

Participation and Involvement

Employees provide a direct input in the decision making process.

This method reduces the resistance by taking the employees views into account.

In view of such involvement, a lower probability of resistance is likely.

Facilitation and Support

Providing counselling or training to employees to enable them to overcome their fears and
anxieties

Negotiation and Agreement

Reaching comprising and bargaining with the people or their representative being impacted
by the change

Compensating those who lose out (e.g. redundancy package)

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Manipulation and Co-optation

Selective dissemination and distortion of information to convey the more positive benefits of
the change.

This method involves the presentation of partial or misleading information to those resisting
change or "buying-off" the main individuals who are at the heart of the resistance.

Coercion

Undertaking a compulsory approach by management to implement change.

This involves the use or threat of force to push through the change.

A very last resort if parties are operating from fixed positions and are unwilling to move.

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 Syllabus H5c. Lewin’s Three Stage Model

Lewin's three-stage model

This looks at the key stages in successfully implementing organisational change- Unfreeze,
change and refreeze

Organisational change involves 're-learning': not merely learning something new, but trying
to unlearn what is already known.

Unfreeze

This creates the motivation to change.

It involves making people within an organisation ready to change

Make the workforce aware of the need (trigger) for change, and creating a readiness to
change

Remove individuals from routines, social relationships so that old behaviours and attitudes

are not ‘reinforced ‘

Confront perceptions and emotions among workers about change

Consult individuals obout proposed changes - reducing feelings of insecurity

Reinforce a willingness to change: validate efforts and suggestions with praise and

responsibility for the change

Effective communication of the need for change is essential

'Unfreezing' may sound simple but, in practice, it can be very difficult because it involves
making people ready to change.

Rational argument will not necessarily be sufficient, particularly if they stand to lose from the
change

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Change Stage

The change (or 'move') stage involves learning new ways of working.

Participation of staff is vital here so as not to feel alienated

New, desirable behaviours or norms are identified, communicated positively and "buy in"
encouraged

Refreeze stage

This is the refreezing the new state of affairs, by setting policies to embed new behaviours,
and establishing new standards.

Ensure staff do not lapse back into old behaviour.

New behaviours are reinforced, so they become habits

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 Syllabus H6. Managing Innovation And Change Management

Syllabus H6a. The basics of Processes

The basics of Processes

Business processes (e.g. Development, manufacturing, distribution etc) make up the value
chain of a company.

Different strategies will need different processes

Process Change Examples

Business Process
Automate Rationalise Redesign
Definitio Manual Processes More efficient Major redesign of
n automated Processes Processes
Exampl Payslips EDI Sharing data with suppliers
es

Businesses are run via a number of different processes, literally everything they do is a
process

How these processes are performed comes from the strategy of that business

The strength of the processes forms a competitive advantage

The strength of this process as a competitive advantage is related to how difficult (or easy) it
is to copy

When I taught this subject many years ago I used to perform a "trick" in my London based
courses.

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I used to ask students to write down a business they think of when i say "Really simple
online booking".

I would then write on the turned off overhead projector (that's how old this example is!) -
EASY JET

The students would then write down their business and be astonished when i turned on the
OHP to see that I had written exactly the same as them.

The reason being of course was that EasyJet had created a fantastic process and was
famous for it, however I couldn't perform that trick anymore because the competition has
caught up and many now have similar easy online booking processes

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 Syllabus H6b. Evaluate The Effectiveness Of Current Organisational Processes

Gap Analysis

Here a project team assess the current position and processes and compare to target end
state

The 'gaps' identified will help to determine the type of process redesign required.

EG. Website upgrade = basic change

Complete Restructuring = needs fundamental rethink of existing processes.

system development team과 비슷한건가?

The project team conduct interviews existing process users - observe staff while they
understand the improvements needed.

Need for A Holistic View

...when looking at a process redesign projects

See how different activities and resources interact. Eg a new website involves human and
technical elements.

Business case and Benefits

Process change proposals create a business case.

This helps management decide the most appropriate process redesign

The business case will include the associated costs and the improvement objectives that will
be achieved (benefits)

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 Syllabus H6b. How should the process be changed?

Scope and Focus of Change

what suggestions or recommendations what we need to do to fix the problems

Harmon Process-Strategy Matrix

(Hasan dossani said less important topics…)
Which processes to change and how to change them

which processes are more or less important

low importance
Impact insource
outsource

straightforward
or
complicated

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Quadrant Type of Process Action Required
Bottom Simple and stable; No Automate them to be as efficient as
Left competitive advantage from possible. They are just a necessary evil eg.
them Payslips

Bottom Simple and stable Automation to a high standard

Right but Strategically important e.g. Assembly work

Top Left Complex and dynamic Not a Outsource

core competence of ours though e.g. Calculating tax to be paid

Top Right Complex and dynamic A core Carefully investigating and analysed
competence Redesigned to create even more value

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 Syllabus H6c. Business Process Redesign

Business Process Redesign

Although this syllabus heading is referring to the current situation of a business (from the
scenario in the exam) - obviously we can’t comment on that here but the following is needed
when the processes aren’t working well currently, and a complete overhaul is needed

Business Process redesign is also called Business process Re-

engineering (BPR)

Harmon recommends a 5 stage approach to this:

1. Plan Identify goals, scope, personnel and plan

2. Analysis Document workflow, identify problems

3. Redesign Explore alternatives and choose best

4. Development Redesign of jobs, products, hiring & firing, KPIs

5. Transition Integrate, train, test, modify where needed

In the exam you may be asked to evaluate an existing process and

make redesign suggestions - look out for..

1. Are there any steps or gaps missing?

2. Any duplication of work?

3. Any no value added activities?

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Process Re-design Patterns

These are simply solutions / approaches that have worked in the past..

Pattern What causes it? Description

Re-engineering Major re-organisation Major redesign from scratch. High risk/return
Simplification Duplication and Checking each step in the process to check
unnecessary activities they’re needed. Low risk/return
Value added Non value adding Check each activity for what value it adds to
analysis activities the customer. Moderate returns
Gaps and Information flows not Using process diagrams to see what needs to
Disconnects working happen. Moderate returns

In the exam you need to decide if you think a complete redesign is needed or just an
improvement on existing processes.

In doing so think about the pros and cons in terms of money, culture, effect of change etc

Process redesign and Strategy

As we have seen BPR involves improving the value chain and looks at existing processes to
check they are operating according to our current strategy

• This strategy, according to Norton and Kaplan’s Balanced Scorecard, is formulated from
four different perspectives.

1. Financial

2. Customers

3. Internal business processes

4. Innovation and learning

• Each of these 4 categories will have KPIs

So BPR should be aimed at improving these KPIs and thus ensuring that they are
following strategy

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 Syllabus H6d. The Feasibility of Possible Redesign Options

The Feasibility Of Possible Redesign Options

The feasibility study filters out too costly, too much, disruptive, demanding on human
resources or have side effects outweighing the advantages.

Feasibility can be split into 4 areas:

Feasibility
Technical Does the necessary technology exist or is significant innovation
required?
Is further development required?
How specialised is the technology and is the expertise available?
Social The outcome of a process improvement proiect may have important
consequences tor employees
Both inside and outside the team, eg statt redundancies, training and
changed work patterns.
Environmenta This is really more about acceptability than feasibility
l Different stakeholders have different environmental concerns
Opinions and reactions may affect the project
Financial Cost-benefit analysis will happen but benefits are often intangible
Assigning monetary values to benefits is tough - especially in the public
and voluntary sectors

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 Syllabus H6e. An Organisation Process Redesign Methodology

A Process Redesign Methodology

So we decide we want to improve a process - now we need a methodology for doing so

Process redesign methodologies are similar project management (see next chapter)

Advantages of having a methodology

A plan provides discipline and keeps focus.

Acceptance by staff is emphasised in the methodology

Harmon's process redesign methodology

Phase
1 Planning Goals, Scope, Team members are all identified and the overall
schedule is developed.
2 Analysis Current problems identified and a general redesign plan is made
3 Redesign Possible solutions considered and the best chosen; objectives for
the next phase are defined.
4 Development Functional aspects are improved, including management and
information systems.
5 Transition The redesigned process is implemented; modifications are made
as needed.

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 Syllabus H7. Leading And Managing Projects

Syllabus H7a. What is a Project

A project has: A beginning and an end

It also has

Goals

Quality, Cost, time and scope constraints

So how is a process different from 'ordinary work'?

Projects Ordinary work

A defined beginning and end On-going
Have resources allocated specifically to Resources used 'full-time'
them
Are intended to be done only once A mixture of many recurring tasks
Follow a plan towards a clear intended Goals and deadlines are more general
end-result
Often cut across organisational and Usually follows the organisation or functional
functional lines structure

Common examples of projects include:

Producing a new product or service

Changing the structure of an organisation

Developing a new information system

Implementing a new business procedure or process

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Time:

Consists of two elements including the project completion date and available man hours.

Scope:

Comprises of the tasks that need to be performed and the levels of quality expected of the
outcome.

Cost:

The available budget for project completion and the value added generated through the
outcome.

Managing Project Risk

This, therefore, basically refers to the management of the 3 constraints.

So you are looking for these constraints to be:

Well Defined (at the beginning)

Well Understood (Particularly if the project is complex)

Well Measured (Particularly if the project is large)

Clearly the less well defined, more complex and large the project - the more risk is involved

Risk management involves keeping a close eye on the constraints from beginning to end
and taking appropriate corrective action wherever necessary

All projects incur risks which include cost over-run, missed deadlines, poor quality,
disappointed customers and business disruption.

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Time Risks:

The risk of not completing the project within the deadline and/or within the time available;

Scope Risks:

The risk of not meeting the specifications and quality levels expected by the customers;

Cost Risks:

The risk of exceeding the budgeted cost of the project or of not achieving the desired value
added following the completion of the project;

Even the basic structure of the project plan is uncertain.

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 Syllabus H7b. The Implications of The Triple Constraint of Scope, Time And Cost

The implications of the triple constraint of scope, time

and cost

Every project is constrained in some way by its scope, time and cost.

These limitations are often called the triple constraint.

The scope concerns what has to be delivered by the project, time is when the project should
deliver by, and cost is concerned with how much can be spent on achieving the deliverable
(the budget).

Quality is also an important feature of projects.

Some authors include quality in their triple constraint (instead of scope), others add it as a
further constraint (quadruple constraint), whilst others believe that quality considerations are
inherent in setting the scope, time and cost goals of a project.

How a particular project is managed depends greatly on the pressures in the triple
constraint.

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 Syllabus H7b. Identify And Plan To Manage Risks

Risk Management in Projects

A risk is anything that will have a negative impact on any one or all of the primary project
constraints, ie Time, Scope and Cost

4 step process:

Identify Risk - Make list of potential risks continually

Analyse Risk - Prioritise according to threat/likelihood

Plan for Risk - Avoid or make contingency plans (TARA)

Monitor Risk - Assess risks continually

The analysis/assessment of risk is primarily concerned with the likelihood of them occurring
and the severity of impact on the organisation or project should they occur.

Sometimes the likelihood is a subjective probability, the opinions of experienced managers

or experts in the field. On other occasions, there is some statistical evidence on which to
base the assessment.

Planning for risk involves TARA

1. Transfer the risk (to a 3rd party eg. insurance)

2. Avoid the risk (don’t take the project on)

3. Reduce the risk through controls (also called mitigation of risk)

4. Accept the risk (particularly if it’s an insignificant or improbable risk)

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All projects incur risks which include cost over-run, missed deadlines, poor quality,
disappointed customers and business disruption.

Time Risks:

The risk of not completing the project within the deadline and/or within the time available;

Scope Risks:

The risk of not meeting the specifications and quality levels expected by the customers;

Cost Risks:

The risk of exceeding the budgeted cost of the project or of not achieving the desired value
added following the completion of the project;

Such risks may be either foreseen, unforeseen or chaotic.

Foreseen risks refers to a distinct and identifiable project influence that may or may not have
an impact on the project;

Unforeseen Uncertainty: Cannot be identified during project planning;

Chaos: whereas projects subject to unforeseen uncertainty start out with reasonably stable
assumptions and goals, projects subject to chaos do not. Even the basic structure of the
project plan is uncertain.

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 Syllabus H7c. The Structures And Information To Successfully Initiate A Project

The structures and information to successfully initiate a

project

Experience has shown that many projects fail because of weaknesses in project

identification and initiation:

An example would be not properly understanding the project’s implications

Structures therefore need to be in place for a successful initiation

These would include:

• a project budget

• a project timetable

• adequate resources

• a well resourced and chosen project team

Initiating a project

This process builds on the work of the start up process, and the project brief is augmented to
form a business case (first document in project management)

1. justification for undertaking a project

2. evaluates pros and cons of each option

3. it is prepared by Project sponsor and

presented to the Board for approval

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 Syllabus H7cd. Designing the Project

A project needs a business case

Building a business case:

To obtain funding

To compete with other projects

To improve planning

To improve project Management

Contents of a Business Case

Heading Content
Introduction Sets the scene and explains reasons behind the project

Executive Summary The key considerations; The options considered; Reasons

behind the choice made and the key numbers
Clear identification and analysis of the problem
Current Situation Strategic and operational assessment including a SWOT
analysis

Options Assessment of each and reasons why not chosen

Cost / benefit analysis Detail in the appendices; tangible and intangible (customer
satisfaction etc) items; Appraisal techniques numbers also

Impact Impact on the cultural web

Risk Identification and Contingency planning constraints

management of each risk

Recommendations Justification for the chosen path

Appendices Detailed cost/benefits and appraisal technique numbers

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Cost / Benefits of a Project

Project Costs

Investment Cost - Include IT costs and project specific assets

Development Costs - Include potential future development costs (as an estimate)
Centrally allocated costs - For use of premises and services (personnel, accounting etc)
External Consultancy costs
Resource costs - for ongoing (incremental) staffing costs and material costs
Quality costs - Training, reworking, monitoring
Flexibility costs - IT equipment for home use; lower batch sizes etc
Disruption costs - loss of productivity during changeover

Project Benefits

Some benefits are more worthy than others - here’s the scale

1. Financial (cost reductions / revenue increases)

2. Quantifiable (now and forecastable before the project)

3. Measurable (now but not forecastable until after the project)

4. Observable (e.g. Improvements in morale)

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 Syllabus H7d. The Costs And Benefits Of A Business Case

The costs and benefits of a business case

Project Appraisal

Projects tie up a lot of resources in terms of time, costs and human resources, it is therefore
important to assess these properly. Part of the assessment includes financial rewards
derived from the projects.

The following project appraisal methods focus purely on the financial rewards of the project,
however this should not be the only determining factor of whether management should
select a project or not.

Indeed, focusing only on financial costs and benefits can lead to the following issues:

Non-financial costs or benefits might outweigh the financial ones

Managers might be encouraged to make use of ‘creative’ calculations of benefits and have
them classified under financial benefits

Costs may be removed from forecasts in an attempt to ‘overstate’ the case for the project

Managers may include slack in forecasts in an attempt to show enough benefit to achieve
project approval

Projects with no financial benefits will be automatically rejected

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Payback Period

The payback period is how long it takes the cash inflows to exceed the initial outflow - "the
time that it takes for an investment to pay for itself."

The quicker the better - particularly when the focus is on liquidity

Eg.

Initial cost 3.6 million

Cash in annually 700,000

What is the payback period?

3,600,000 / 700,000 = 5.1429

Take the decimal (0.1429) and multiply it by 12 to get the months - in this case 1.7 months

So the answer is 5 years and 1.7 months

Eg 2

Consider the following data:

Cumulative
Capital out 800 -800
Cash in 100 -700
Cash in 240 -460
Cash in 200 -260
Cash in 250 -10
Cash in 120 +110

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When the cumulative cashflow becomes positive then this is when the initial payment has
been repaid and so is the payback period

So in the final year we need to make 10 more to recoup the initial 800. So, that’s 10 out of
120. 10/120 x 12 (number of months) = 1.

So the answer is 4 years 1 month.

Return on capital employed (ROCE)

Average annual profit (PBIT) of the investment / Cost of the investment

This is used when company’s are more interested in PROFITABILITY than liquidity

It uses profits rather than cashflows

The answer is expressed as a % and can be compared to a target return (often the
company’s cost of capital)

Net Present Value

So, to appraise an investment we compare the cost to all the discounted inflows. The
hopefully positive difference is the NPV

If a company has 2 projects under consideration it should choose the one with the highest
NPV.

NPV Proforma
0 1 2 3 4
Sales x x x x
Cost (x) (x) (x) (x)
Profit x x x x
Tax (x) (x) (x) (x)
Capital Expense (x)
Scrap x
WDA x x x x
Working Capital (x) (x) (x) (x) x

Discount Factor

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Illustration
0 1 2 3 4
Land & Buildings 2000
F&F 500
Revenue 600 800 1000 1200
COS 150 200 250 300
Overheads 100 100 100 100

Additional information:
20% of office overhead is an allocation of head office operating costs.
The cost of land and buildings includes a feasibility study which has already been paid of
100
The entity hope to sell the business at the end of year 4 for 1,500
Cost of capital is 10%
Tax is 30% and is payable one year after profits are earned
WDA on fittings and equipment at 25% on a reducing balance basis. None available on land
and buildings.
Estimated resale proceeds of 100 for the fittings and equipment have been included in the
total figure of 1,500 given above.
Working capital = 10% of next years sales

Answer
0 1 2 3 4 5
Sales 600 800 1000 1200
Costs 150 200 250 300
Overhead 80 80 80 80
Profit 370 520 670 820
Tax -111 -156 -201 -246
Capital Expense -2400
Scrap 1500
WDA 37.5 28 21 33.5
Working Capital -60 -20 -20 -20 120

Discount Factor 0 0.909 0.826 0.751 0.68 0.621

-2460 318 352 392 1537 -132

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NPV = 7

WDA working
Yr 1 500 x 25% x 30% = 37.5
Yr 2 37.5 x 75% = 28
Yr 3 28 x 75% = 21

Asset effective cost = (500 - 100) = 400.

So WDA should be 400 x 30% = 120, so extra 33.5

NPV Benefits

it considers the time value of money (that is in the discount rate used)

it gives an absolute figure not a percentage

it considers the whole life of the project

is based on real cashflows.

NPV drawbacks

is the reliance placed on the cost of capital - this can be tricky to calculate (as we shall see
later)

inflation rates for selling price and variable cost are assumed to be constant in future
periods. In reality, interaction between a range of economic and other forces influencing
selling price per unit and variable cost per unit will lead to unanticipated changes in both of
these project variables

it is heavily dependent on the production and sales volumes forecasts

Internal Rate of Return

The IRR is essentially the discount rate where the initial cash out (the investment) is equal to
the PV of the cash in. So, it is the discount rate where the NPV = 0

Consequently, to work out the IRR we need to do trial and error NPV calculations, using
different discount rates, to try and find the discount rate where the NPV = 0.

The good news is you only need to do 2 NPV calculations and then apply a formula.

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That formula is:

L + NPV L / [NPV L - NPV H x (H - L)]

L= Lower discount rate

H = Higher discount rate

NPV L = NPV @ lower rate

NPV H = NPV @ higher rate

Illustration

If a project had an NPV of 50,000 when discounted at 10%, and -10,000 when discounted at
15% - what is the IRR?

Answer

10 + (50,000/60,000) x 5% = 14.17%

ROCE, Payback, NPV and IRR compared

NP IR ROCE Payback
V R

Time value of money accounted for? Yes Yes No No

Use relevant cashflows? Yes Yes No No

Looks at cashflows for all investment’s life? Yes Yes Yes No

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 Syllabus H7d. The Role Of A Benefits Realisation Plan

The role of a benefits realisation plan

After the benefits have been quantified (or otherwise measured) and allocated to owners,

the business case will need to identify how those benefits will be realised.

This plan will identify factors that indicate when the change has been successful and the

benefits are being realised, and will illustrate everything that has to happen in order for this

to occur.

The benefits realisation plan will involve

• Full descriptions of each benefit and change with responsibilities for delivery defined and

agreed

• Measures, and where possible expected values, for each benefit

• Measurements to establish the current baseline

• Agreed ownership of all the changes and actions in place to address issues that may

affect the achievement of changes

• Evidence or criteria to be used to assess whether each change has been successfully

carried out

• Complete and documented benefits dependency network identifying all the benefit and

change relationships

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Management of Benefits

The idea is that some benefits are not automatic but need work to be realized

Process
Identify & Structure Effect on stakeholders and business case
benefits
Plan realisation Responsibility allocated and performance measures set (using
current as baseline)
Executing the plan Interim targets monitored and remedial action taken
Review results Allows the firm to learn so future actions improved
Establish potential for Similar to stage 1 - with hindsight of unforeseeable benefits
future benefits that may have occurred

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 Syllabus H7e. Managing the Project

Project Execution
board: ensure business case is justified, approve the business case
and major decisions and oversight of the porject
Project Team Structures -
sponsor
Projects need coordination. -
manager
-
team
Teams will be from different function boundaries, therefore a matrix structure is required

Projects need different skills and cross organisational reporting lines, each individual then
has a dual role, their functional/divisional responsibilities as well as those of the project
team.

The size of the team will depend on the project

ultimately responsible and accountable for the project,

leading the project,strategic knowledge,
Project Sponsor (director) provide senior guidance to project manager,
basic understanding is more than enough
Normally a senior member of management, often the one with most to gain (or lose) from it

They direct and therefore allow the Project Manager to manage.

Responsibility Explanation
Gatekeeper Selecting only projects that support the business strategy
Monitor Have regular meetings with the PM and give advice where needed
Supporter Assist the PM to do their job efficiently
Decisionmaker Ultimate responsibility lies with the sponsor
Champion Ensure that the project is given high priority by all project members
Problem solver When the team lacks the skills to solve it alone
Resource Vital to get resources from across the different functions at the right
negotiator time arrange resources required for the project

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 technical expertise
Project Manager Detailed project planning and execution

• Manages it on a day-to-day basis. Responsibility to deliver the project and ensure

effectiveness and efficiency

• Various roles include team leader, co-ordinator, relationship manager, problem solver,
budget manager and change manager

• They are often ‘generalists’ not specialists, facilitating rather than supervising team
members

Task Needs Team Needs Individual Needs

Reach Objectives Co-ordinate the team Motivation
Planning Keep them motivated Support
Resources & Responsibilities allocated Create a sense of identity Guidance
Quality maintained
Resolve Problems
Sponsor and Manager
1. different roles (segregation of duties)
2. technical expertise (strategic vs. technical)
3. sponsor: monitor the project manager and team

Typical problems faced by Project Managers

1. Managing people with their own department responsibilities

2. Dealing with departmental managers

3. Managing the resources

4. Dealing with specialists

The project manager does not usually have the power to reward project team members.

That resides with their department line manager normally.

Project team members struggle with feeling part of their department AND part of the project
one-off team.

This needs managing by the project manager

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 Syllabus H7g. Addressing Typical Problems

Addressing typical problems

Leadership and team building

• Be positive (but realistic) about all aspects of the project

• Understand where the project fits into the big picture

• Delegate tasks appropriately

• Do not be restrained by organisational structures

Organisational

Ensure all project documentation is clear and distributed to all who require it

Communication and negotiation

• Listen to project team members

• Negotiate on funding, timescales, staffing and other resources, quality and disputes

• Ensure management is kept informed and is never surprised

Technical

By providing the technical expertise and experience needed to manage the project

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Personal qualities

• Be flexible

• Be creative. If one method of completing a task proves impractical a new approach may

be required

• Patience is required even in the face of tight deadlines

Problem solving

Delegate as much responsibility as possible to team members

React fast and decisively

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 Syllabus H7f. Defining The Project

Every project should start with a plan..

A project plan is important because:

1. Communicates roles and timings

2. Encourages forward thinking

3. Provides the measures of success

4. Identifies resources needed

Contents of a Project Plan

Part of Plan Contents

Overview Background, Aims, scope, outputs, stakeholder analysis (mendelow),
Risk Analysis (risk map), Intellectual property rights
Resources Details of project partners, reporting relationship, decision process
Detailed Plan Project deliverables and reports, phasing of work and deadlines
Evaluation Plan How the output quality should be evaluated, how success will be
measured
Quality Plan Quality assurance procedures for each deliverable
Dissemination How outcomes will be shared with stakeholders
Plan
Exit & What will happen to knowledge etc at the end. See if any outputs may
Sustainability live on after profit ends
Plan

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 Initial Documentation

The project initiation document (PID).prepared after business case is approved by the board.
prepared by project sponsor to communicate details of the project w/project
team and manager
This is used to develop and clarify the terms of reference for the project.

It's contents are as follows:

(Background/introduction)
• Business Justification - basically the objectives from the business case. It is important to

clearly distinguish between project and business objectives and assign responsibilities to

each

• Scope of the Project - objectives and deliverables. These need to be perfectly clear and

well defined

• Constraints (cost, time and scope) - as above these are vital to be fully understood at the

very outset

• Roles and responsibilities - including authorisations - it should be made clear that the
Key stakeholders (sponsor, manager, team, user, customers, suppliers, govt)
project sponsor (see managing the project section) is responsible for making decisions

about the project, providing resources, considering and agreeing changes.

The role of the project sponsor should be formally defined and everyone's

responsibilities should be clear.

Any failure to adhere to those responsibilities should be addressed.

• Risks and resources committed to the project

추가)

Major assumptions used

Project monitoring and reporting procedures

Financial (Cost and Benefit) Analysis

Duration / Timelines

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• Business Process Redesign

A specific project can be linked to a specific process - this is then business process

redesign

The steps for this would be:

1. Analyse the existing process

2. Design the new process

3. Get the resources for the new process

4. Manage the implementation

For an e-business system this would involve

1. Establish e-business plan

2. Design the system and build new website

3. Integrate the e-business into the current system

4. Test the system and monitor

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 Syllabus H7g. Monitoring the Project

Quality, Time, Cost

Project management

Ensuring the goals of the project are achieved:

• on time Project duration/timelines

• within budget

• to the required quality

We now know the project manager's tasks but remember she also has to understand which
tasks cannot begin until others have been completed, and which tasks can be carried on at
the same time.

After planning, comes the controlling and monitoring of the project

This involves keeping things on schedule and there dealing with any slippages in time or
cost over-runs

• Scope management

The risk is that project specification is not reached, so this involves breaking down the
total project into individual tasks

‘Scope creep’ happens when during the course of the project, uncontrolled scope
changes are made to the it takes longer and costs more than necessary to complete.

• Time management

Non time-critical task can be delayed, so special attention is paid to those time critical
ones

Another problem is that all time planning is based on estimates

As mentioned above, the project manager needs to identify the inter-dependencies

between certain tasks.

Which have to be done before others and which can be done in parallel

This is called critical path analysis or network analysis

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• Monitoring completion times: slippage

A CPA chart can be used by the project manager to:

1. Ensure time-critical activities are being completed on schedule

2. Calculate maximum delays possible for none-time critical task

3. See when slippage has occurred and allocate extra resources if necessary

• Cost management

The expected financial returns might be expressed in terms of net present value (NPV)
and payback, or internal rate of return on investment (IRR).

However, costs need to stay within budget, for these returns to materialise

Standard costing techniques will be used to analyse the difference between budgeted
and actual costs.

The difference will be caused by either:

o actual spending is higher than planned

o the amount of work done is more or less than budgeted.

• These are expenditure variances and volume variances.

• Project Gateways

These are review points for critical points in the project.

They ensure the business case remains valid

At each project gateway - If there are problems then control measures and corrective
action will be necessary (or stop if severely off course)

Normally carried out by someone not involved in the project

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• A Product Breakdown Structure

This looks at the physical components of a particular product. It comes in the form of a
hierarchy.

It begins with the final product at the top of the hierarchy followed by the sub-categorised
elements of the product.

It reduces a complex project, or product, into manageable components.

As a result, teams can obtain a clear understanding of a product, its components, and
what is required to provide those components

Threat Identification

This will obviously reduce the risk of slippage and other problems

Threat Prevention

Threat Prevention
Poor management or planning or Training managers, no critical projects until proved
controls themselves
Poor Planning Use proper planning methods
Poor Controls Set out in advance
Unrealistic deadline Ensure no slippage and change deadlines
Insufficient budgets Do a smaller project properly
Moving targets Structured walkthroughs and prototyping

Corrective action examples

1. Fast tracking - doing some phases in parallel (instead of in sequence)

2. Crashing - reducing the time available on critical aspects while minimising the cost of
doing so

3. Adding resources

4. Reducing scope or quality

5. Incentives and punishments

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 Syllabus H7h. Concluding a Project

both are done after the project is finished

Project Completion

Post Project Review PPR

simply looks at how the project was managed
A post-project review takes place once the project has been completed.

In fact, it can often be the last stage of the project, with the review culminating in the sign-off
of the project and the formal dissolution of the project team.

The focus of the post-project review is on the conduct of the project itself , not the product it
has delivered.

The aim is to identify and understand what went well and what went badly in the project and
to feed lessons learned back into the project management standards with the aim of
improving subsequent project management in the organisation.

This involves:

1. Acceptance by client

2. Review of outputs (against goals)

3. Disbanding the team

4. Performance review

5. Lessons learnt

6. Formal closure by the steering committee

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Post Implementation Review PIR
those objectives have been achieved or not
A post-implementation review focuses on the product delivered by the project.

It usually takes place a specified time after the product has been delivered.

This allows the actual users of the product an opportunity to use and experience the product
or service and to feedback their observations into a formal review.

The post-implementation review will focus on the product’s fitness for purpose .

The review will not only discuss strategies for fixing or addressing identified faults, but it will
also make recommendations on how to avoid these faults in the future.

This involves:

1. Gap analysis on business case objectives

2. Costs / benefits v forecasts

3. Other benefits realised

4. Effectiveness of new business operations

5. Stakeholder satisfaction

6. PIRs are on-going to ensure benefits are managed and realised (PPR is a one -off with a
lessons learnt goal)

7. PIR objective is to ensure maximum benefit is obtained from the product of the project
(PPR focuses on the project itself)

Benefits Realisation Review

To see if the benefits claimed at evaluation stage are subsequently realised.

It is concerned with establishing whether the predicted benefits in the business case have
been realised once the product or service delivered by the project has been in place for
some time.

It compares actual costs and benefits with those predicted in the business case

A benefits realisation review also takes place after the product has been delivered .

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It revisits the business case to see if the costs predicted at the initiation of the project were
accurate and that the predicted benefits have actually accrued.

In effect, it is a review of the initial cost/benefit analysis and any subsequent updates made
to this analysis during the conduct of the project.

It may be part of a post-implementation review , although the long-term nature of most

benefits means that the post-implementation review is often held too soon to properly
conduct benefits realisation.

In fact, it can be argued that benefits realisation is actually a series of reviews where the
predicted long-term costs and benefits of the business case are monitored .

Again, one of the objectives is to identify lessons learned and in this case to feed these back
into the benefits management process of the organisation.

It includes:

• Seeing which benefits have been achieved (and which haven’t)

• Identify any unexpected benefits and weaknesses

• Understand reasons for the above

• Understand how to improve the management process

Thus it forces the sponsor to define the nature, timing and value of each benefit

Project Management Software

This software to help plan and control of the project

• The software package needs four items of information:

How long each activity lasts

Are any of the activities dependent on each other (does one have to be done after
another etc)

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 What resources (and when they) are available

• It can be used for Planning, Estimating, Monitoring and Reporting

Planning Estimating Monitoring Reporting

Create Create alternative Allow all project members Gives access to
diagrams of the resource allocations access to real time info all members
system
Create Gantt Create budgets A database for all Can create end
charts etc of stage reports
Allocate timings to Automatic
different project comaprisons to plan
sections

Advantages:

1. Improved planning and control

2. Improved communication

3. Improved quality of systems developed

Miscellaneous points

When choosing..

• Look at all software which is within budget and has the essential functions

• Trial them if possible

• Get them installed and get training on them

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