CIMA Integerated Management

CIMAS Ofcial Study SystemManagerial Level

Integrated ManagementDavid Harris

AMSTERDAM BOSTON HEIDELBERG PARIS SAN DIEGO SAN FRANCISCO

LONDON NEW YORK SINGAPORE SYDNEY

OXFORD TOKYO

CIMA Publishing An imprint of Elsevier Linacre House, Jordan Hill, Oxford OX2 8DP 30 Corporate Drive, Burlington, MA 01803 First published 2005 Copyright # 2005, Elsevier Ltd. All rights reservedNo part of this publication may be reproduced in any material form (including photocopying or storing in any medium by electronic means and whether or not transiently or incidentally to some other use of this publication) without the written permission of the copyright holder except in accordance with the provisions of the Copyright, Designs and Patents Act 1988 or under the terms of a licence issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London, England W1T 4LP. Applications for the copyright holders written permission to reproduce any part of this publication should be addressed to the publisher Permissions may be sought directly from Elseviers Science and Technology Rights Department in Oxford, UK: phone: (+44) (0) 1865 843830; fax: (+44) (0) 1865 853333; e-mail: [email protected]. You may also complete your request on-line via the Elsevier homepage (http://www.elsevier.com), by selecting Customer Support and then Obtaining Permissions

British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN 0 7506 6710 9 For information on all CIMA publications visit our website at www.cimapublishing.com

Important Note A new edition of the CIMA Ofcial Terminology is due to be published in September 2005. As this is past the publication date of this Study System the page reference numbers for Management Accounting Ofcial Terminology contained in this Study System are for the 2000 edition. You should ensure that you are familiar with the 2005 CIMA Ofcial Terminology (ISBN: 0 7506 6827 X) once published, available from www.cimapublishing.com

Typeset by Newgen Imaging Systems (P) Ltd, Chennai, India Printed in Great Britain

Contents

The CIMA Study SystemAcknowledgements How to use your CIMA Study System Guide to the Icons used within this Text Study technique The Integrated Management Syllabus Transitional arrangements

xv xv xv xvi xvii xviii xxii

1 The Nature of Strategic Management1.1 Learning Outcomes What is strategy about? 1.1.1 Some initial denitions 1.1.2 Common themes in strategy 1.1.3 Three elements to strategy 1.1.4 Levels of strategy A model of the rational strategy process 1.2.1 Mission and objectives 1.2.2 Corporate appraisal 1.2.3 Strategic option generation 1.2.4 Strategy evaluation and choice 1.2.5 Strategy implementation 1.2.6 Review and control Approaches to formulating business strategy 1.3.1 A formal top-down strategy process 1.3.2 Benets of business strategy 1.3.3 Drawbacks of formal business strategy 1.3.4 Strategy and small businesses Alternatives to the rational approach to strategy 1.4.1 Criticisms of the rational model of strategy formulation 1.4.2 Emergent strategies 1.4.3 Logical incrementalism Resource-based versus positioning view of strategy 1.5.1 The source of competitive advantage 1.5.2 Economic prot 1.5.3 Competitive advantage and economic theory 1.5.4 The positioning approach

1.2

1.3

1.4

1.5

1 1 1 1 2 2 4 5 6 6 6 6 7 7 7 7 9 9 10 12 12 14 15 17 17 17 18 18

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INTEGRATED MANAGEMENT P5

1.6

1.7

1.8

1.9

1.10

1.11

1.12

1.13

1.5.5 Resource-based theory (RBT) 1.5.6 Some RBT writers 1.5.7 Comments on resource-based views of strategy Stakeholders 1.6.1 The identity of stakeholders 1.6.2 The inuence of stakeholders 1.6.3 The Mendelow matrix 1.6.4 Assessing power of stakeholders 1.6.5 Assessing interest of stakeholders 1.6.6 Illustration of the stakeholder matrix 1.6.7 Strategies to deal with stakeholders 1.6.8 Conict between stakeholders Mission 1.7.1 Terminology 1.7.2 Elements of a mission statement 1.7.3 Roles of mission statements Setting strategic objectives 1.8.1 The link between mission and objectives 1.8.2 The goal structure Critical success factors 1.9.1 Dening critical success factors 1.9.2 Methodology of CSF analysis Meeting the objectives of shareholders 1.10.1 Maximisation of shareholder wealth as an objective 1.10.2 Financial and non-nancial objectives Competing objectives 1.11.1 Importance of the existence of competing objectives 1.11.2 Resolving competing objectives Corporate governance 1.12.1 What is corporate governance? 1.12.2 The history of corporate governance 1.12.3 The combined code principles of corporate governance 1.12.4 The benets of corporate governance SummaryReadings Revision Questions Solutions to Revision Questions

19 19 21 23 23 23 24 24 25 25 25 27 27 27 27 28 29 29 30 31 31 31 32 32 33 33 33 34 35 35 35 38 39 39 43 59 63

2 Strategy, Structure and Culture2.1 2.2 Learning Outcomes Strategy and structure Organisational structure 2.2.1 Internal structure 2.2.2 Organisational design and contingency theory 2.2.3 Contingency theory

71 71 71 72 73 73 74

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2.3

2.4

2.5

2.6

2.2.4 Structural characteristics 2.2.5 Strategic choice and the issue of consistency 2.2.6 Entrepreneurial organisation (Figure 2.1) 2.2.7 Functional organisation 2.2.8 Holding companies: federated rms and franchises 2.2.9 Divisional organisation 2.2.10 Matrix organisation 2.2.11 Flexible rms, networks and complex organisation forms 2.2.12 Mintzbergs (1983) structural congurations Organisational culture 2.3.1 The importance of culture in organisations 2.3.2 Determinants of culture 2.3.3 Writers on culture 2.3.4 Models for categorising culture 2.3.5 Culture and control Improving effectiveness 2.4.1 Balancing control with autonomy 2.4.2 Decentralisation 2.4.3 New venturing 2.4.4 Empowerment 2.4.5 Team working 2.4.6 Innovation 2.4.7 Organisational learning and knowledge management 2.4.8 Rosabeth Moss Kanter and entrepreneurship The network organisation 2.5.1 An overview of network organisations 2.5.2 Forms of network relationship 2.5.3 Implications of network organisations 2.5.4 Theoretical basis of network organisations 2.5.5 Transactions cost theory 2.5.6 Transactions cost theory and network organisations 2.5.7 Network organisations and resource-based theory SummaryReadings Revision Questions Solutions to Revision Questions

74 75 76 76 77 78 80 82 84 88 88 88 89 91 94 95 95 96 97 98 99 99 100 101 102 102 103 104 104 104 107 109 110 113 127 131

3 Contemporary Thinking on StrategyLearning Outcomes 3.1 Trends in the general management and structure of organisations 3.1.1 Changes in the business environment 3.1.2 International structures 3.1.3 Mergers and de-mergers

137 137 137 137 139 139

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3.2

3.3

3.4 3.5

3.6

3.7

New patterns of employment 3.2.1 The exible rm 3.2.2 Implications of exibility for employment 3.2.3 Flexible time arrangements 3.2.4 Homeworking 3.2.5 Core and periphery workers 3.2.6 The knowledge worker 3.2.7 Implications for management accounting 3.2.8 A critical perspective on exible organisations Competition Porters ve forces model 3.3.1 Basic argument of the model 3.3.2 Using the model 3.3.3 Threat of entry 3.3.4 Rivalry among existing competitors 3.3.5 Pressure from substitute products 3.3.6 Bargaining power of buyers 3.3.7 Bargaining power of suppliers 3.3.8 Exercise on confectionery industry 3.3.9 Solution An ecological perspective 3.4.1 Environmental responsibilities Social responsibility 3.5.1 Scope of social responsibility 3.5.2 Must social responsibility conict with beneting shareholders? Shareholder wealth and ethics 3.6.1 Nature of ethics 3.6.2 Example of an ethical issue 3.6.3 Friedman: prot is the sole objective 3.6.4 Sternberg: shareholder wealth is natural purpose 3.6.5 A stakeholder view of business ethics 3.6.6 An egoistical view 3.6.7 Implications of ethics for the chartered management accountant SummaryReadings Revision Questions Solutions to Revision Questions

140 140 140 141 141 141 141 142 143 144 144 144 145 146 146 147 147 147 148 148 148 149 149 150 151 151 152 152 152 153 154 154 155 157 169 173 179 179 179 179 180 180 182

4 ProjectsLearning Outcomes 4.1 Denition 4.2 Characteristics of a project 4.3 The project life-cycle 4.3.1 The project life-cycle phases 4.3.2 An alternative project life-cycle iteration

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4.4

4.5

4.6 4.7

4.8

4.3.3 Project approach 4.3.4 Other frameworks: 4, 5, 7 or 9? The project as a conversion process 4.4.1 Inputs 4.4.2 Constraints 4.4.3 Outputs 4.4.4 Mechanisms Examples of projects 4.5.1 One successful project: ongoing 4.5.2 One not so successful project Why some projects fail Strategy and scope 4.7.1 Strategy 4.7.2 Scope SummaryReadings Revision Questions Solutions to Revision Questions

182 183 184 184 185 185 185 185 185 188 190 191 191 191 191 193 211 213

5 People and Projects5.1 5.2 5.3 Learning Outcomes Introduction The roles of the project manager The responsibilities of the project manager 5.3.1 Organisation 5.3.2 Planning 5.3.3 Controlling The skills of the project manager 5.4.1 Leadership skills 5.4.2 Communication skills 5.4.3 Negotiation skills 5.4.4 Delegation skills 5.4.5 Problem-solving skills 5.4.6 Change-management skills Project teams Problems of team-working 5.6.1 Unclear team goals and objectives 5.6.2 Lack of team structure 5.6.3 Lack of denition of roles 5.6.4 Poor leadership 5.6.5 Poor team communication 5.6.6 Lack of commitment Project management and team-building Project stakeholders 5.8.1 Managing stakeholder expectations

5.4

5.5 5.6

5.7 5.8

215 215 215 215 216 216 217 217 218 218 219 220 220 221 222 222 223 223 223 223 223 224 224 224 224 226

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5.9

Projects and organisation structure 5.9.1 Matrix organisations 5.10 SummaryReadings Revision Questions Solutions to Revision Questions

226 227 227 229 247 253 257 257 257 257 258 258 258 258 258 258 258 260 260 264 265 265 265 265 265 266 267 273 277 279 279 279 279 280 280 280 280 281 281 282 282

6 The Project Management Process6.1 6.2 6.3 Learning Outcomes Introduction A denition of project management The project management process 6.3.1 Initiation 6.3.2 Planning 6.3.3 Executing leadership 6.3.4 Controlling 6.3.5 Completing Project planning 6.4.1 Initiation 6.4.2 Detailed project planning 6.4.3 The baseline plan Project objective constraints 6.5.1 Project scope/functionality 6.5.2 Project schedule/time 6.5.3 Project cost 6.5.4 Customer satisfaction/quality SummaryReadings Revision Questions Solutions to Revision Questions

6.4

6.5

6.6

7 Identifying and Selecting Projects7.1 7.2 7.3 7.4 7.5 Learning Outcome Setting project objectives Identifying project proposals Formation of project proposals Setting project requirements The feasibility study 7.5.1 Assessing project feasibility 7.5.2 Technical feasibility 7.5.3 Social and ecological feasibility 7.5.4 Fit with business goals 7.5.5 Financial feasibility

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7.6

Types of cost 7.6.1 Capital costs 7.6.2 Revenue costs 7.6.3 Finance costs 7.7 Risk sensitivity 7.8 Financial evaluation techniques 7.9 Risk and uncertainty 7.9.1 Quantitative risk 7.9.2 Socially constructed risk 7.9.3 Qualitative risk 7.9.4 Managing risk 7.9.5 Uncertainty 7.10 SWOT analysis 7.10.1 An example of a SWOT analysis 7.10.2 A contingency plan 7.11 SummaryReadings Revision Questions Solutions to Revision Questions

283 283 283 283 283 284 284 285 285 285 285 286 286 287 288 288 289 299 305

8 Performing the Project8.1 8.2 8.3 8.4 Learning Outcomes Introduction Planning the project Performing the project 8.3.1 An example development of an information system Monitoring and controlling the project 8.4.1 Making effective control decisions 8.4.2 PRINCE 2 methodology 8.4.3 Other project management methodologies Project closure 8.5.1 Organising project documentation 8.5.2 Collection of receipts and making nal payments Post-completion review and audit 8.6.1 Post-project review meetings 8.6.2 Post-completion audit 8.6.3 Justifying the cost of post-completion audit 8.6.4 Continuous improvement SummaryReadings Revision Questions Solutions to Revision Questions

8.5

8.6

8.7

313 313 313 313 314 314 315 315 317 317 318 318 319 319 319 319 320 320 321 323 339 343

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9 Project Management Tools9.1 9.2 Learning Outcome Introduction The planning process 9.2.1 Benets of planning methods 9.2.2 Communication of project planning Gantt charts Network analysis 9.4.1 Calculation of the EET 9.4.2 Calculation of the LET 9.4.3 Slack or oat An alternative method for constructing network diagrams: activity on node Project evaluation and review technique (PERT) Project management (PM) software 9.7.1 PM software functions 9.7.2 Advantages of using PM software 9.7.3 PM software pitfalls SummaryReadings Revision Questions Solutions to Revision Questions

9.3 9.4

347 347 347 348 348 348 348 349 350 351 352 352 354 354 354 355 356 357 359 365 369 373 373 373 373 373 375 376 376 378 379 380 380 381 382 383 384 384 385 386 386 386

9.5 9.6 9.7

9.8

10 Management10.1 Learning Outcomes Power, authority, responsibility and delegation 10.1.1 Power and authority 10.1.2 Authority as legitimate power 10.1.3 Organisational power 10.1.4 Responsibility 10.1.5 Delegation of authority The characteristics of leaders and managers Personality trait theories of leadership Management styles 10.4.1 Kurt Lewin 10.4.2 Rensis Likert 10.4.3 Tannenbaum and Schmidt 10.4.4 Robert Blake and Jane Mouton Contingency theories of leadership 10.5.1 John Adair action-centred leadership 10.5.2 Fiedler Situational leadership styles 10.6.1 Hersey and Blanchard 10.6.2 Richard Boyd (1987) transformational leaders

10.2 10.3 10.4

10.5

10.6

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10.7

Classical and contemporary theories of management 10.7.1 Scientic management 10.7.2 The administrative school 10.7.3 Bureaucracy: a culture, process or a form of organisation? 10.7.4 The human relations school 10.7.5 Systems theory 10.7.6 Contingency theory 10.7.7 Peter Drucker: management by objectives (MBO) 10.7.8 Modern perspectives on organisations 10.8 Managing in different cultures 10.8.1 National cultures 10.8.2 Power distance 10.8.3 Uncertainty avoidance 10.8.4 Individualism and collectivism 10.8.5 Masculinity/femininity 10.8.6 Time orientation 10.8.7 Other cultural characteristics 10.8.8 Changing behaviour 10.9 Information gathering 10.9.1 Interviews 10.9.2 Questionnaires 10.9.3 Observation 10.9.4 Other information gathering methods 10.10 SummaryReadings Revision Questions Solutions to Revision Questions

387 387 388 390 391 392 393 395 396 397 397 397 398 398 398 398 398 398 399 399 400 400 401 401 403 411 415 421 421 421 421 421 422 422 423 424 424 425 426 428 428 429 429 429 429

11 Management of Groups11.1 Learning Outcomes Behaviour in work groups 11.1.1 Informal groups 11.1.2 Formal groups 11.1.3 Formation and development 11.1.4 Integration and organisation 11.1.5 Group dynamics and performance 11.1.6 Formal groups: roles and teams 11.1.7 Team roles Meredith Belbin (1981) 11.1.8 Vaill (1982): high-performance teams 11.1.9 Problems with groups Communication 11.2.1 Oral and written communication Project meetings 11.3.1 Project status review meetings 11.3.2 Project design review meetings 11.3.3 Project problem-solving meetings

11.2 11.3

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11.4 11.5 11.6 11.7 11.8

Effective meetings The roles of team members in meetings Problems with meetings Post-project evaluation meeting Project reporting 11.8.1 Project initiation document (PID) 11.8.2 Progress reporting 11.8.3 The nal report 11.9 Negotiation 11.9.1 The need for negotiation 11.9.2 Negotiation approaches 11.9.3 The aim of negotiation 11.10 SummaryReadings Revision Questions Solutions to Revision Questions

430 430 431 433 433 433 434 434 434 434 435 435 435 437 439 443

12 Control Systems in Organisations12.1 12.2 12.3 Learning Outcomes Objectives of internal control systems Internal control systems Levels of control 12.3.1 Strategic control 12.3.2 Tactical control 12.3.3 Operational control Effective control systems An example of a control system in practice 12.5.1 Strategic level 12.5.2 Tactical level Health and safety 12.6.1 Safety, health and the environment 12.6.2 Safety committee and representatives 12.6.3 Managing safety 12.6.4 Working with contractors 12.6.5 Health and safety training 12.6.6 Managing health 12.6.7 Stress management Dismissal, redundancy and job insecurity 12.7.1 Dismissal Time management 12.8.1 Personal time management 12.8.2 Time management values 12.8.3 Time management action 12.8.4 Time scheduling

12.4 12.5

12.6

12.7 12.8

449 449 449 449 451 451 451 452 452 453 453 453 455 455 456 456 456 457 458 458 460 460 462 462 462 463 463

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12.9

Mentoring 12.9.1 Why mentoring? 12.9.2 Benets of mentoring 12.10 SummaryReadings Revision Questions Solutions to Revision Questions

463 463 464 464 465 473 477

13 Conict and Discipline13.1 Learning Outcomes Conict in organisations 13.1.1 The symptoms of conict 13.1.2 Forms/sources of conict 13.1.3 Handling conict 13.1.4 Resolutions of industrial relations conict 13.1.5 Managing conict Discipline 13.2.1 The meaning of discipline 13.2.2 Self-discipline 13.2.3 Disciplinary situations 13.2.4 Taking disciplinary action 13.2.5 Immediacy: Douglas McGregors hot stove rule 13.2.6 Disciplinary procedures 13.2.7 ACAS code of practice 13.2.8 Grievance procedures 13.2.9 Fairness and commitment in the work place 13.2.10 Diversity and equal opportunities SummaryReadings Revision Questions Solutions to Revision Questions

13.2

13.3

485 485 485 486 486 490 491 494 497 497 497 498 498 500 500 501 502 503 506 509 511 519 523

Preparing for the ExaminationRevision technique Planning Getting down to work Tips for the nal revision phase Format of the examination Structure of the paper Revision questions mapping grid

529 529 529 530 530 531 531 531

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Section Section Section Section Section Section

A type questions B type questions C type questions A solutions B solutions C solutions

533 535 537 548 549 555 583

Index May 2005 Examination

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The CIMA Study System

AcknowledgementsEvery effort has been made to contact the holders of copyright material, but if any here have been inadvertently overlooked the publishers will be pleased to make the necessary arrangements at the rst opportunity.

How to use your CIMA Study SystemThis Integrated Management Study System has been devised as a resource for students attempting to pass their CIMA exams, and provides:

a detailed explanation of all syllabus areas; extensive practical materials, including readings from relevant journals; generous question practice, together with full solutions; an exam preparation section, complete with exam standard questions and solutions.

This Study System has been designed with the needs of home-study and distance-learning candidates in mind. Such students require very full coverage of the syllabus topics, and also the facility to undertake extensive question practice. However, the Study System is also ideal for fully taught courses. The main body of the text is divided into a number of chapters, each of which is organised on the following pattern:

Detailed learning outcomes expected after your studies of the chapter are complete. You should assimilate these before beginning detailed work on the chapter, so that you can appreciate where your studies are leading. Step-by-step topic coverage. This is the heart of each chapter, containing detailed explanatory text supported where appropriate by worked examples and exercises. You should work carefully through this section, ensuring that you understand the material being explained and can tackle the examples and exercises successfully. Remember that in many cases knowledge is cumulative: if you fail to digest earlier material thoroughly, you may struggle to understand later chapters. Readings and activities. Most chapters are illustrated by more practical elements, such as relevant journal articles or other readings, together with comments and questions designed to stimulate discussion.xv2005.1

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Question practice. The test of how well you have learned the material is your ability to tackle exam-standard questions. Make a serious attempt at producing your own answers, but at this stage do not be too concerned about attempting the questions in exam conditions. In particular, it is more important to absorb the material thoroughly by completing a full solution than to observe the time limits that would apply in the actual exam. Solutions. Avoid the temptation merely to audit the solutions provided. It is an illusion to think that this provides the same benets as you would gain from a serious attempt of your own. However, if you are struggling to get started on a question you should read the introductory guidance provided at the beginning of the solution, and then make your own attempt before referring back to the full solution.

Having worked through the chapters you are ready to begin your nal preparations for the examination. The nal section of this CIMA Study System provides you with the guidance you need. It includes the following features:

A brief guide to revision technique. A note on the format of the examination. You should know what to expect when you tackle the real exam, and in particular the number of questions to attempt, which questions are compulsory and which optional, and so on. Guidance on how to tackle the examination itself. A table mapping revision questions to the syllabus learning outcomes allowing you to quickly identify questions by subject area. Revision questions. These are of exam standard and should be tackled in exam conditions, especially as regards the time allocation. Solutions to the revision questions. As before, these indicate the length and the quality of solution that would be expected of a well-prepared candidate.

If you work conscientiously through this CIMA Study System according to the guidelines above you will be giving yourself an excellent chance of exam success. Good luck with your studies!

Guide to the Icons used within this TextKey term or denition Equation to learn Exam tip or topic likely to appear in the exam Exercise Question Solution Comment or Note

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Study techniquePassing exams is partly a matter of intellectual ability, but however accomplished you are in that respect you can improve your chances signicantly by the use of appropriate study and revision techniques. In this section we briey outline some tips for effective study during the earlier stages of your approach to the exam. Later in the text we mention some techniques that you will nd useful at the revision stage.

PlanningTo begin with, formal planning is essential to get the best return from the time you spend studying. Estimate how much time in total you are going to need for each subject that you face. Remember that you need to allow time for revision as well as for initial study of the material. The amount of notional study time for any subject is the minimum estimated time that students will need to achieve the specied learning outcomes set out earlier in this chapter. This time includes all appropriate learning activities, for example face-to-face tuition, private study, directed home study, learning in the workplace, revision time, etc. You may nd it helpful to read Learning to Learn by Sam Malone, CIMA Publishing, ISBN: 1874784434. This book will provide you with proven study techniques. Chapter by chapter it covers the building blocks of successful learning and examination techniques. The notional study time for Managerial level Integrated Management is 200 hours. Note that the standard amount of notional learning hours attributed to one full-time academic year of approximately 30 weeks is 1200 hours. By way of example, the notional study time might be made up as follows:Hours

Face-to-face study: up to Personal study: up to Other study e.g. learning in the workplace, revision, etc.: up to

60 100 40 200

Note that all study and learning-time recommendations should be used only as a guideline and are intended as minimum amounts. The amount of time recommended for face-toface tuition, personal study and/or additional learning will vary according to the type of course undertaken, prior learning of the student, and the pace at which different students learn. Now split your total time requirement over the weeks between now and the examination. This will give you an idea of how much time you need to devote to study each week. Remember to allow for holidays or other periods during which you will not be able to study (e.g. because of seasonal workloads). With your study material before you, decide which chapters you are going to study in each week, and which weeks you will devote to revision and nal question practice. Prepare a written schedule summarising the above and stick to it! The amount of space allocated to a topic in the study material is not a very good guide as to how long it will take you. For example, Summarising and Analysing Data has a weight of 25 per cent in the syllabus and this is the best guide as to how long you should spend on it. It occupies 45 per cent of the main body of the text because it includes many tables and charts.2005.1

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It is essential to know your syllabus. As your course progresses you will become more familiar with how long it takes to cover topics in sufcient depth. Your timetable may need to be adapted to allocate enough time for the whole syllabus.

Tips for effective studying(1) Aim to nd a quiet and undisturbed location for your study, and plan as far as possible to use the same period of time each day. Getting into a routine helps to avoid wasting time. Make sure that you have all the materials you need before you begin so as to minimise interruptions. (2) Store all your materials in one place, so that you do not waste time searching for items around the house. If you have to pack everything away after each study period, keep them in a box, or even a suitcase, which will not be disturbed until the next time. (3) Limit distractions. To make the most effective use of your study periods you should be able to apply total concentration, so turn off the TV, set your phones to message mode, and put up your do not disturb sign. (4) Your timetable will tell you which topic to study. However, before diving in and becoming engrossed in the ner points, make sure you have an overall picture of all the areas that need to be covered by the end of that session. After an hour, allow yourself a short break and move away from your books. With experience, you will learn to assess the pace you need to work at. You should also allow enough time to read relevant articles from newspapers and journals, which will supplement your knowledge and demonstrate a wider perspective. (5) Work carefully through a chapter, making notes as you go. When you have covered a suitable amount of material, vary the pattern by attempting a practice question. Preparing an answer plan is a good habit to get into, while you are both studying and revising, and also in the examination room. It helps to impose a structure on your solutions, and avoids rambling. When you have nished your attempt, make notes of any mistakes you made, or any areas that you failed to cover or covered only skimpily. (6) Make notes as you study, and discover the techniques that work best for you. Your notes may be in the form of lists, bullet points, diagrams, summaries, mind maps, or the written word, but remember that you will need to refer back to them at a later date, so they must be intelligible. If you are on a taught course, make sure you highlight any issues you would like to follow up with your lecturer. (7) Organise your paperwork. There are now numerous paper storage systems available to ensure that all your notes, calculations and articles can be effectively led and easily retrieved later.

The Integrated Management SyllabusSyllabus outlineThe syllabus comprises: Topic and Study Weighting A The Basis of Strategic Management 30% B Project Management 40% C The Management of Relationships 30%A B

C

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Learning aimsStudents should be able to:

identify and apply management techniques necessary for decision-making that cuts across functional areas; analyse data in support of strategic decision-making; contribute to decision-making in these areas by advising management.

Assessment strategyThere will be a written examination paper of three hours, with the following sections. Section A 20 marks A variety of compulsory objective test questions, each worth between 2 and 4 marks. Miniscenarios may be given, to which a group of questions relate. Section B 30 marks Three compulsory medium answer questions, each worth 10 marks. Short scenarios may be given, to which some or all questions relate. Section C 50 marks Two questions, from a choice of three, each worth 25 marks. Short scenarios may be given, to which questions relate. Learning Outcomes and Syllabus Content

A The basis of strategic management 30%Learning outcomes On completion of their studies students should be able to: (i) (ii) (iii) (iv) (v) (vi) explain the process of strategy formulation; evaluate different organisational structures; discuss concepts in contemporary thinking on strategic management; apply tools for strategic analysis appropriately; explain the purpose and principles of good corporate governance; evaluate competitive situations and apply this knowledge to the organisation.

Syllabus content The process of strategy formulation. The relationship between strategy and organisational structure. The reasons for conict between the objectives of an organisation, or between the objectives of an organisation and its stakeholders, and the ways to manage this conict. Strategic decision-making processes.

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Approaches to strategy (e.g. rational, adaptive, emergent, evolutionary or system-based views based on Porter, Mintzberg, Bartlett and Ghoshal). Transaction cost view of the rm (e.g. Coase, Williamson) and its implications for organisational structure. Resource-based views of the rm and implications for strategy development. Ecological perspective on the rm. The determinants, importance and role of organisational cultures and ways to improve the effectiveness of an organisation. Introduction to corporate governance, including stakeholders and the role of government. Translating strategy into business (e.g. formation of strategic business units, encouragement of entrepreneurship inside organisations). Contemporary issues in business management (e.g. alliances, demergers, virtual organisations, corporate social responsibility and business ethics).

B Project management 40%Learning outcomes On completion of their studies students should be able to: (i) identify a project and its attributes; (ii) apply suitable structures and frameworks to projects to identify common management issues; (iii) produce a basic outline of the process of project management; (iv) identify the characteristics of each phase in the project process; (v) demonstrate the role of key stakeholders in the project; (vi) distinguish the key tools and techniques that would need to be applied in the project process, including the evaluation of proposals; (vii) identify methodologies and systems used by professional project managers; (viii) identify the strategy and scope for a project; (ix) identify stakeholder groups and recommend basic strategies for the management of their perceptions and expectations; (x) produce a basic project plan, recognising the effects of uncertainty and recommending strategies for dealing with this uncertainty, in the context of a simple project; (xi) identify structural and leadership issues that will be faced in managing a project team; (xii) recommend appropriate project control systems; (xiii) evaluate through selected review and audit, the learning outcomes from a project; (xiv) evaluate the process of continuous improvement to projects. Syllabus content The denition of a project, project management, and the contrast with repetitive operations and line management. 4-D and 7-S models to provide an overview of the project process, and the nine key process areas (PMI) to show what happens during each part of the process. Stakeholders (both process and outcome) and their needs. Roles of project sponsors, boards, champions, managers and clients.2005.1


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Key tools for project managers (e.g. Work Breakdown Structure, network diagrams (Critical Path Analysis), Gantt charts, resource histograms, establishment of gates and milestones). Evaluation of plans for projects. The key processes of PRINCE2 and their implications for project staff. The role of determining trade-offs between key project objectives of time, cost and quality. Managing scope at the outset of a project and providing systems for conguration management/change control. The production of basic plans for time, cost and quality. Scenario planning and buffering to make provision for uncertainty in projects, and the interface with the risk management process. Organisational structures, including the role of the project and matrix organisations, and their impact on project achievement. Teamwork, including recognising the life-cycle of teams, team/group behaviour and selection. Control of time, cost and quality through performance and conformance management systems. Project completion documentation, stakeholder marketing, completion reports and system close-down. The use of post-completion audit and review activities and the justication of their costs.

C Management of relationships 30%Learning outcomes On completion of their studies students should be able to: (i) explain the concepts of power, bureaucracy, authority, responsibility, leadership and delegation; (ii) analyse the relationship between managers and their subordinates; (iii) discuss the roles of negotiation and communication in the management process, both within an organisation and with external bodies; (iv) explain how groups form within organisations and how this affects performance; (v) demonstrate personal time management skills; (vi) construct a set of tools for managing individuals, teams and networks, and for managing group conict; (vii) recommend ways to deal effectively with discipline problems; (viii) explain the process of mentoring junior colleagues; (ix) discuss the importance of national cultures to management style; (x) explain the importance of business ethics and corporate governance to the organisation and its stakeholders; (xi) identify methods of conducting research and gathering data as part of the managerial process. Syllabus content The concepts of power, authority, bureaucracy, leadership, responsibility and delegation and their application to relationship within an organisation and outside it. The characteristics of leaders, managers and entrepreneurs.2005.1

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Management-style theories (e.g. Likert, Tannenbaurn and Schmidt, Blake and Mouton). The use of systems of control within the organisation (e.g. employment contracts, performance appraisal, reporting structures). Theories of control within rms and types of organisational structure (e.g. matrix, divisional, network). The advantages and disadvantages of different styles of management. Managing in different countries and cultures. Contingency approaches to management style (e.g. Adair, Fiedler). Theories of group development, behaviour and roles (e.g. Tuckman, Belbin). Disciplinary procedures and their operation, including the form and process of formal disciplinary action and dismissal (e.g. industrial tribunals, arbitration and conciliation). Personal time management. The nature and effect of legal issues affecting work and employment, including the principles of employment law (i.e. relating to health, safety, discrimination, fair treatment, childcare, contracts of employment and working time). The sources of conict in organisations and the ways in which conict can be managed to ensure that working relationships are productive and effective. Communication skills (i.e. types of communication tools and their use, as well as the utility and conduct of meetings) and ways of managing communication problems. Negotiation skills. Creativity and idea generation. Information gathering techniques (e.g. interviews, questionnaires). Introduction to corporate governance, including business ethics and the role, obligations and expectations of a manager.

Transitional arrangementsStudents who have passed the Systems and Project Management paper under the Beyond 2000 syllabus will be given a credit for the Integrated Management paper under the new 2005 syllabus. For further details of transitional arrangements, please contact CIMA directly or visit their website at www.cimaglobal.com.

2005.1

The Nature of Strategic Management

1

L EARNING O UTCOMESBy the end of this chapter you should be able to:" " " "

explain the process of strategy formulation; discuss concepts in contemporary thinking on strategic management; apply tools for strategic analysis appropriately; explain the purpose and principles of good corporate governance.

1.1 What is strategy about?1.1.1 Some initial denitionsConsider the following denitions of strategy: 1. Strategy: A course of action, including the specication of resources required, to achieve a specic objective. CIMA: Management Accounting: Ofcial Terminology, p. 50. 2. Strategic plan: A statement of long-term goals along with a denition of the strategies and policies which will ensure achievement of these goals. CIMA: Management Accounting: Ofcial Terminology, p. 50. 3. The basic characteristics of the match an organisation achieves with its environment is called its strategy. Hofer and Schendel (1978, p. 4). 4. Strategy is the direction and scope of an organisation over the long term: which achieves advantage for the organisation through its conguration of resources within a changing environment, to meet the needs of markets and to full stakeholder expectations. Johnson and Scholes (1997, p. 10). 5. Corporate strategy is the pattern of major objectives, purposes and goals and essential policies or plans for achieving those goals, stated in such a way as to dene what business the company is in or is to be in and the kind of company it is or is to be. Andrews, cited in Lynch (2000, p. 8).12005.1

2 THE NATURE OF STRATEGIC MANAGEMENT

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6. Corporate strategy is concerned with an organisations basic direction for the future: its purpose, its ambitions, its resources and how it interacts with the world in which it operates. Lynch (2000, p. 5).

1.1.2 Common themes in strategyStrategy involves the following issues:

It is about the purpose and long-term objectives of the business (denitions 2, 3, 4 and 6). It is concerned with meeting the challenges from the rms business environment such as competitors and the changing needs of customers (denitions 3, 4 and 6). It involves using the rms resources effectively and building on its strengths to meet environmental challenges (denitions 1, 4 and 6). It is ultimately about delivering value to the people who depend on the rm, its stakeholders, such as customers and shareholders (denition 4).

A case study of strategy The Readings section of this chapter contains an article about the strategy of Abbey National. You should turn to this now.

1.1.3 Three elements to strategyIt is possible to perceive of a rms strategy as consisting of several different elements (Figure 1.1). Competitive strategy This deals with how the rm competes for business and where its earnings come from. It will involve considerations such as:

how it attracts customers; what it decides to produce or sell; which markets and countries it operates in; how it will win-out against rivals.

For example, Marks & Spencer plc (M&S) traditionally competes on quality, reliability and value. It sells clothes, food, cosmetics, furniture and nancial services. Everything

Figure 1.12005.1

The elements of strategy



carries its own brand name that it hopes signies these brand values to the customer. It operates predominantly in the United Kingdom by selling from shops in the high street and out-of-town malls but is also operating mail order and experimenting with internet shopping. It has attempted expansion into the United States and continental Europe. It seeks to beat rivals by achieving higher margins through using its supply-chain strategy to exibly deliver the right products at competitive prices. It hopes its brand reputation and wide distribution will give it high volumes and also enable it to charge better prices than other volume outlets or to gain access to higher margin markets such as furniture and nancial services. Financial strategy This deals with the rms relations with its investors and other providers of credit. Clearly management has a major responsibility to meet the wishes of the shareholders of the business. It must also bear in mind the banks and suppliers who are also sources of capital. These issues will be dealt with thoroughly at the Strategic Level, in your Financial Strategy studies. For present purposes we can note that nancial strategy deals with considerations such as:

providing an adequate return to shareholders; protecting the value of the shareholders investment through avoiding excessive risk; ensuring that the capital structure and range of foreign currency liabilities are appropriate for the needs of the business; obtaining funds in an amount and at a cost and for a duration that meet the needs of the business.

While M&S was pursuing successful competitive strategies its earnings were supportive of its nancial strategy. Prots increased year-on-year and investors were prepared to pay a premium price for M&S shares. M&S was seen as a safe bet by investors and professional fund managers. They recognised that although M&S was unlikely to deliver the sudden spectacular leaps in prots associated with some other businesses, neither was it likely to disappoint the investors either. This meant that the rm could raise additional capital relatively cheaply by issuing new shares and investors were happy to subscribe to them. Moreover, at dividend time investors were content to allow prots to be reinvested in the business to nance further growth. This again provided funds. Investment and resource strategy This area of strategy concerns how management uses funds retained from prots or otherwise borrowed from investors. Investment and resource strategy covers a wide area and includes:

purchase of land, buildings and other xed capital equipment; investments in research and development of new products or processes of production; investment in advertising and brand creation and support; the nancing of human resource recruitment and development; acquisitions of other businesses; working capital management and inventory.

These provide the resources the rm needs to carry out its competitive strategy. At M&S the funds were used in a variety of ways. Existing stores were always maintained to a high standard by a rolling programme of retting. New stores in popular2005.1


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locations, particularly in out-of-town malls, were opened regularly. Funds were also spent on acquisitions such as the Littlewoods chain. These increased the coverage and oor space of M&S in a way that enabled it to consolidate its position as a major retail force. In its stores staff were well paid and given excellent training, good welfare services and smart uniforms. Elsewhere M&S spent investment funds on developing its own clothes designs and recipes as well as on putting in the information technology infrastructure to support its inventory management systems and its expansion into nancial services. A successful business will enjoy a virtuous circle where these three elements work in harmony together. However, if the competitive strategy fails to deliver the customers and earnings necessary the rm faces a vicious spiral of falling share price, inadequate funds and underinvestment.

1.1.4 Levels of strategyStrategy exists at several levels in the organisation. A simplied model of the business organisation is given in Figure 1.2. Corporate strategy The corporate centre is at the apex of the organisation. It is the head ofce of the rm and will contain the corporate board. A textbook written 20 years ago would have assumed that all competitive strategy was formulated at corporate level and then implemented in a top-down manner by instructions to the business divisions. During the 1980s, high-prole corporate planners like IBM, General Motors and Ford ran into difculties against newer and smaller upstart competitors who seemed to be more exible and entrepreneurial. One consequence was the devolution of responsibility for competitive strategy to business units. Corporate strategy today typically restricts itself to determining the overall purpose and scope of the organisation. Common issues at this level include:

decisions on acquisitions, mergers and sell-offs or closure of business units; conduct of relations with key external stakeholders such as investors, the government and regulatory bodies; decisions to enter new markets or embrace new technologies (sometimes termed diversication strategies);

Figure 1.2 Organisation chart showing corporate, strategic business unit and functional strategies2005.1



development of corporate policies on issues such as public image, employment practices or information systems.

Business strategy A strategic business unit (SBU) is dened by CIMA as:A section, within a larger organisation, responsible for planning, developing, producing and marketing its own products or services. CIMA: Management Accounting: Ofcial Terminology, p. 39.

Management of the SBU will be responsible for winning customers and beating rivals in its particular market. Consequently it is at this level that competitive strategy is usually formulated. The considerations at this level will include:

marketing issues such as product development, pricing, promotion and distribution; decisions on production technology; stafng decisions.

A business strategy should be formulated within the broad framework of objectives laid down by the corporate centre to ensure that each SBU plays its part. The extent to which the management of the SBU is free to make competitive strategy decisions varies from corporation to corporation and reects the degree of centralisation in the management culture of the rm. Functional strategies The functional (or sometimes called operational ) level of the organisation refers to main business functions such as sales, production, purchasing, human resources and nance. Functional strategies are the long-term management policies of these functional areas. They are intended to ensure that the functional area plays its part in helping the SBU achieve the goals of its business strategy.

1.2 A model of the rational strategy processMake sure you understand, and can reproduce, this diagram. Figure 1.3 shows a model of the steps which management may take to develop a strategy for their business.

Figure 1.3 A model of a rational strategy process2005.1


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1.2.1 Mission and objectivesThese set the purposes of the organisation to be satised by the strategy. A mission is a broad statement of the purposes of the business. It will be open-ended and reect the core values of the business. A mission will often dene the industry that the rm competes in and make comments about its general way of doing business. For example:

British Airways seeks to be the worlds favourite airline. Nokia speaks of connecting people. DHL delivers your promises. easyEverything group wants to paint the world orange.

Objectives differ from mission because they generally specify quantitative measures of the performance to be achieved and the time frame in which it is to be achieved. For a mobile phone operator these might include goals such as prot and growth but also non-nancial targets such as customer service or geographical coverage.

1.2.2 Corporate appraisalDuring this stage, management assess the ability of the business, following its present strategy, to reach the objectives they have set. They will draw on two sets of information: (a) Information on the current performance and resources position of the business. This will have been gathered in a separate position audit exercise. (b) Information on the present business environment and how this is likely to change over the period of the strategy. This will have been collected by a process of environmental analysis and will include information on: competitors; tastes of customers; state of the economy. This stage is also termed a SWOT analysis, standing for strengths, weaknesses, opportunities and threats.

1.2.3 Strategic option generationManagement seeks to identify alternative courses of action to ensure that the business reaches the objectives they have set. This will be largely a creative process of generating alternatives building on the strengths of the business and allowing it to tackle new products or markets to improve its competitive position.

1.2.4 Strategy evaluation and choiceAt this point, managements have a number of ideas to improve the competitive position of the business. The evaluation stage considers each strategic option in detail for its feasibility and t with the mission and circumstances of the business.2005.1



By the end of this process management will have decided on a shortlist of options that will be carried forward to the strategy implementation stage.

1.2.5 Strategy implementationThe strategy sets the broad direction and methods for the business to reach its objectives. However, none of it will happen without more detailed implementation. The strategy implementation stage involves drawing up the detailed plans, policies and programmes necessary to make the strategy happen. It will also involve obtaining the necessary resources and committing them to the strategy. These are commonly called tactical and operational decisions:

Tactical programmes and decisions are medium-term policies designed to implement some of the key elements of the strategy such as developing new products, recruitment or downsising of staff or investing in new production capacity. Project appraisal and project management techniques are valuable at this level. Operational programmes and decisions cover routine day-to-day matters such as meeting particular production, cost and revenue targets. Conventional budgetary control is an important factor in controlling these matters.

1.2.6 Review and controlThis is a continuous process of reviewing both the implementation and the overall continuing suitability of the strategy. It will consider two aspects:

Does performance of the strategy still put the business on course for reaching its strategic objectives? Are the forecasts of the environment on which the strategy was based still accurate, or have unforeseen threats or opportunities arisen subsequently that might necessitate a reconsideration of the strategy?

1.3 Approaches to formulating business strategy1.3.1 A formal top-down strategy processLarge organisations will formalise the development of business strategies. The following are typical features of the process: 1. A designated team responsible for strategy development. There are several groups of actors in this process: (a) A permanent strategic planning unit reporting to top management and consisting of expert staff collecting business intelligence, advising divisions on formulating strategy and monitoring results. (b) Groups of managers, often the management teams of the SBUs, meeting periodically to monitor the success of the present strategies and to develop new ones. These are sometimes referred to as country weekends because they often take place away from the ofce to avoid the day-to-day interruptions.2005.1


STUDY MATERIAL P5

2.

3.

4.

5.

(c) Business consultants acting as advisers and facilitators to the process by suggesting models and techniques to assist managers in understanding their business environments and the strategic possibilities open to them. You will be reading about many of these models and techniques later. Formal collection of information for strategy purposes. The management team will call upon data from within and outside the rm to understand the challenges they face and the resources at their disposal. This information can include: (a) Environmental scanning reports compiled by the business intelligence functions within the rm, including such matters as competitor behaviour, market trends and potential changes to laws. (b) Specially commissioned reports on particular markets, products or competitors. (c) Management accounting information on operating costs and performance together with nancial forecasts. (d) Research reports from external consultancies on market opportunities and threats. Collective decision-taking by the senior management team. This involves the senior management team working together to develop and agree business strategies. Techniques such as brainstorming ideas on ip charts and using visual graphical models to summarise complex ideas will assist this process. Also, arriving at a decision will involve considerable conict as particular managers are reluctant to see their favoured proposal rejected and a different strategy adopted. A process of communicating and implementing the business strategy. This can be accomplished using a combination of the following methods: (a) Writing a formal document summarising the main elements of the plan. This will be distributed on a condential basis to other managers and key investors, but also perhaps to other key stakeholders such as labour representatives, regulatory bodies, major customers and key suppliers. (b) Brieng meetings and presentations to the stakeholders mentioned above. Frequently reporters from the business press will be invited to ensure that the information reaches a broader public. Naturally the ne detail will remain condential. (c) The development of detailed policies, programmes and budgets based on achieving the goals laid out in the business strategy. (d) The development of performance targets for managers and staff. These ensure that everyone plays their part in the strategy (and perhaps receive nancial rewards for doing so). Regular review and control of the strategy. Management will monitor the success of the strategy by receiving regular reports on performance and on environmental changes.

The simple budgetary control systems and monthly variance reports common in management accounting control systems were originally developed to enable managers to control mass production operations. Today the sophisticated competitive strategies of many rms have necessitated the development of more complex performance measurement systems to supplement traditional budgetary control information. These are variously termed enterprise resource management systems and balanced scorecards. There has also been an increased emphasis on competitor and other environmental information to assist managers in steering their businesses. Testing your appreciation of managements need for non-nancial measures and environmental information will be a recurring feature of questions in this examination.2005.1



1.3.2 Benets of business strategyBusiness strategy formulation obviously uses a lot of organisational resource. What are the benets? 1. Avoids short-termist behaviour. It ensures that management considers the long-term development of the business rather than focusing solely on short-term results and operational results. This provides the shareholder value referred to in Section 1.3.1 above. 2. Helps identify strategic issues. By encouraging management to consider the business environment in their plans and decisions it will help them keep ahead of change and to be more proactive. 3. Goal congruence. There are many aspects to this: (a) It will help coordinate the different business units, divisions and departments and ensure that they work together to realise the full potential of the corporation. (b) Asset investment decisions will be taken with the long-term needs of the business in mind. This could include design or acquisition of buildings and capital equipment, information systems or acquisitions of other businesses. (c) Tactical programmes will be congruent with the strategy. This might affect the types of staff recruited and developed, the location of production and distribution facilities or the sorts of products and brands created. 4. Improves stakeholder perceptions of the business. If the rm demonstrates that it has a clear idea of where it is going, it enables others to make plans based on its future. This may lead to (a) Higher share price because investors are condent of higher future returns. (b) Attraction and retention of staff and higher morale because employees can see that their career aspirations may be met within the rm. (c) Improved relations with suppliers who feel they can rely on orders in the future. 5. Provides a basis for strategic control. By having a process of formulation and implementation this ensures that: (a) There is someone looking after the development of strategy. (b) There are clear programmes and policies being developed to implement it. (c) There are targets and reports enabling review of the success of the strategy. 6. Develops future management potential and ensures continuity. This relates to the fact that formal strategy formulation is a collective process. This means that: (a) Different functional managers (e.g. nance or marketing) gain an appreciation of the other disciplines of business and so develop into general managers. (b) Providers of information to the strategy process become more deeply involved in the business and develop as a pool of expertise from which the next generation of managers may be recruited. (c) Avoids succession problems when members of senior management retire or move on. The strategy of the rm is understood by all and will outlast the loss of key members of the management team.

1.3.3 Drawbacks of formal business strategySome writers are critical of the formal process discussed above, because: 1. It is too infrequent to allow the business to be dynamic. This view emphasises the infrequency of the strategy round, say every 5 years, and the time it takes to achieve any change to the2005.1


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2.

3.

4.

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6.

strategy. If the environment changes unexpectedly, the rms performance may deteriorate as it continues to follow a business strategy which has now become inappropriate to its business environment, for example by continuing to make a product no one wants. It forbids the development of radical or innovative strategies. The need to retain consensus among the management team means that radical ideas are too often rejected. Writers who advance this argument remind us of the inherent conservatism of committees and of the fact that some of the success stories of the past few decades such as Microsoft, Intel, Virgin and (at points) Apple and Body Shop have also been rms whose names are associated with radical and visionary entrepreneurs. These business leaders tend to follow the emergent strategy approach discussed in Section 1.4.2. It suffers from difculties of implementation. The formal process is management-led and seeks to pursue the goals of the business. Successful implementation requires the participation, or at least acquiescence, of middle and junior management together with operative staff. There is a danger that the formal process will not build the support of these people and hence will be misunderstood or resisted. The result will be that the goals of the strategy are not realised. There is loss of entrepreneurial spirit. Entrepreneurs are persons who break rules and make changes to conventional ways of doing business. On the other hand a middle manager in a strategically managed rm will be rewarded for carrying out their allotted part in the strategy and for not breaking the rules. The effect will be to encourage conformity among managers. This will lose the rm potentially successful ventures and perhaps also the services of gifted entrepreneurial managers who may leave in frustration. It is impossible in uncertain business environments. Formal business strategy requires that the strategists are able to make reliable assumptions about the future and particularly about the opportunities and threats facing them. Critics argue that the business environment is now more uncertain than ever before. Because in their view the future cannot be forecast some writers argue that management efforts should be diverted from trying to plan strategies and instead should focus on improving the ability of their businesses to respond and adapt to change. It is too expensive and complicated for small businesses. The manager of a small business is unlikely to be skilled in the techniques needed for developing the kinds of business strategy described above. Moreover the opportunity cost in terms of the time away from direct management of the operational parts of the business are likely to be too great.

1.3.4 Strategy and small businessesAccording to Birley (1982), the formal process described above may be unsuitable for small businesses for four reasons: 1. Differences in goals. In a small rm the goals of the business are often inseparable from the goals of the owner-manager and immediate family group. Small businesses often do not exhibit the economic rationality and single-minded pursuit of dividends and growth often associated with businesses governed by external shareholders. Birley suggests that small-business goals may pass through a life-cycle from the foundation of the business: (a) Initial desire for independence and a chance to run their own business coupled with a desire for a satisfactory income and lifestyle.2005.1



(b) Mid-life desire to achieve a balance between satisfactory nancial returns and a good home life. This means that growth may not be a primary consideration. (c) When approaching retirement, the founder will have a number of possible objectives: to ensure that the business passes to children or loyal employees, regardless of their skills or aptitudes; to nd a buyer for the business, often with safeguards for staff. 2. Limited scope of product/market choices. Small-business managers typically consider a much narrower range of strategic options than do their large-business counterparts: (a) Because their business is already narrowly based on the specic trade skills and knowledge of the proprietor. Any new product or market venture will seem very radical. (b) The day-to-day survival of the business will depend on success in this narrow market and management will not want to move too far away from it. (c) Managements knowledge, skills and horizons will tend to be limited to their current industry. They will not notice wider opportunities. 3. Limited resources. Smaller rms lack the resources to invest in new strategic ventures and rapid growth. Therefore they do not exhibit the sudden strategic leaps envisaged by the rational model: (a) Less capital due to absence of external shareholders. (b) Less managerial resource because proprietor is unwilling to delegate or share control. (c) Smaller current income stream means that any unsuccessful strategic investment may destroy the rm. 4. Organisational structure. Strategic implementation demands the setting up of an appropriate structure and selection of an appropriate team to carry it out. Small rms may not be able to do this due to: (a) Desire by the proprietor to maintain absolute control. (b) Impatience with targets, budgets and other systems that smack of bureaucracy. (c) Difculties for other managers to work with founder who may exhibit set ways of thinking and doing business. Birleys observations certainly ring true of many small, family-controlled businesses. However, there are many examples of (initially) small entrepreneurs who have managed to exhibit very different paths of strategic development. For example:

Jeffrey Bezos (Amazon.com) Richard Branson (Virgin Group) Bill Gates (Microsoft Corporation) Stelios Haji-Ioannou (easyGroup founder of easyJet) Julian Richer (Richer Sounds) Anita Roddick (The Body Shop) Alan Sugar (Amstrad Corporation)

These businesses follow strategies that have been termed variously freewheeling opportunism, proactive management or radical entrepreneurship. One distinguished writer has coined the term The New Alchemists to describe them (Handy and Handy, 1999). Increasingly their approaches to strategy have been emulated by the dotcom rms of the new e-business world.2005.1


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They have particular features in common with one another: 1. They grew in an industry that was already dominated by one or more large corporations. Their success was almost always through exploiting the complacency or errors of the larger corporations. 2. The founder of the business had a particular vision of how they wanted the business to develop, which they stuck to. 3. The products or services they offer tend to be in markets that exhibit spontaneous purchasing behaviour where service and reassurance are important or which have been subject to recent radical changes (or discontinuities) due to emergence of new technologies, tastes or legislative frameworks. 4. They did not rely on conventional nancing sources to develop their businesses initially (and several subsequently had unsatisfactory relationships with equity markets). 5. They do not appear to use rational strategy formulation techniques, but rather rely on vision, the skills of the proprietor and a low aversion to risk. 6. The day-to-day involvement of the founder in the detailed running of the business has been critical. This has led to increased criticism of the top-down, rational model and greater interest in bottom-up creative approaches.

1.4 Alternatives to the rational approach to strategy1.4.1 Criticisms of the rational model of strategy formulationThis is likely to be examined quite frequently. Many strategy writers would dispute the model advanced so far by questioning some of the implicit assumptions. They would argue that organisational rationality is merely a textbook assumption from economics, with little basis in the real world. 1. Organisations are incapable of having objectives. This argument is derived from the insight of organisational sociology that organisations are really just collections of people. According to Cyert and March (1963), an organisation does not have goals of its own but rather it is the people within it that have the goals. Notions of prot (or shareholder wealth) maximisation are merely articially simplied assumptions left over from economics. This leaves us with a picture of the goals pursued by a strategy being in fact the outcome of a bargaining process between various factions around the boardroom table. The consequences of this view are: (a) Objectives may be in conict with one another. (b) Objectives will change from time to time according to which management faction nds itself in the ascendancy. (c) Objectives are unlikely to be directly related to the economic benet of the shareholder. (d) Management will inevitably nd itself adjudicating between the claims of the various stakeholder groups such as investors, employees, customers and government.2005.1



2.

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One consequence of this is their adoption of satiscing behaviour where they try to follow strategies aimed at pleasing most of the people most of the time. (If you consider the way you have to juggle between the elements of your daily life, job, study, home life, leisure, etc., you get the idea of what satiscing means.) A more sophisticated argument is that management will formulate strategy in the light of its beliefs about the status of the rm and the nature of the environment around it. These beliefs are inevitably partially irrational and so any strategy based on them is likewise not completely rational. This is sometimes called an interpretative view of strategy because any attempt to explain a given rms strategy must consider the beliefs (or paradigms) in the minds of its management. Senior management should not be the only people involved in setting strategy. Writers argue that by making a separation between strategy formulation and strategy implementation the rational approach is bound to lead to difculties. In the rst place, senior management are too detached and will lack the detailed understanding of the problems of a given business division and the requirements of the particular customers and technologies there. The result will be a strategy that is unlikely to address the divisions needs. Second, and more fundamentally, they will not consider the social processes, values and cultures of the staff in the division or, if considered, these soft factors will be misinterpreted. The resulting strategy will have unanticipated harmful effects on the motivation and commitment of those required to implement it. This view favours wider participation in strategy formulation through encouraging emergent strategies to percolate up from below. We shall return to this view in more detail later. In reality, strategy formulation is not a simple step-by step process aimed at nding the best way to meet the rms objectives. The model described in Figure 1.3 presents the process as moving in one direction. In reality, strategy formulation is a much more jumbled-up process and can include considerable backtracking and revisiting of earlier stages in the model. Indeed some writers question whether objectives are ever set in advance and suggest that management may revise or set strategic objectives in the light of the corporate appraisal or to match the strategies developed during the strategic option generation stage. Furthermore the strategy formulation process is very political. The main inuence on the information considered and the options generated and accepted will be the power of particular personalities and factions in the management team. The strategies that rms eventually follow are not the same as the ones they set out in their plans. At the time of strategy formulation, management suffer from bounded rationality. This means that they cannot have perfect knowledge of the future and so any strategies developed will fail to take into account all eventualities. Consequently, the actual strategy will need to be adapted to suit the circumstances as they unfold. Strategy is not something decided in advance by managers. This view is most famously associated with Mintzberg. He argues that strategy is often recounted by managers long after the event. In this post-rationalisation, they will tend to present all occurrences as intentional action and ignore all the things that happened by chance and those that did not work out. In this view, strategy emerges as a pattern from the piecemeal decisions of management. Another name for this view is adaptive because it sees the organisation as adapting to the circumstances around it. Strategy should not be a rational process. This view is held by writers who are keen to re-establish the role of the individual manager and leadership in determining a rms success. The doctrine of action rationality proposed by Brunsson (1985) is a good example of this. Brunsson argues that excessive rationality in decision-making will rob a2005.1


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manager of the motivation and commitment necessary to implement the strategy successfully. Instead they will be haunted by doubts that they may have chosen the wrong alternative, aware of some of the inconsistency between objectives and conscious of all the things that might go wrong and the fact that the members of management that disagreed with the strategy are secretly hoping it will go wrong. It is better that managers should select a course of action from a small number of alternatives, focus on just the positive consequences and then formulate objectives based on the likely outcomes of the strategy once it has become established. This is very similar to the ready-re-aim philosophy associated with some successful rms.

1.4.2 Emergent strategiesThe research of Mintzberg (1987) suggests that few of the strategies followed by rms in the real world are as consciously planned as the rational model suggests. The real strategies of real rms are a long way from mental maps designed by a rational process. Instead, they are a combination of the planned strategy and another unanticipated emergent strategy (Figure 1.4). Mintzberg describes emergent strategies as patterns or consistencies realised despite, or in the absence of, intentions. By this he means us to understand that they just happen along the way with differing degrees of management involvement. The failure of intended strategies to be fully realised as deliberate strategies does not surprise Mintzberg. He regards it as unlikely that a rms environment can be as totally predictable or totally benign as it would need to be for all intended strategies to work out. The emergent strategy is often a response to unexpected contingencies and the resulting realised strategy may, in the circumstances, be superior to the intended strategy. Mintzberg considers managements role in this process and suggests that some strategies may be deliberately emergent. By this he means that managers may create the conditions for new ideas to ourish and strategies to emerge. This has the effect of focusing attention on the role of the manager as at the heart of the strategy and reduces the importance of the rational process we have been discussing. According to Mintzberg, the manager should try to craft a vision through moulding the organisation and its strategy in the same way as a potter works clay on the wheel, developing it gently and with regard for its own natural characteristics. To do this, a manager must exhibit the following skills:

Manage stability. Managers should be able to master the details of running their business and not feel compelled to constantly rethink the businesss strategic future. As Mintzberg says: To manage strategy . . . is not so much to promote change as to know when to do so.

Figure 1.42005.1

Mintzbergs types of strategy



Detect discontinuity. This is the ability to detect the subtle environmental changes that may affect the business and be able to assess their potential impact on its future performance. Mintzberg states: The trick is to manage within a given strategic orientation most of the time yet be able to pick out the occasional discontinuity that really matters. Know the business. Mintzberg believes that the craftsman-manager will exhibit a hands-on feel for the business that goes beyond the cold and fragmented analysis available from reports and statistical analysis. He believes that formal strategy systems distance managers from their business and hence ensure that they lack the knowledge they need to run it. Manage patterns. Management should encourage strategic initiatives to grow throughout the business and watch to see how they develop and intervene once this is clear. Mintzberg says: In more complex organisations this may mean building exible structures, hiring creative people, dening broad umbrella strategies, and watching for the patterns that emerge. Reconcile change and continuity. Managers must realise that radical changes and new patterns of strategy will create resistance and instability in the rm. They must keep radical departures in check while preparing the ground for their introduction.

1.4.3 Logical incrementalismLogical incrementalism is the term developed by Lindblom (1959, 1979) to describe how government administrators muddle through from year to year rather than carry out bold strategic initiatives. Administrators will avoid radical strategies that take the organisation off in a new direction. Instead they will accept that they cannot foresee the future and survive by muddling through, taking small steps based on what has been done and has worked in the past. Lindblom is not recommending logical incrementalism. Rather he is recording the reality of its existence. As he says, if the environment changes radically (a discontinuity) then logical incrementalism will not respond sufciently and hence the strategy will drift away from what is required by the environment.

Figure 1.5

Logical incrementalism2005.1


STUDY MATERIAL P5

Quinn (1978) takes a more positive view of logical incrementalism than Lindblom. For Quinn, a manager must map where he or she wants the organisation to go and then proceed towards it in small steps, being prepared to adapt if the environment changes or if support is not forthcoming. The managerial role functions as a management learning process with the following elements:

The manager sits at the centre of a network of formal and informal communications with staff, customers and others. They will be attuned to the problems and issues confronting the organisation. They may use formal strategy models and techniques to understand these. Once they sense that a need for change has arisen and that events are pushing the rm in a particular direction, they will start to develop a general strategic vision for the organisation. Often they will wait until circumstances have made other managers responsive to ideas for a change to the organisation. Rather than present the strategy full-blown, and risk opposition, the manager will build political support for the ideas by revealing them to key committees or on management retreats. Commitment will be gained to an initial trial of the strategy. This will build further commitment among those charged with making the project a success and erode the consensus in favour of the old way of doing business. This consensus will build and press the strategic change forward incrementally.

The use of formal strategic frameworks is valuable in developing and communicating the changed strategy. This is the logical element in Quinns methodology because it ensures that the process leads somewhere. The incrementalism comes from the need to subordinate rapid change to the process of gaining consensus and avoiding resistance (similar to Mintzbergs Reconcile change and continuity). Quinn suggests four key roles for the manager in this process: 1. 2. 3. 4. Improve the quality of information used in key decisions. Overcome personal and political pressures resisting change. Deal with the varying lead times and sequencing of events in the decisions. Build organisational awareness and support for the strategies.

As we can see, Mintzberg and Quinn are essentially making the same point: that strategies are not always planned or revealed in advance and that management skill is crucial. Unlike Lindblom, they do not see this as unacceptably conservative, but see it as realistic. Logical incrementalism has been criticised as potentially being too slow to enable the organisation to cope with rapid changes in its environment. Evaluation of approaches to strategy Much academic research devotes itself to understanding how a business came to pursue a given strategy in the same way as a historian might seek to account for the origins and conduct of a war. Although fascinating, this reective approach is not the perspective of the syllabus you are following. The syllabus focuses on how strategy may be developed and how as a chartered management accountant you may assist in this process. For this, it is better that we take a rational approach as a basic framework. This said, we should still recognise what2005.1



Mintzberg and others have alerted us to, that in the real world strategies can be inuenced by irrational factors and that implementation is a crucial step in successful strategies. As Mintzberg has commented, most real-world strategies walk on two feet, balanced between the rational approach and the emergent approach. As a footnote to the earlier discussion of dotcom rms it is worth recalling that during the latter part of 2000 several of the most ambitious examples of such businesses ran into serious nancial difculty and the share prices of the general sector declined sharply. Many business writers put this down to failures by management to develop satisfactory business models. In other words, the investors had put their money into business ideas that could not make a return for shareholders or which lacked a credible strategy. This could support the view that a more formal approach to strategy brings benets even in the age of e-commerce and e-business.

1.5 Resource-based versus positioning view of strategyThis is likely to be examined quite frequently.

1.5.1 The source of competitive advantageTheorists of business strategy disagree on the origins of competitive advantage. Until the 1990s, most writers took a positioning view; however, more recently, a resource-based perspective has become popular. They may be characterised as follows: 1. Positioning view. Competitive advantage stems from the rms position in relation to its competitors, customers or stakeholders. This has broadly been the approach so far of this Study System. It is sometimes called an outside-in view because it is concerned with adapting the organisation to t its environment. It seems to have grown out of marketing theory. 2. Resource-based view. Competitive advantage stems from some unique asset or competence possessed by the rm. This is an inside-out view of strategy because the rm must go in search of environments that enable it to harness its internal competences. This perspective comes from Economics.

1.5.2 Economic protBoth sets of strategy writers take an economic view of competitive advantage, seeing it as something enabling the rm to generate a superior return on shareholders investment through time. Economic prot is essentially the excess of the rms earnings over the opportunity costs of the capital it employs. In other words, for an economic prot to be recorded the returns to the shareholder must exceed the rate of return the shareholder could have obtained by investing the same funds in the next best alternative. For example, consider this simple investment situation: Marsh Hall plc has net assets of 520m. Its prots last year were 62.4m. Its direct rival Jevons plc has net assets of 780m and earnings of 70.2m.2005.1


STUDY MATERIAL P5

Advise the investors in Marsh Hall plc and Jevons plc on the economic performance of the rms. We need to calculate the economic prot earned by the two rms:

Marsh Hall plc is making a return on net assets of 12 per cent (62.4/520). Jevons plc is making a return on net assets of 9 per cent (70.2/780). Investors in Marsh Hall are therefore enjoying a positive economic prot of 15.6m, calculated as (12 9%) 520m. In other words, they are 15.6m better off by investing in Marsh Hall than if they had invested in the next-best alternative, Jevons plc. Investors in Jevons are suffering a negative economic prot of 23.4m (i.e. 3 per cent of 780m) because they chose not to invest in Marsh Hall plc.

Investors should switch their investments from Jevons plc to Marsh Hall plc to gain a better return. The effect of this would be to reduce the share price of Jevons and raise the share price of Marsh Hall. The market value of Jevons would fall and the market value of Marsh Hall will rise. In a simple way this illustrates the link between economic prot and shareholder value.

1.5.3 Competitive advantage and economic theoryThe concept of economic prot is the same as the supernormal prot (or economic rent) enjoyed by the monopolies you studied in Economics for Business at Foundation Level. According to economic theory, supernormal prot arises whenever market power belongs to rms rather than consumers. In the short run, rms in competitive markets can enjoy supernormal prots until competitive entry erodes prots by increasing buyer choice and pushing prices down. However the only rms that can enjoy supernormal prots in the long run are those that have erected barriers to entry. The debate over positioning versus resource-based approaches to strategy also has its origins in economic theory. The two sides disagree on the sources and durability of the competitive advantages that lead to supernormal prots.

1.5.4 The positioning approachThe positioning approach to strategy takes the view that supernormal prots result from the following factors:

high market share relative to rivals; differentiated product; low costs.

We will encounter here and in Paper P4 the positioning approach several time in the present text: 1. Porters Five Forces theory argues that the long-term return on investment (ROI) of an industry is determined by ve forces and so an appropriate strategy for a given rm is to increase its protability by adopting a strategy that positions it against these forces in the long run better than its rivals. These strategies are the generic strategies of overall cost leadership, differentiation or focus and can be pursued by developing a unique conguration of its value chain or value system.2005.1



2. Stakeholder theory suggests that the long-term competitive success of a rm will depend on its developing a sustainable relationship with the key stakeholders on whom it depends for resources, custom and permission to operate. The distinctive outside-in perspective of the positioning view consists in its assertion that threats and opportunities are external and that management must mould the organizations size, structure, culture, skills and products in response to them.

1.5.5 Resource-based theory (RBT)Resource-based theorists make the following criticisms of the positioning view: 1. The competitive advantages are not sustainable. Positioning advantages are short run. These advantages are too easily copied in the long run by rivals or will lose their power as the product life-cycle enters its decline phase. Therefore, superior long-run protability cannot be explained or assured by possession of a world-beating product, a dominant market position or low-cost position. According to RBT writers (e.g. Barney, 1991), superior protability instead depends on the rms possession of unique resources or abilities that cannot easily be duplicated by rivals. 2. Environments are too dynamic to enable positioning to be effective. Positioning depends on the customer group, buyers, suppliers, rivals, etc., to

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