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CIMA OfficialLearning System

Managerial Level

E2 EnterpriseManagement

Ann NortonJenny Hughes


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CIMA Publishing is an imprint of ElsevierLinacre House, Jordan Hill, Oxford OX2 8DP, UK30 Corporate Drive, Suite 400, Burlington, MA 01803, USA

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Contents

The CIMA Learning System xiiiAcknowledgements xiiiHow to use your CIMA Learning System xiiiGuide to the Icons used within this Text xivStudy technique xvPaper E2 Enterprise Management xvii

1 The Nature of Strategic Management 1 Learning Outcomes 31.1 Introduction to the nature of strategic management 31.2 The concept of strategy 3 1.2.1 Common themes in strategy 41.3 Levels of strategy 41.4 A model of the rational strategy process 6 1.4.1 Mission, objectives and goals 7 1.4.2 The link between mission, goals and objectives 8

1.4.3 The goal structure 9 1.4.4 External environmental and competitive analysis 10 1.4.5 Internal analysis/position audit 12 1.4.6 Corporate appraisal (SWOT) 13 1.4.7 Strategic options and choice 14 1.4.8 Strategy implementation 16 1.4.9 Review and control 161.5 Criticisms of the rational model of strategy formulation 161.6 A formal top-down strategy process 18 1.6.1 Benefits of the formal top-down approach to strategy 19

1.6.2 Drawbacks of the formal top-down approach to strategy 201.7 Strategy and small businesses 211.8 Achieving competitive advantage alternative perspectives:

resource-based view versus the positioning view 23 1.8.1 Competitive advantage and economic theory 23 1.8.2 The positioning approach 23 1.8.3 Resource-based view 24 1.8.4 Principles of resource-based theory 24 1.8.5 The implications of the resource-based view for strategy

development 27

1.9 Alternative approaches to formulating strategy 28 1.9.1 Emergent strategies 28 1.9.2 Logical incrementalism 29


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CONTENTS 1.10 Stakeholders 31

1.10.1 The influence of stakeholders 32 1.10.2 The Mendelow matrix 32 1.10.3 Assessing power of stakeholders 33 1.10.4 Assessing interest of stakeholders 33 1.10.5 Strategies to deal with stakeholders 34

1.10.6 Conflict between stakeholders 351.11 Meeting the objectives of shareholders 35 1.11.1 Maximisation of shareholder wealth as an objective 36 1.11.2 Competing objectives 36 1.11.3 Resolving competing objectives 371.12 Summary 38

Section A type questions 55

Section B type questions 56

Section A solutions 59

Section B solutions 61

2 The Nature of the Competitive Environment 67 Learning Outcomes 692.1 Introduction 692.2 Environmental impact assessment 692.3 Different stages in environmental analysis 70 2.3.1 Analysing the macro-environment 71 2.3.2 Analysing the micro-environment/industry environment 73 2.3.3 Industry life cycle analysis 78 2.3.4 Illustration of external environmental analysis Example

of a car manufacturer 78 2.3.5 Evaluation of environmental models 80 2.3.6 Survival and success factors 812.4 Causes of environmental uncertainty 81 2.4.1 Impact of uncertainty 82 2.4.2 Has uncertainty really increased? 832.5 Competitor analysis 83 2.5.1 The importance of competitor analysis 83 2.5.2 Competitor analysis key concepts 84

2.5.3 Levels of competitors 84 2.5.4 Gathering competitor intelligence 86 2.5.5 Forecasting competitors response profiles 882.6 Competitor accounting 89 2.6.1 Evaluation of barriers to entry 89 2.6.2 Estimate competitors costs 902.7 The global economic environment 90 2.7.1 The new global economy 912.8 National competitive advantages 93 2.8.1 Porters Diamond 93

2.8.2 Demand conditions 93


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2.8.3 Related and supporting industries 94 2.8.4 Factor conditions 94 2.8.5 Firm structure, strategy and rivalry 94 2.8.6 Other events 94 2.8.7 National competitive advantage 94 2.8.8 Losing competitive advantage 95

2.8.9 Porters strategic prescriptions 95 2.8.10 Comment on Porters Diamond 952.9 Country analysis and political risk 96 2.9.1 Political risk 962.10 Sources of information for environmental analysis 97 2.10.1 Environmental scanning 97 2.10.2 Accessing environmental information 98 2.10.3 Detailed environmental analysis 98 2.10.4 Categorisation of information sources 992.11 Summary 99

Section A type question 101




3 Contemporary Perspectives in StrategyDevelopment 109 Learning Outcome 1113.1 Introduction 111

3.2 Internationalisation and globalisation 1123.3 Complex organisation forms 114 3.3.1 Strategic alliances 115 3.3.2 Illustrations of network organisations 1153.4 Theoretical basis of network organisations transactions cost theory 117 3.4.1 Assest specificity an illustration 118 3.4.2 A critique of transactions cost theory 1203.5 Social responsibility and strategic decisions 122 3.5.1 Must social responsibility conflict with benefiting

shareholders? 122

3.5.2 An ecological perspective and environmentalresponsibilities 124

3.5.3 Shareholder wealth and ethics 125 3.5.4 Implications of ethics for the chartered management

accountant 1273.6 Summary 128






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CONTENTS 4 Understanding Project Management 149

Learning Outcomes 1514.1 Introduction 1514.2 Projects and project management definitions 1524.3 Characteristics of a project 152

4.4 The project life cycle 153 4.4.1 The project life-cycle phases 153 4.4.2 An alternative project life cycle an iterative process 155 4.4.3 Project approaches 155 4.4.4 Other project management frameworks: 4, 5, 7 or 9? 1564.5 The project as a conversion process 158 4.5.1 Inputs 158 4.5.2 Constraints 158 4.5.3 Outputs 159 4.5.4 Mechanisms 1594.6 Strategy and scope 1594.7 Projects and the project manager 159 4.7.1 The roles of the project manager 160 4.7.2 The responsibilities of the project manager 160 4.7.3 Organisation 160 4.7.4 The project manager and project planning 161 4.7.5 The project manager and controlling 1614.8 The skills of the project manager 162 4.8.1 Leadership skills 162 4.8.2 Communication skills 163 4.8.3 Negotiation skills 163 4.8.4 Delegation skills 165 4.8.5 Problem-solving skills 165 4.8.6 Change-management skills 1654.9 Projects and people project teams 166 4.9.1 Problems of project team-working 166 4.9.2 Unclear team goals and objectives 166 4.9.3 Lack of team structure 167 4.9.4 Lack of definition of roles 167 4.9.5 Poor leadership 167 4.9.6 Poor team communication 167 4.9.7 Lack of commitment 168 4.9.8 Project management and team-building 168 4.9.9 Project team meetings 1684.10 Project stakeholders 169 4.10.1 Managing stakeholder expectations 170 4.10.2 Stakeholder conflict 1714.11 Projects and organisation structures and support 171 4.11.1 Matrix organisations 171 4.11.2 Project office 1734.12 Why some projects fail 173


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4.13 Examples of projects 174 4.13.1 One successful project ongoing 175 4.13.2 One not so successful project 1774.14 Summary 179


Section B type questions 200 Section A solutions 203


5 The Process of Project Management 209 Learning Outcomes 2115.1 Introduction 2115.2 The project management process 2125.3 Project initiation 212 5.3.1 Setting project objectives 212 5.3.2 Identifying project proposals 212 5.3.3 Formation of project proposals 213 5.3.4 Setting project requirements 213 5.3.5 Assessing project feasibility 214 5.3.6 Risk and uncertainty 218 5.3.7 Uncertainty 219 5.3.8 SWOT analysis 219 5.3.9 The project Initiation Document 2215.4 Project planning 222 5.4.1 Detailed project planning 223 5.4.2 Project objective constraints 2265.5 Tools and techniques to aid project planning 227 5.5.1 Work breakdown structure 227 5.5.2 Gantt charts 227 5.5.3 Network analysis 228 5.5.4 Slack or float 231 5.5.5 An alternative method for constructing network diagrams:

activity on node 231 5.5.6 Milestones and control gates 232 5.5.7 Project evaluation and review technique (PERT) 233

5.5.8 Coping with risk and uncertainty 2335.6 Project management (PM) software 234 5.6.1 PM software functions 234 5.6.2 Advantages of using PM software 235 5.6.3 PM software pitfalls 2355.7 Executing or performing the project 2365.8 Monitoring and controlling the project 237 5.8.1 Making effective control decisions 238 5.8.2 Earned value management 239 5.8.3 PRINCE2 methodology 240

5.8.4 Other project management methodologies 241


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CONTENTS 5.9 Project completion and closure 242

5.9.1 Organising project documentation 242 5.9.2 Collection of receipts and making final payments 2425.10 Post-completion review and audit 243 5.10.1 Post-project review meetings 243 5.10.2 Post-completion audit 243

5.10.3 Justifying the cost of post-completion audit 243 5.10.4 Continuous improvement 2445.11 Summary 245





6 Management 289 Learning Outcomes 2916.1 Introduction 2916.2 Classical and contemporary theories of management 291 6.2.1 The Classical School 292 6.2.2 The human relations school 296 6.2.3 Systems theory 297 6.2.4 Contingency theory 298 6.2.5 Peter Drucker: management by objectives (MBO) 300 6.2.6 Contemporary perspectives on organisations 3016.3 Power, authority, responsibility and delegation 302 6.3.1 Power and authority 302 6.3.2 Authority as legitimate power 302 6.3.3 Organisational power 303 6.3.4 Responsibility 304 6.3.5 Delegation 3056.4 Management and the Role of Managers 306 6.4.1 Managers or Leaders 3076.5 Different Perspectives of Leadership 308 6.5.1 Personality, trait or qualities theories of leadership 308 6.5.2 Management styles 309

6.5.3 One best style? 3146.6 Contingency and Situational theories of leadership 314 6.6.1 John Adair action-centred leadership 315 6.6.2 Fiedler 315 6.6.3 Hersey and Blanchard 3166.7 Transformational leaders 3166.8 Entrepreneurs 3176.9 Organisational culture 318 6.9.1 Different levels of culture 320 6.9.2 Models for categorising culture 321

6.9.3 Culture and organisational effectiveness 323


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6.9.4 Culture The International Dimension 326 6.9.5 Culture and control 3266.10 Managing in different cultures 327 6.10.1 National cultures 327 6.10.2 Other cultural characteristics 328 6.10.3 Changing behaviour 328

6.11 Mentoring 3296.12 Summary 330





7 Management of Relationships in the WorkingEnvironment 343 Learning Outcomes 3457.1 Introduction 3457.2 The meaning of groups and teams 3457.3 Types of groups 346 7.3.1 Formal groups 346 7.3.2 Informal groups 346 7.3.3 Reference groups 347 7.3.4 Self directed and autonomous groups 3477.4 Effective group performance 347 7.4.1 Formation and development 348 7.4.2 Group cohesiveness 348 7.4.3 Team roles 3497.5 Group dynamics and team performance 350 7.5.1 High-performance teams 3517.6 Problems with groups 3517.7 Communication 353 7.7.1 Oral and written communication 353 7.7.2 The communication process 3547.8 Effective meetings 356 7.8.1 The roles of team members in meetings 357 7.8.2 Problems with meetings 3587.9 Negotiation 359 7.9.1 The aim of negotiation 359 7.9.2 Phases involved in negotiation 359 7.9.3 Negotiation approaches 3607.10 Management of the finance function 360 7.10.1 Business Process Outsourcing (BPO) 360 7.10.2 Outsourcing non-core activities 361 7.10.3 Benefits of outsourcing 361 7.10.4 Drawbacks of outsourcing 361 7.10.5 Shared service centres (SSC) 362 7.10.6 Benefits of shared services 362


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CONTENTS 7.10.7 Embedding finance personnel in business and strategic

decision processes 363 7.10.8 Contribution of finance to other functions 3637.11 The finance function and external stakeholders 363 7.11.1 External reporting 3647.12 Summary 365





8 Control Systems in Organisations 381 Learning Outcomes 3838.1 Introduction 3838.2 The meaning of control 3838.3 A review of management theorists and control 3848.4 Basic control models 3858.5 Types of organisational control 386 8.5.1 Personal centralised control 386 8.5.2 Bureaucratic control 386 8.5.3 Output control 386 8.5.4 Clan or cultural control 3878.6 Objectives of internal control systems 3878.7 Internal control systems 3878.8 Levels of control 388 8.8.1 Strategic control 389 8.8.2 Tactical control 389 8.8.3 Operational control 3908.9 Effective control systems 3908.10 Practical difficulties with control systems 3908.11 An example of a control system in practice: HR and staff

performance appraisal 391 8.11.1 Strategic level 391 8.11.2 Tactical level performance appraisal and the

employment contract 391

8.12 Health and safety 393 8.12.1 Safety committee and representatives 394 8.12.2 Managing safety 394 8.12.3 Working with contractors 394 8.12.4 Health and safety training 3958.13 The nature of business ethics 396 8.13.1 Factors affecting ethical obligations 397 8.13.2 Developing an ethical organisation 398 8.13.3 Example of an ethical issue 399


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8.14 Professional ethics 400 8.14.1 Fundamental principles 400 8.14.2 Conceptual framework 4018.15 Corporate governance 401 8.15.1 What is corporate governance 401 8.15.2 The earliest considerations of corporate governance 402

8.15.3 The combined code principles of corporate governance 404 8.15.4 The benefits of corporate governance 4058.16 Summary 406





9 Conflict and Discipline 421 Learning Outcomes 4239.1 Introduction 4239.2 The nature of conflict in organizations 423 9.2.1 The symptoms of conflict 424 9.2.2 Horizontal conflict 424 9.2.3 Vertical conflict 427 9.2.4 Handling conflict 427 9.2.5 Managing intergroup conflict 429 9.2.6 Industrial relations and conflict 431 9.2.7 Resolutions of industrial relations conflict 4329.3 Discipline 434 9.3.1 The meaning of discipline 434 9.3.2 Self-discipline 435 9.3.3 Disciplinary situations 435 9.3.4 Taking disciplinary action 435 9.3.5 Immediacy: Douglas McGregors hot stove rule 437 9.3.6 Disciplinary procedures 437 9.3.7 ACAS code of practice 4399.4 Grievance procedures 4399.5. Tribunal applications 440

9.5.1 Resolving disputes without a tribunal hearing 4419.6 Dismissal, redundancy and job insecurity 4419.7 Fairness and commitment in the work place 442 9.7.1 Diversity and equal opportunities 446 9.7.2 Working time directives 448 9.7.3 Child care 4489.8 Summary 449




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CONTENTS Section A solutions 457


Preparing for the Examination 465Revision technique 467

Getting down to work 468 Tips for the final revision phase 468Format of the examination 469 Section A type questions 469 Section B type questions 472 Background 475 The World Youth Indoor Games, November 2004 475 Project sponsor 475 Farchester Games Co-ordination Committee (FGCC) 475 Definition and objectives of the project 476

Telecommunications and Information Technology 476 Software requirements 476 Project activities 476 Critical project dimensions 477 Project status 478 Section A solutions 481 Section B solutions 490

Exam Q & As 513

Index 515


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The CIMALearning System

Acknowledgements

Every effort has been made to contact the holders of copyright material, but if any herehave been inadvertently overlooked the publishers will be pleased to make the necessaryarrangements at the first opportunity.

How to use your CIMA Learning System

This Enterprise Management Learning Systemhas been devised as a resource for studentsattempting 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 Learning 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 LearningSystem is also ideal for fully taught courses.

The main body of the text is divided into a number of chapters, each of which is organ-ised on the following pattern:

Detailed learning outcomesexpected after your studies of the chapter are complete. Youshould assimilate these before beginning detailed work on the chapter, so that you canappreciate where your studies are leading.

Step-by-step topic coverage. This is the heart of each chapter, containing detailed explana-tory text supported, where appropriate, by worked out examples and exercises. Youshould work carefully through this section, ensuring that you understand the materialbeing explained and can tackle the examples and exercises successfully. Remember thatin 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 questionsdesigned to stimulate discussion.


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Question practice. The test of how well you have learned the material is your ability totackle 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 condi-tions. In particular, it is more important to absorb the material thoroughly by complet-ing 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 benefits as you would gain from a serious attempt ofyour own. However, if you are struggling to get started on a question, you should readthe introductory guidance provided at the beginning of the solution, and then makeyour own attempt before referring back to the full solution.

Having worked through the chapters, you are ready to begin your final preparations forthe examination. The final section of this CIMA Learning System provides you with theguidance 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 ques-tions 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 condi-

tions, 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 Learning System according to the guide-lines above, you will be giving yourself an excellent chance of exam success. Good luckwith your studies!

Guide to the Icons used within this Text

Key term or definition

Equation to learn

Exam tip or topic likely to appear in the exam

Exercise

Question

Solution

Comment or Note

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Study technique

Passing exams is partly a matter of intellectual ability, but however accomplished you arein that respect you can improve your chances significantly by the use of appropriate studyand revision techniques. In this section we briefly outline some tips for effective study dur-ing the earlier stages of your approach to the exam. Later in the text we mention some

techniques that you will find useful at the revision stage.

Planning

To begin with, formal planning is essential to get the best return from the time you spendstudying. Estimate how much time in total you are going to need for each subject that youface. Remember that you need to allow time for revision as well as for initial study of thematerial. The amount of notional study time for any subject is the minimum estimatedtime that students will need to achieve the specified learning outcomes set out earlier inthis 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,and so on. You may find it helpful to read Better Exam Results by Sam Malone, CIMAPublishing, ISBN: 0 7506 6357 X. This book will provide you with proven studytechniques. Chapter by chapter it covers the building blocks of successful learning andexamination techniques. Check

The notional study time for Enterprise Managerial is 200 hours. Note that the standardamount of notional learning hours attributed to one full-time academic year of approxi-mately 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 60Personal study: up to 100Other study e.g. learning in the workplace, revision, etc.: up to 40

200

Note that all study and learning-time recommendations should be used only as a guidelineand are intended as minimum amounts. The amount of time recommended for face-to-facetuition, 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 examina-tion. 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 chap-ters you are going to study in each week, and which weeks you will devote to revision andfinal 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 guideas to how long it will take you. Rather, it is essential to know your syllabus. As your courseprogresses you will become more familiar with how long it takes to cover topics in suffi-

cient depth. Your timetable may need to be adapted to allocate enough time for the wholesyllabus.

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Tips for effective studying

1. Aim to find a quiet and undisturbed location for your study, and plan as far as possibleto use the same period of time each day. Getting into a routine helps to avoid wastingtime. Make sure that you have all the materials you need before you begin, so as tominimise interruptions.

2. Store all your materials in one place, so that you do not waste time searching for itemsaround the house. If you have to pack everything away after each study period, keepthem 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 beable 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 becom-ing engrossed in the finer points, make sure you have an overall picture of all the areasthat need to be covered by the end of that session. After an hour, allow yourself a shortbreak 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 articlesfrom newspapers and journals, which will supplement your knowledge and demon-strate a wider perspective.

5. Work carefully through a chapter, making notes as you go. When you have covereda 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 andrevising, and also in the examination room. It helps to impose a structure on your solu-tions, and avoids rambling. When you have finished your attempt, make notes of anymistakes 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, orthe 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 anyissues you would like to follow up with your lecturer.

7. Organise your paperwork. There are now numerous paper storage systems available toensure that all your notes, calculations and articles can be effectively filed and easilyretrieved later.

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Paper E2 Enterprise Management

Syllabus Overview

Paper E2 moves away from the emphasis on functional knowledge within Paper E1Enterprise Operations, towards an holistic, integrated view of management across the

organisation. Building on important concepts in strategic management, this paper devel-ops tools and techniques for identifying the key types of competitive environment. Theskills and tools of project management are also addressed. Finally, the paper introducesthe skills and tools needed to work with, manage and develop teams. This includes boththe legal aspects of managing individuals, as well as the softer elements of negotiation andleadership skills.

Syllabus Structure

The syllabus comprises the following topics and study weightings:

A Strategic Management and Assessing theCompetitive Environment

30%

B Project Management 40%C Management of Relationships 30%

Assessment Strategy

There will be a written examination paper of 3 hours, plus 20 minutes of pre-examinationquestion paper reading time. The examination paper will have the following sections:

Section A 50 marksFive compulsory medium answer questions, each worth 10 marks. Short scenarios may begiven, to which some or all questions relate.

Section B 50 marksOne or two compulsory questions. Short scenarios may be given, to which questionsrelate.

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Learning Outcomes and Indicative Syllabus Content

E2 A. Strategic Management and Assessing the Competitive Environment (30%

Learning Outcomes

Lead Component

1. Discuss differentcompetitive environmentsand key externalcharacteristics of theseenvironments. (4)

(a) Discuss the nature of competitiveenvironments.

(b) Distinguish between different types ofcompetitive environments.

PEST analysis and its derivatives The use of stakeholder mapping Qualitative approaches to comp Competitor analysis and compe

quantitative tools of competitor Sources, availability and quality of Porters Five Forces model and i

environment. (A, B) Porters Diamond and its use for

nations. (A, B)

2. Discuss importantdevelopments in strategicmanagement. (4)

(a) Discuss concepts in established andemergent thinking in strategic management.

(b) Compare and contrast approaches tostrategy formulation.

(c) Explain the relationships between differentlevels of strategy in organisations.

Perspectives on the strategic mancost, resource-based view and ec

Approaches to strategy (e.g. ratiosystembased views. (B)

Levels of strategy (e.g. Corporatcandidates are not expected to id


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E2 B. Project Management (40%)

Learning Outcomes

Lead Component

1. Discuss tools andtechniques of projectmanagement. (4)

(a) Identify a project, a programme and theirattributes.

(b) Apply suitable structures and frameworksto projects to identify common projectmanagement issues.

(c) Construct an basic outline of the process ofproject management.

(d) Identify the characteristics of each phase inthe project process.

(e) Apply key tools and techniques, including

the evaluation of proposals.(f ) Produce a basic project plan incorporating

strategies for dealing with uncertainty, inthe context of a simple project.

(g) Identify structural and leadership issuesthat will be faced in managing a projectteam.

(h) Compare and contrast project controlsystems.

(i) Discuss the value of post-completion audit.(j) Apply a process of continuous

improvement to projects.

The definition of a programme, acontrast with repetitive operation

4-D and 7-S models to provide anine key process areas (PMI) to sprocess. (B)

The benefits and limitations of hprojects. (C)

Key tools for project managers (ediagrams (Critical Path Analysis)and milestones). (E, F)

Earned Value Management. (H) Evaluation of plans for projects. The key processes of PRINCE2 a

(B, C, D, E, F, H) Managing scope at the outset of

configuration management/chang The production of basic plans fo Scenario planning and buffering to

as part of the risk and opportunitie Organisational structures, includ

organisations, and their impact o Teamwork, including recognising

behaviour and selection. (G) Control of time, cost and quality

management systems. (J) Project completion, documentat

close-down. (I) The use of post-completion audi

of their costs. (I, J)


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E2 B. Project Management (40%) (Contd)

Learning Outcomes

Lead Component

2. Evaluate the relationship ofthe project manager to theexternal environment. (5)

(a) Produce a strategy for a project.(b) Recommend strategies for the

management of stakeholder perceptionsand expectations.

(c) Explain the roles of key players in a projectorganisation.

Determining and managing tradtime, cost and quality. (A)

Stakeholders (both process and otheir needs and expectations, maperceptions. (B)

Roles of support structures, incluproject sponsors (SROs), boards,


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E2 C. Management of Relationships (30%) (Contd)

Learning Outcomes

Lead Component

The principles of corporate goverProfessional Accountants, and theexpectations of a manager. (G)

How to lead and manage a team. The role of a mentor, and the pro Motivating team members. (A, E The use of systems of control wit

contracts, performance appraisal,


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The Nature of StrategicManagement


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1LEARNINGOUTCOMES

By the end of this chapter you should be able to: compare and contrast approaches to strategy formulation;

discuss concepts in established and emergent thinking in strategic management;

explain the relationship between different levels of strategy;

discuss the nature of competitive environments.

1.1 Introduction to the nature of strategic

managementThe strategic management process is essentially concerned with the decisions organisa-tions make about their future direction and the development and implementation of strat-egies which will enhance the competitiveness of organisations. There are many differentapproaches to strategic management but they all have the aim of establishing the purposeof the organisation and guiding managers on how to implement strategies to achieveorganisational goals.

This chapter will start by defining the concept of strategy. It will explain the variousactivities involved in the strategic management process, based on the formal rational

approach to strategy. The ways in which organisations can gain competitive advantage willalso be explored. Some of the alternative approaches to strategic management will then beexplained. The final part of the chapter will discuss the concept of stakeholders and exam-ine how different stakeholders can influence the strategy process.

1.2 The concept of strategy

Strategy has many different interpretations and dimensions. These characteristics distinguishstrategic issues from operational issues in organisations. Listed below are just some definitions:

1. Strategy. A course of action, including the specification of resources required, to achieve aspecific objective. CIMA:Management Accounting: Official Terminology, 2005 edition p. 54.

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THENATUREOFSTRATEGICMANAGEMENT 2. Strategic plan. A statement of long-term goals along with a definition of the strate-

gies and policies which will ensure achievement of these goals. CIMA: ManagementAccounting: Official Terminology, 2005 edition p. 54.

3. Strategy is the direction and scope of an organisation over the long term. Whichachieves advantage in a changing environmentthrough its configuration of resources andcompetenceswith the aim of fulfilling stakeholder expectations. Johnson et al. (2008).

4. The basic characteristic of the match an organisation achieves with its environment iscalled its strategy. Hofer and Schendel (1978, p. 4).

5. Corporate strategy is the pattern of major objectives, purposes and goals and essen-tial policies or plans for achieving those goals, stated in such a way as to define whatbusiness the company is in or is to be in and the kind of company it is or is to be.Andrews, cited in Lynch (2006).

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 itoperates.Lynch (2006).

1.2.1 Common themes in strategy

From these different definitions strategy is concerned with:

The purpose and long-term direction of the business. The scope of an organisations activities and actions required to meet its objectives

(broad or narrow). Meeting the challenges from the firms business external environment, such as competi-

tors and the changing needs of customers. Using the organisations internal resources and competencies effectively and building on

its strengths to meet environmental challenges. Delivering value to the people who depend on the firm, its stakeholders, such as custom-

ers and shareholders, to achieve competitive advantage.

Whatever interpretation is put on strategy, the strategic actions of an organisation will havewidespread and long-term consequences for the position of the organisation in the market-place, its relationship with different stakeholders, and overall performance.

1.3 Levels of strategy

Strategy occurs at different levels in the organisation. Figure 1.1 provides asimplified model of the hierarchy at which different strategies are made. At the

top of the hierarchy is where corporate strategy is made; this provides the frameworkfor the development of business strategy, which in turn provides the framework forfunctional strategies. The different levels of strategy formulation are therefore inter-dependent in that one level should be consistent with the strategies at the next level.

Corporate strategy

The corporate centre is at the apex of the organisation. It is the head office of the firm andwill contain the corporate board.


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Corporate strategyis typically concerned with determining the overall purpose and scopeof the organisation, in other words what type of business or businesses should the organi-sation be in. Common issues at this level include:

decisions on acquisitions, mergers and sell-offs or closure of business units; relations with key external stakeholders such as investors, the government and regulatory

bodies; decisions to enter new markets or embrace new technologies (sometimes termed diversi-

fication strategies); development of corporate policies on issues such as public image, employment practices

or information systems.Decisions at this level tend to complex and non-routine in nature because they often

involve a high degree of uncertainty based on what might happen in the future.The formal planning approach to strategy assumes that all strategy is formulated at cor-

porate level and then implemented in a top-down manner by instructions to the businessdivisions. During the 1980s, high-profile corporate planners like IBM, General Motorsand Ford ran into difficulties against newer and smaller upstart competitors who seemedto be more flexible and entrepreneurial. One consequence was the devolution of responsi-bility for competitive strategy to strategic business units (SBUs).

Business strategyThis level of strategy is concerned with how an operating or strategic business unitapproaches a particular market.

Corporate centreof organisation

Strategic businessunit

Corporatestrategy

Businessstrategy

Functionalstrategies



Financial strategyMarketingstrategy

Human resourcesstrategy

etc.

Figure 1.1 Organisation chart showing corporate, strategic business unit and functional strategies.From GIDO/CLEMENTS. Successful Project Management with Microsoft Project CD, 1E.

1999 South-Western, a part of Cengage Learning, Inc. Reproduced by permission.www.cengage.com/permissions

A strategic business unit (SBU) is defined by CIMA as: A section, usually adivision, within a larger organisation, that has a significant degree of autonomy,

typically being responsible for developing and marketing its own products or services.

CIMA:Management Accounting: OfficialTerminology, 2005 edition, p. 27.


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THENATUREOFSTRATEGICMANAGEMENT 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 usuallyformulated. The considerations at this level will include:

marketing issues such as product development, pricing, promotion and distribution; how should it segment the market should it specialise in particular profitable segments.

Business strategy should be formulated within the broad framework of the overall objec-tives laid down by the corporate centre to ensure that each SBU plays its part. The extentto which the management of the SBU is free to make competitive strategy decisions variesfrom organisation to organisation and reflects the degree of centralisation versus decen-tralisation in the management structure of the firm.

Functional strategiesThe functional (sometimes called operational) level of the organisation refers to mainbusiness functions such as sales, production, purchasing, human resources and finance.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 SBUachieve the goals of its corporate strategy.

1.4 A model of the rational strategy process

The traditional approach to strategic management is often termed the formal or rationalapproach, and can be described as a series of logical steps which involve:

the determination of an organisations mission the setting of goals and objectives the understanding of the organisations strategic position the formulation of specific strategies the commitment of resources

A continuous analysis of the external environment and the organisations internalresources is needed in order to plan for the future development and survival of the business.

The rational strategy process is often conceived as consisting of four major steps:

1. Analysis of current position2. Formulation of strategic options3. Implementation of strategies4. Monitor, review and evaluation.

This process seeks to answer questions concerning where the organisation is now,where it should go in the future, and how it should get there. The rational model there-fore involves a number of interrelated stages. Figure 1.2 below illustrates a framework ofthe rational strategy process and shows the various stages which management may take todevelop a strategy for their organisation.

Make sure you understand what activities occur during the stages included in

the model, and can reproduce, this diagram.


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The basic idea from the model is that we start with the existing strategy of the organisa-tion and evaluate it using information collected from internal and external analysis. Fromthis we can determine if the organisation should continue with its existing strategy or for-

mulate a new strategy that will enable the organisation to compete more effectively. Havingmade a choice on the strategic direction, the next stage involves implementing the strategyand then evaluating performance to determine whether or not goals have been achieved.

Each of the different stages in the model above will now be elaborated on, introducingsome of the tools and techniques of strategic management. However, Chapter 2 will pro-vide further explanation of some of the strategic management analytical tools, particularlythose that can be used to examine the external environment and competitive environments.

1.4.1 Mission, objectives and goals

Johnson, Scholes and Whittington (2008) provide the following useful guide to help dis-tinguish between the terminology of strategy.

Position auditInternal analysis

Mission andobjectives

Corporateappraisal(SWOT)

Strategic optiongeneration

Strategyevaluation and

choice

Strategyimplementation

Environmental analysisExternal analysis

Competitor analysis

Review andcontrol

Figure 1.2 A model of a rational strategy process

Term Definition

Mission Overriding purpose in line with the values and expectations of stakeholders.What business are we in?

Vision or strategic intent Desired future state: the aspiration of the organisationGoal General statement of aim or purpose may be qualitative in natureObjective Quantification (if possible) or more precise statement of the goalStrategies Long-term direction expressed in broad statements about the direction the

organisation should be taking and the types of actions required to achieveits objectives

From the above table we can see that a mission is a broad statement of the purposes ofthe business. It will be open-ended and reflect the core values of the business. A missionwill often define the industry that the firm competes in and make comments about its gen-eral way of doing business.

For example:

British Airways seeks to be the worlds favourite airline Nokia speaks of connecting people


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DHL delivers your promises easyEverything group wants to paint the world orange.

Does your organisation have a mission statement? What is it? How is the mis-sion communicated to employees.

Roles of mission statementsMission statements help at four places in the rational model of strategy:

1. Mission and objectives. The mission sets the long-term framework and trajectory for thebusiness. It is the job of the strategy to progress the firm towards this mission over thecoming few years covered by the strategy.

2. Corporate appraisal. Assessing the firms opportunities and threats, its strengths andits weaknesses must be related to its ability to compete in its chosen business domain.Factors are relevant only insofar as they affect its ability to follow its mission.

3. Strategic evaluation. When deciding between alternative strategic options, managementcan use the mission as a touchstone or benchmark against which to judge their suitabil-ity. The crucial question will be, Does the strategy help us along the road to being thekind of business we want to be?

4. Review and control. The key targets of the divisions and functions should be related tothe mission, otherwise the mission will not be accomplished.

Research conducted among companies by Hooley et al. (1992) revealed the followingpurposes of mission statements:

1. To provide a basis for consistent planning decisions.2. To assist in translating purposes and direction into objectives suitable for assessment

and control.3. To provide a consistent purpose between different interest groups connected to the

organisation.4. To establish organisational goals and ethics.5. To improve understanding and support from key groups outside the organisation.

1.4.2 The link between mission, goals and objectives

Whilst the mission is normally an open-ended statement of the firms purposes and strategies,strategic objectives and goals translate the mission into strategic milestones for the businessstrategy to reach. In other words, the outcomes that the organisations seeks to achieve.

A strategic objective will possess four characteristics which set it apart from a missionstatement:

1. a precise formulation of the attribute sought2. an index or measure for progress towards the attribute3. a target to be achieved4. a time-frame in which it is to be achieved.

Another way of putting this is to say that objectives must be SMART, that is,

Specific unambiguous in what is to be achieved Measurable specified as a quantity


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Attainable within reach Relevant appropriate to the group or individual to whom it is applied Time-bound with a completion date.

Table 1.1 lists some examples of strategic objectives.

1.4.3 The goal structure

Thegoal structureis the hierarchy of objectives in the organisation. It can be visualised asthe diagram in Figure 1.3 suggests.

Objectives perform a number of functions:

1. Planning. Objectives provide the framework for planning. They are the targets whichthe plan is supposed to reach.2. Responsibility. Objectives are given to the managers of divisions, departments and oper-

ations. This communicates to them:(a) the activities, projects or areas they are responsible for(b) the sorts of output required(c) the level of outputs required.

3. Integration. Objectives are how senior management coordinate the firm. Provided thatthe objectives handed down are internally consistent, this should ensure goal congru-ence between managers of the various divisions of the business.

4. Motivation. Management will be motivated to reach their objectives in order to impresstheir superiors, and perhaps receive bonuses. This means that the objectives set must coverall areas of the mission. For example, if the objectives emphasise purely financial outcomes,then managers will not pay much heed to issues such as social responsibility or innovation.

5. Evaluation. Senior management control the business by evaluating the performance ofthe managers responsible for each of its divisions. For example, by setting the managera target ROI and monitoring it, senior management ensure that the business divisionmakes a suitable return on its assets.

You may be familiar with these five functions (often recalled using the acronym PRIME)from your studies in budgetary control. Budget targets are a good example of operational

level objectives. In this chapter, however, we are working at a higher level by consideringthe strategic objectives of the firm.

Table 1.1 Examples of strategic objectives

Mission Attributes Measure

Growth Sales volume 000s of unitsShare of market % of total volumeAsset base of firm Net assets

Quality Customer satisfaction Repeat purchasesDefects No. per 000Consistency Adoption of standard procedures

Innovation Peer group respect Industry awards receivedSpeed to market Development timeSuccessful new products % of sales from new products

Social responsibility Non-discrimination Workforce compositionEnvironmental pollution Cubic metres of wasteSafety Notified incidents


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Having established where the organisation is in terms of its mission, goals and objec-tives, it must then determine where it wants to go in the future. This will be influenced bythe nature of the external environment and the organisations internal capability.

1.4.4 External environmental and competitive analysis

The strategy of an organisation must allow it to achieve a good fit with its environment.As part of its strategic analysis, an organisation should look at the various factors within itsenvironment that may represent threats or opportunities and the competition it faces.

The analysis requires an external appraisal to be undertaken by scanning the business externalenvironment for factors relevant to the organisations current and future activities. To achieve

this there are a number of strategic management tools that can assist in this process. Theseincluded the PEST framework which helps in the analysis of the macro or general environmentand the five forces model which can be used to analyse the competitive environment.

PEST framework

The PEST framework is used to categorise environmental influences into fourheadings that can be used to assess the external factors that might impact on

the organisations development in the future. These are used to understand the key

drivers of change. A brief summary of the PEST framework is provided below,however, further discussion of the framework can be found in Chapter 2.

Mission statementTranslated into a small number of

strategicobjectivesreached by

following strategiescommunicated to management

as numeroustactical objectives

which in turn are implemented and reviewedthrough setting a large number of

operational objectiveswhich may be communicated to managers and staff

responsible through theirindividual performance targets

Figure 1.3 A goal structure

Political. These are political or legal factors affecting the organisation, such as legislationor government policy, stability of the government, government attitudes to competitionand so on.

Economic. These are economic factors such as tax rates, inflation, interest rates, exchangerates, consumer disposable income, unemployment levels and so on.

Social. These are social, cultural or demographic factors (i.e. population shifts, age

profiles, etc.) and refer to attitudes, value and beliefs held by people; also changes inlifestyles, education and health and so on.


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Technological. These are changes in technology that an organisation might use andimpact on the way work is done, such as new system or manufacturing processes.

Some authors have expanded the mnemonic PEST into PESTEL to include explicitreference to ethical or environmental and legal factors.

If you are asked to apply the PEST model to an organisation, simply look for things

that might affect the organisation, and put each of them under the most appropriate head-ing. A brief explanation as to why you feel each activity creates either an opportunity orthreat will suffice.

The competitive environment five forces modelAs well as the macro environmental factors, part of external analysis also requires anunderstanding of the competitive environment and what are likely to be the majorcompetitive forces in the future. A well-established framework for analysing andunderstanding the nature of the competitive environment is Porters five forces model(see Figure 1.4.).

Porter argues that competition in an industry is determined by its basicunderlying economic structure the five competitive forces

1. rivalry among existing firms2. bargaining power of buyers3. bargaining power of suppliers4. threat of new entrants

5. threat of substitute products or services.The collective strength of these forces determines the profit potential, defined as

long-run return on invested capital, of the industry. Some industries have inherentlyhigh profits due to the weakness of these forces. Others, where the collective force isstrong, will exhibit low returns on investment. This model will be explored further inChapter 2.

The outcomes from the PEST analysis and five forces analysis will help determine theopportunities for an organisation, and also the potential threats.

Rivalry amongexisting firms

Threat ofentry

Bargaining powerof suppliers

Substitute productsor services

Bargaining powerof buyers

Figure 1.4 Porters five forces model. Reprinted with the permission of The Free Press, a division

of Simon & Schuster Adult Publishing Group, from Competitive Strategy: Techniques for AnalyzingIndustries and Competitorsby Michael E. Porter. 1980, 1998 by The Free Press. All rights reserved.


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THENATUREOFSTRATEGICMANAGEMENT 1.4.5 Internal analysis/position audit

Internal analysis is needed in order to determine the possible future strategic options byappraising the organisations internal resources and capabilities. This involves the identifi-cation of those things which the organisation is particularly good at in comparison to itscompetitors.

The analysis will involve undertaking a resource audit to evaluate the resources theorganisation has available and how it utilises those resources for example, financialresources, human skills, physical assets, technologies and so on. It will help the organisa-tion to assess its strategic capability. That is the adequacy and suitability of the resourcesand competences of an organisation for it to survive and prosper. Johnson, Scholes andWhittington (2008) explain that this depends upon having:

threshold resources the resources needed to meet the customers minimum require-ments and therefore to continue to exist;

threshold competences the activities and processes needed meet customers minimumrequirements and therefore continue to exist;

unique resources the resources that underpin competitive advantage and are difficultfor competitors to imitate or obtain;

core competences are activities that underpin competitive advantage and are difficultfor competitors to imitate or obtain.

There is often confusion surrounding the terms resources and competences essentiallyresources are what the organisation has, whereas competences are the activities and proc-esses through which the organisation deploys its resources effectively. This concept will bereturned to later in this chapter when examining the resource-based view of strategy.

Michael Porter suggested that the internal position of an organisation can be analysed

by looking at how the various activities performed by the organisation added (or didnot add) value, in the view of the customer. Porter proposed a model, the Value Chain(Figure 1.5), for carrying out such an analysis. To be included in the Value Chain, anactivity has to be performed by the organisation better, differently or more cheaply thanby its rivals.

The value chain of any organisation can be divided into primary activities andsupport activities, each of these activities can be considered as adding value to

an organisations products or services.

Firm infrastructureHuman resource management

Technology development

Secondary orsupportactivities

Procurement

Primaryactivities

Inboundlogistics

OperationsOutboundlogistics

Marketingand sales

Service

Figure 1.5 The Value Chain. Based on the work of Michael Porter


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The primary activities of the value chain are as follows:

Inbound logistics. The systems and procedures that the organisation uses to get inputsinto the organisation, for example the inspection and storage of raw materials.

Operations. The processes of converting inputs to outputs, for example productionprocesses.

Outbound logistics. The systems and procedures that the organisation uses to get outputsto the customer, for example storage and distribution of finished goods. Marketing and sales. Those marketing and sales activities that are aimed at persuading

customers to buy, or to buy more, for example TV or point-of-sale advertising. Service. Those marketing and sales activities that are clearly aimed before or after the

point of sale, for example warranty provision, or advice on choosing or using the product.

The secondary (or support) activities of the value chain are as follows:

Procurement. The acquisition of any input or resource, for example buying raw materialsof capital equipment.

Technology development. The use of advances in technology, for example new ITdevelopments. Human resource management. The use of the human resources of the organisation, for

example by providing better training. Firm infrastructure. Those general assets, resources or activities of the organisation that

are difficult to allocate to one of the other activity headings, for example a reputation forquality, or a charismatic Chief Executive.

If you are asked to apply the value chain to an organisation, simply look for things thatthe organisation does well, and put each of them under the most appropriate heading. Abrief explanation as to why you feel each activity has strength will suffice.

Undertake a resource audit and value change analysis for your organisation, orfor an organisation that you are familiar with. This should help you in under-

standing the purpose of different strategic management frameworks.

1.4.6 Corporate appraisal (SWOT)

Having undertaken an analysis of the trends and possible external environmental and com-petitive and internal developments that may be of significance to the organisation, the nextstep is to bring together the outcomes from the analysis.

This is often referred to as corporate appraisal or SWOT analysis, standing for strengths,weaknesses, opportunities and threats.

During this stage, management will assess the ability of the business, following its presentstrategy, to reach the objectives they have set. They will draw on two sets of information:

(a) Information on the current performance and resource position of the business. Thiswill have been gathered in a separate internalposition auditexercise.

(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 externalenvironmental analysis and competitor analysis.


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THENATUREOFSTRATEGICMANAGEMENT The four categories of SWOT can be explained in more detail as follows:

1. Strengths. These are the particular skills or distinctive competences which the organisa-tion possesses and which gives it an advantage over the competitors.

2. Weaknesses. These are the things that are going badly (or work badly) in the organisa-tion and can hinder the organisation in achieving its strategic aims, such as a lack of

resources, expertise or skills.3. Opportunities. These relate to events or changes outside the organisation, that is in itsexternal business environment, which are favourable to the organisation. The events orchanges can be exploited to the advantage of the organisation and will therefore providesome strategic focus to the decision-making of the managers within the organisation.

4. Threats. Threats relate to events or changes outside the organisation in its business envi-ronment which are unfavourable and that must be defended against. The organisationwill need to introduce some strategies to overcome these threats in some way or it maystart to lose market share to its competitors.

The strengths and weaknesses normally result from the organisations internal factors, and

the opportunities and threats relate to the externalenvironment. So, the strengths and weak-nesses come from internal position analysis tools such as the Value Chain, and the opportu-nities and threats from environment analysis tools such as PEST and the five forces model.

1.4.7 Strategic options and choice

Strategic choice is the process of choosing the alternative strategic options generated by theSWOT analysis. Management need to seek to identify and evaluate alternative courses ofaction to ensure that the business reaches the objectives they have set. This will be largelya 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.The strategic choice process involves making decisions on:

What basis should the organisation compete and on what basis can it achieve competi-tive advantage?

What are the alternative directions available and which products/markets should theorganisation enter or leave?

What alternative methods are available to achieve the chosen direction?

Achieving competitive advantageWhen developing a corporate strategy, the organisation must decide upon which basis it isgoing to compete in its markets. This involves decisions on whether to compete across thewhole marketplace or only in certain segments (this is referred to as competitive scope).A further consideration is the way in which the organisation can gain competitive advan-tage, that is anything that gives on organisation an edge over its rivals and which can besustained over time. To be sustainable, organisations must seek to identify the activitiesthat competitors cannot easily copy and imitate (We will return to this later in this chapterwhen the resource-based view to strategy is introduced.).

Organisations must assess why customers chose to use one organisation over another.The answer to this question can be broadly categorised into two reasons:

1. The price of the product/service is lower.2. The product/service is perceived to provide better added value.


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Decisions on the above questions will determine the genericstrategy options for achiev-ing competitive advantage known as generic because they are widely applicable to firmsof all sizes and in all industries. The two types of generic competitive strategies that enableorganisations to achieve competitive advantage are referred to as low-cost strategies or dif-ferentiation strategies. For example, organisations can compete on price-based strategiesserving prices to sensitive segments of the marketplace or they can choose to pursue a dif-

ferentiation strategy which seeks to be unique on dimensions valued by buyers, such asproduct design, branding, product performance and service levels. In addition, organisa-tions need to decide on whether they are going to compete in the broad marketplace orwhether they are going to focus on one or more particular segments or niches.

Identify an organisation that follows a price based strategy and one that achievescompetitive advantage through differentiation. Then for each organisation

identify what the core competencies need to be to support the competitive strategy.

Strategic directionThe organisation also has to decide how it might develop in the future to exploit strengthsand opportunities or minimise threats and weaknesses. There are various options thatcould be followed, including:

Market penetration. This is where the organisation seeks to maintain or increase its shareof exiting markets with existing products.

Product development. Strategies are based on launching new products or making productenhancement which are offered to its existing markets.

Market development. Strategies are based on finding new markets for existing products.This could involve identifying new markets geographically or new market segments. Diversification. Strategies are based on launching new products into new markets and is

the most risky strategic option.

Strategic methodsNot only must the organisation consider on what basis to compete and the direction ofstrategic development, it must also decide what methods it could use. The options are:

Internal development. This is where the organisation uses it own internal resources topursue its chosen strategy. It may involve the building up a business from scratch.

Takeovers/acquisitions or mergers. An alternative would be to acquire resources by takingover or merging with another organisation, in order to acquire knowledge of a particularproduct/market area. This might be to obtain a new product range or market presenceor as a means of eliminating competition.

Strategic alliances. This route often has the aim of increasing exposure to potential cus-tomers or gaining access to technology. There are a variety of arrangements for strategicalliances, some of which are very formalised and some which are much looser arrange-ments. We will return to the topic of strategic alliances in Chapter 2.

Evaluation of strategic options

The evaluation stage considers each strategic option in detail for its feasibility and fit withthe mission and circumstances of the business. By the end of this process, management will


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THENATUREOFSTRATEGICMANAGEMENT have decided on a shortlist of options that will be carried forward to the strategy imple-

mentation stage. The various options must be evaluated against each other with respectto their ability to achieve the overall goals. Management will have a number of ideas toimprove the competitive position of the business.

1.4.8 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 strategyimplementation stage involves drawing up the detailed plans, policies and programmesnecessary to make the strategy happen. It will also involve obtaining the necessary resourcesand committing them to the strategy. These are commonly called tactical and operationaldecisions:

Tactical programmes and decisionsare medium-term policies designed to implement someof the key elements of the strategy such as developing new products, recruitment or

downsizing of staff or investing in new production capacity. Project appraisal and projectmanagement techniques are valuable at this level.

Operational programmes and decisionscover routine day-to-day matters such as meetingparticular production, cost and revenue targets. Conventional budgetary control is animportant factor in controlling these matters.

1.4.9 Review and control

This is a continuous process of reviewing both the implementation and the overall con-tinuing suitability of the strategy. It will consider two aspects:

1. Does performance of the strategy still put the business on course for reaching its strate-gic objectives?

2. Are the forecasts of the environment on which the strategy was based still accurate, orhave unforeseen threats or opportunities arisen subsequently that might necessitate areconsideration of the strategy?

1.5 Criticisms of the rational model of strategy

formulationMany writers on strategy dispute the rational model of strategy formulation by question-ing some of the implicit assumptions. They would argue that organisational rationality ismerely a textbook assumption from economics, with little basis in the real world.

1. Organisations are incapable of having objectives. This argument is derived from theinsight of organisational sociology that organisations are really just collections of peo-ple. According to Cyert and March (1963), an organisation does not have goals of itsown but rather it is the people within it that have the goals. Notions of profit (or share-holder wealth) maximisation are merely artificially simplified assumptions left over

from economics. This leaves us with a picture of the goals pursued by a strategy being


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in fact the outcome of a bargaining process between various factions around the board-room table. The consequences of this view are:(a) Objectives may be in conflict with one another.(b) Objectives will change from time to time according to which management faction

finds itself in the ascendancy.(c) Objectives are unlikely to be directly related to the economic benefit of the

shareholder.(d) Management will inevitably find itself adjudicating between the claims of the vari-

ous stakeholder groups such as investors, employees, customers and government.One consequence of this is their adoption of satisficing behaviour where they tryto follow strategies aimed at pleasing most of the people most of the time. (If youconsider 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 satisficing means.) A moresophisticated argument is that management will formulate strategy in the light ofits beliefs about the status of the firm 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 interpretativeviewof strategy because any attempt to explain a given firms strategy must consider thebeliefs (or paradigms) in the minds of its management.

2. Senior management should not be the only people involved in setting strategy. Writers arguethat by making a separation between strategy formulation and strategy implementation,the rational approach is bound to lead to difficulties. In the first place, senior manage-ment are too detached, and will lack the detailed understanding of the problems of agiven business division and the requirements of the particular customers and technolo-gies there. The result will be a strategy that is unlikely to address the divisions needs.Secondly, 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 mis-interpreted. The resulting strategy will have unanticipated harmful effects on the moti-vation and commitment of those required to implement it. This view favours widerparticipation in strategy formulation through encouraging emergent strategiesto perco-late up from below. We shall return to this view in more detail later.

3. In reality, strategy formulation is not a simple step-by step process aimed at finding thebest way to meet the firms objectives.The model described in Figure 1.2 presents theprocess as moving in one direction. In reality, strategy formulation is a much morejumbled-up process and can include considerable backtracking and revisiting of ear-lier 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 thelight of the corporate appraisal or to match the strategies developed during the stra-tegic option generation stage. Furthermore, the strategy formulation process is verypolitical. The main influence on the information considered and the options gener-ated and accepted will be the power of particular personalities and factions in themanagement team.

4. The strategies that firms eventually follow are not the same as the ones they set out in theirplans. At the time of strategy formulation, management suffer from bounded rational-ity. This means that they cannot have perfect knowledge of the future and so any strate-gies 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.


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THENATUREOFSTRATEGICMANAGEMENT 5. 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 longafter the event. In this post-rationalisation, they will tend to present all occurrences asintentional action and ignore all the things that happened by chance and those that didnot work out. In this view, strategy emerges as apatternfrom the piecemeal decisions ofmanagement. Another name for this view is adaptivebecause it sees the organisation as

adapting to the circumstances around it.6. 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 firms suc-cess. The doctrine of action rationalityproposed by Brunsson (1985) is a good example ofthis. Brunsson argues that excessive rationality in decision-making will rob a manager of themotivation and commitment necessary to implement the strategy successfully. Instead, theywill be haunted by doubts that they may have chosen the wrong alternative, aware of someof the inconsistency between objectives, and conscious of all the things that might go wrongand the fact that the members of management that disagreed with the strategy are secretlyhoping 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 formulateobjectives based on the likely outcomes of the strategy once it has become established. Thisis very similar to the ready-fire-aim philosophy associated with some successful firms.

1.6 A formal top-down strategy process

Large organisations will often formalise process of strategy formulation. The following aretypical 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 formulatingstrategy and monitoring results.

(b) Groups of managers, often the management teams of the SBUs, meeting periodi-cally to monitor the success of the present strategies and to develop new ones. Theseare sometimes referred to as strategy away days because they often take place awayfrom the office to avoid the interruptions day-to-day functioning.

(c) Business consultants acting as advisers and facilitators to the process by suggestingmodels and techniques to assist managers in understanding their business environ-

ments and the strategic possibilities open to them. You will be reading about manyof these models and techniques later.

2. Formal collection of information for strategy purposes. The management team will callupon data from within and outside the firm to understand the challenges they face andthe resources at their disposal. This information can include:(a) Environmental scanning reports compiled by the business intelligence functions

within the firm, including such matters as competitor behaviour, market trends andpotential changes to laws.

(b) Specially commissioned reports on particular markets, products or competitors.(c) Management accounting information on operating costs and performance, together

with financial forecasts.(d) Research reports from external consultancies on market opportunities and threats.


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3. Collective decision-taking by the senior management team. This involves the senior managementteam working together to develop and agree business strategies. Techniques such as brain-storming ideas on flip charts and using visual graphical models to summarise complex ideaswill assist this process. Also, arriving at a decision will involve considerable conflict as particularmanagers are reluctant to see their favoured proposal rejected and a different strategy adopted.

4. A process of communicating and implementing the business strategy. This can be accom-

plished 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 confidential basis to other managers and key investors, and alsoperhaps to other key stakeholders such as labour representatives, regulatory bodies,major customers and key suppliers.

(b) Briefing meetings and presentations to the stakeholders mentioned above.Frequently, reporters from the business press will be invited to ensure that the infor-mation reaches a broader public. Naturally, the fine detail will remain confidential.

(c) The development of detailed policies, programmes and budgets based on achievingthe goals laid out in the business strategy.

(d) The development of performance targets for managers and staff. These ensure that eve-ryone plays their part in the strategy (and perhaps receive financial rewards for doing so).

5. Regular review and control of the strategy. Management will monitor the success of thestrategy by receiving regular reports on performance and on environmental changes.Today, the sophisticated competitive strategies of many firms have necessitated the devel-opment of more complex performance measurement systems to supplement traditionalbudgetary control information. These are variously termed enterprise resource managementsystems and balanced scorecards. There has also been an increased emphasis on competitorand other environmental information to assist managers in steering their businesses.

Testing your appreciation of managements need for non-financial measures and environ-mental information will be a recurring feature of questions in this examination.

1.6.1 Benefits of the formal top-down approachto strategy

Business strategy formulation obviously uses a lot of organisational resource. What are thebenefits?

1. Avoids short-termist behaviour. It ensures that management considers the long-term develop-ment of the business rather than focusing solely on short-term results and operational results.

2. Helps identify strategic issues. By encouraging management to consider the business envi-ronment in their plans and decisions, it will help them keep ahead of change and to bemore 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 facilitiesor the sorts of products and brands created.


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THENATUREOFSTRATEGICMANAGEMENT 4. Improves stakeholder perceptions of the business. If the firm demonstrates that it has a clear

idea of where it is going, it enables others to make plans based on its future. This maylead to:(a) higher share price because investors are confident 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 firm;

(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 implementa-

tion, 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 thatformal strategy formulation is a collective process. This means that:(a) Different functional managers (e.g. finance 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 inthe business and develop as a pool of expertise from which the next generation ofmanagers may be recruited.

(c) Avoids succession problems when members of senior management retire or moveon. The strategy of the firm is understood by all and will outlast the loss of keymembers of the management team.

1.6.2 Drawbacks of the formal top-down approachto strategy

Some 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 infrequencyof the strategy round, say every 5 years, and the time it takes to achieve any change to thestrategy. If the environment changes unexpectedly, the firms performance may deteriorateas it continues to follow a business strategy which has now become inappropriate to itsbusiness environment, for example by continuing to make a product no one wants.

2. It forbids the development of radical or innovative strategies. The need to retain consensusamong the management team means that radical ideas are too often rejected. Writerswho 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 that of firms whosenames are associated with radical and visionary entrepreneurs. These business leaderstend to follow the emergent strategy approach.

3. It suffers from difficulties of implementation. The formal process is management-led andseeks to pursue the goals of the business. Successful implementation requires the par-ticipation, or at least acquiescence, of middle and junior management, together withoperative staff. There is a danger that the formal process will not build the support ofthese people and hence will be misunderstood or resisted. The result will be that thegoals of the strategy are not realised.

4. There is loss of entrepreneurial spirit. Entrepreneurs are persons who break rules andmake changes to conventional ways of doing business. On the other hand, a middle


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manager in a strategically managed firm will be rewarded for carrying out their allottedpart in the strategy and for not breaking the rules. The effect will be to encourage con-formity among managers. This will lose the firm potentially successful ventures and per-haps also the services of gifted entrepreneurial managers who may leave in frustration.

5. It is impossible in uncertain business environments. Formal business strategy requires thatthe strategists are able to make reliable assumptions about the future and particularly

about the opportunities and threats facing them. Critics argue that the business envi-ronment is now more uncertainthan ever before. Because in their view, the future can-not be forecast. Some writers argue that management efforts should be diverted fromtrying to plan strategies and instead should focus on improving the ability of their busi-nesses to respond and adapt to change.

6. It is too expensive and complicated for small businesses. The manager of

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