Chap - 1 Strategy and Business

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Ahapter 1 The Institute of Chartered Accountants in England and Wales, March 2009 1

ontents

trategy and business

ntroduction

xamination context

opic List1 Approaches to strategy

2 Strategic planning versus strategic management

3 The role of the leader in strategic management

4 Doing without overarching visions:incrementalism

5 Deliberate and emergent strategies

6 Positioning versus resource-based views ofstrategic advantage

7 Planning horizon

8 Strategy and ethics

ummary and Self-test

nswers to Self-test

nswers to Interactive questions

Business strategy

2 The Institute of Chartered Accountants in England and Wales, March 2009

Introduction

Learning objectives Tick off

Explain strategic management systems

Evaluate omission, inconsistencies and weaknesses in strategic management systems

Evaluate potential ethical stances of an organisation

Specific syllabus references for this chapter are: 1a, 2a.

Practical significanceStrategies are the courses of action a firm follows through time. A business that survives is one that hasfollowed a successful strategy. One that fails or that loses-out in a takeover did not have a successfulstrategy. Strategies affect earnings, jobs, ability to pay suppliers and whether and what terms customers getproducts and services. Only in retrospect can we say with any certainty whether it has worked or not.

Management needs a way to ensure its strategies are good ones from the start. This chapter contrastsstrategies that are planned in advance with strategies made up 'on the run'.

Strategy pervades most areas of management. It influences how the business is viewed by investors andsignificant business partners such as a supplier or the customer who has a major contract to award.

But strategy theory is also subject to fashions and fads. In your career you will learn to speak the jargon ofstrategy and of the latest fad being pushed by consultants, academics and journalists. This chapter will showyou that strategy matters. It will also show you that it is an art and not a science and that, even as art,management needs to be aware of just what it is buying into.

Stop and thinkWhat businesses can you think of that have done well? Do you think it was plain luck or was it goodmanagement?

How about the firm that employs you? Does it have a clear idea of what it will be doing in five or ten yearstime that is more than just 'we'll still be here doing the same old thing'?

Working contextTrainee accountants are not routinely invited to advise major corporations on business strategyformulation. However you may still see the impact of strategy formulation in a number of ways.

Is your client getting involved in new lines of business and markets and have they considered thebenefits and risks. This could affect your assessment of their risk and ability to stay as a going concern.

Are adequate financial controls in place or are things getting out of control. A good strategic plan willensure controls and risks are dealt with, whereas more ad hoc strategies often lead to overtrading andpoor financial control. You may be required to give an initial assessment of this in an audit.

You may advise a client on raising money. A small sum for a small client's business idea or asset. Alarge sum for a large client to buy a rival. Both are risky. Have they thought through their plan? Whereis the evidence to justify this investment?

Investment advice is about picking winning companies. The winners are the ones who have successfulstrategies. How can you tell in advance if it is a good strategy?

STRATEGY AND BUSINESS

The Institute of Chartered Accountants in England and Wales, March 2009 3

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Syllabus linksIn the Business and Finance paper you will have covered the basic objectives and processes of strategicmanagement. You will also have covered the polices that can be used to help ensure a business actsethically.

This chapter revises these topics and provides a range of alternative perspectives on the role ofmanagement in the strategic process. The following topics, revised and expanded here, were introduced inyour Business and Finance paper:

General objectives of strategic management, the strategic management processes

Nature and purpose of strategic plans, business plans and operational plans

The policies and procedures a business should implement to promote an ethical culture

In addition the section on professional ethics draws upon material from section 4 of the Assurancepaper syllabus

The framework of the rational planning model will be employed in subsequent chapters.

Business strategy


Examination context

Exam requirementsThis chapter deals with a number of different views and models of strategic management. Whilst anappreciation of the underlying models is important, in the exam this topic will be tested in the context of ascenario and the knowledge from this chapter will need to be applied. The interactive questions are usefulin demonstrating how this may form the subject of one part of the requirement of a question.

This chapter also provides an overview of the nature, purposes and limitations of strategy which will assistin understanding all the subsequent chapters, even where some of these concepts may not be directlyexamined in detail.



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1 Approaches to strategy

Section overview Strategies are about the long term development and survival of the business.

Strategy takes place at several levels ranging from the corporate centre down to strategies forfunctions such as marketing, human resources and finance.

Therefore strategy can mean different things to different people. Mintzberg calls these Plans, PatternsPerspective, Ploys and Positions.

1.1 What is 'strategy'?There are probably as many different definitions of 'strategy' (or 'corporate strategy') as there aretextbooks on the subject.

Definitions'Strategy is the direction and scope of an organisation over the long term, which achieves advantage forthe organisation through its configuration of resources within a changing environment, to meet the needs ofmarkets and to fulfil stakeholder expectations.' (Johnson, Scholes and Whittington).

'Corporate strategy is concerned with an organisation's basic direction for the future, its purpose, itsambitions, its resources and how it interacts with the world in which it operates' (Lynch).

From these we can say that strategy is therefore concerned with:

The long-term direction (objectives) of the organisation The environment in which it operates The resources at its disposal The return it makes to stakeholders.

About your studies

This chapter reviews some of the leading theories of strategy formulation and provides the names of manyauthorities on strategy. The remaining chapters of this text also provide coverage of names and theories.

The focus of your examination is a practical one. You will be required to interpret business scenarios andto provide professional advice to clients and management on what to do. You will not be required to writeout pages of names and theories for the sake of it.

The models and theories you will cover are to be used in three ways in the examination:

1 To analyse and interpret: Applying the appropriate models and perspectives to the situation andissues in the scenario will help you see underlying causes better.

2 To generate solutions: Many of the theories include recommendations or approaches to resolvingproblems. You may wish to pass this advice on to management.

3 To substantiate your comments: The theorists and models are recognised by management whomay have studied them too. You would be expected to refer to them in a real business report. Youwill get some marks for doing the same in your Business Strategy exam.

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Theories of strategy and of strategic management must be used with caution. They don't apply in allsituations and the evidence for them is not always clear cut. Therefore this text draws attention to thelimitations of some to help you decide how far you can apply them in the exam.

This chapter reviews two broad approaches to strategy: the strategic planning approach and thestrategic management approach.

Types

Competitivestrategy

Financialstrategy

Investment andresource strategyA

PPROACHES

Corporatestrategy

LEVELS

Corporate

Business

Functional

Traditional

Emergent

1.2 Levels of strategyStrategy can exist at several levels in an organisation as shown in the diagram below:

Corporate

Business

Functional

1.2.1 Corporate strategy

Corporate strategy is generally determined at head office/main board level. The types of matters dealt withinclude:

Determining the overall corporate mission and objectives

Overall product/market decisions, e.g. expand, close down, enter new market, develop new productetc via methods such as organic growth, merger and acquisition, joint venture etc

Other major investment decisions besides those for products/markets, e.g. information systems, ITdevelopment

Overall financing decisions - obtaining sufficient funds at lowest cost to meet the needs of the business

Relations with external stakeholders, e.g. shareholders, bondholders, government, etc.



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1.2.2 Business strategy

This normally takes place in strategic business units (SBUs).

An SBU is 'a section, within a larger organisation, which is responsible for planning, developing, producingand marketing its own products or services'.

Competitive strategy is normally determined at this level covering such matters as:

How advantage over competitors can be achieved

Marketing issues, such as the 4Ps (product, price, promotion, place).

1.2.3 Functional (operational) strategies

This refers to the main functions within each SBU, such as production, purchasing, finance, human resourcesand marketing, and how they deliver effectively the strategies determined at the corporate and businesslevels.

1.3 Mintzberg's 5PsMintzberg (The Strategy Process) looked at how the word 'strategy' has been used by people who havewritten about the subject.

Plan

Ploy

Pattern

Position

Perspective

Strategy asplan

A strategic plan is a document, produced at the end of a planning process. It isexplicit, written down and contains targets and instructions for people to follow.

Strategy asploy

A ploy is a manoeuvre in a competitive game with the intention of winning a victoryover, or disadvantaging somehow, a competitor.

Strategy aspattern

Strategy may become apparent by a stream of actions or as a pattern ofbehaviour or a consistency in what the organisation does. This arises from theculture of the management team.

Strategy asposition

Strategy as 'position' involves how the firm fits with its environment. It includes:

'Matching' the internal resources and competences (strengths and weaknesses)of the organisation with environmental conditions (opportunities and threats).

A market position in relation to other firms: e.g. offering a product/service to aparticular segment or satisfying customer needs in a particular way (e.g. highprice and high quality vs low price and lower quality).

Strategy asperspective

Strategy as a unique way of looking at the world and interpreting it such as AppleInc. which believes ICT is a lifestyle accessory whereas Dell seems to see it as amore functional business tool.

Business strategy


2 Strategic planning versus strategic management

Section overview There is a contrast between strategic planning and strategic management as approaches to strategy

formulation.

The rational planning model, originated by Ansoff starts from fixed objectives as a 'top down cascade'of defined steps.

This yields benefits for the business such as integration of business units and increased strategicthinking.

Mintzberg criticises it as a failure in practical and of dubious validity as an explanation of what doesand should happen.

2.1 Contrast between planning and management approach

Strategic planning also called

Top down approach

Rational approach

Formal approach

Traditional approach

Strategy involves setting goals first and thendesigning strategies to reach them

Some prediction of the future is possible

Outcomes of strategic choices can bepredicted and controlled

Possible to separate the planning and selectionof strategies from the implementation ofstrategies

Strategic management also called

Emergent approach

Bottom up approach

Builds management team with right strategicskills

Managers of divisions granted significantautonomy

Empowerment of mangers to develop andadapt strategies as circumstance change andopportunities and threats arise



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2.2 A rational (prescriptive) approach to strategy formulation

EXTERNALANALYSIS

INTERNALANALYSIS

CORPORATEAPPRAISAL

MISSION ANDOBJECTIVES

GAP

STRATEGICCHOICE

STRATEGYIMPLEMENTATION

REVIEW ANDCONTROL

STRATEGICANALYSIS

STRATEGICCHOICE


The main stages in the rational approach are:

1. Conduct a corporate appraisal: This involves assessing the present business environment andassessing how it may develop over the timescale of the plan horizon (typically five + years). It will alsoconsider the internal position of the business, including such things as its present staffing, quality ofproducts and financial condition.

2. Set mission and objectives: Management will assess whether the long-term interests of thebusiness are best met in its present industry and competing in its present way or whether the businessneeds to strike out in a new direction. This is called its mission. Objectives will be set for the comingyears. The job of strategy is to attain them.

3. Gap analysis: Involves forecasting performance forward and comparing it with the strategicobjectives set by management. If forecast performance is below the objectives set then this exposes agap which must be filled by new and better strategy.

4. Strategic choice: Management must generate new business options for the firm such as newproducts or markets, and evaluate these to arrive at a set of potentially successful and affordablestrategies to help the firm reach the objectives set.

5. Strategy implementation: Management carries out the strategy at corporate, business andfunctional levels by the development of organisational structures, policies and programmes to carry itout.

Business strategy


2.3 Benefits claimed for strategic planningStrategic planning can achieve several purposes:

Creates a management process to detect and respond to changes in market and environmental forcesand so improve performance

Provides a framework for all SBUs of the organisation to produce plans with clear, long term goalsthus avoiding short-termism

Enables derivation of milestones for achievement of goals and monitoring progress by stages

Mechanism to ensure harmony of objectives, both between different SBUs and over time (oftenreferred to as 'goal congruence')

Improves stakeholder perceptions of the business, for example a clear strategy may improve the shareprice

Investment in planning process develops future management potential and can aid continuity whensenior management retire or move on.

2.4 Mintzberg's criticisms of strategic planningStrategic planning has fallen from popularity and has been criticised. Mintzberg's critique below is amongstthe most insightful.

Mintzberg argues that planning doesn't work out in practice.

Problem Comments

Practical failure Empirical studies have not proved that formal planning processes contribute tosuccess.

Routine andregular

Strategic planning often occurs as an annual cycle, but a firm cannot allow itselfto wait every year for the month of February to address its problems.

Reducesinitiative

Formal planning discourages strategic thinking. Once a plan is locked in place,people are unwilling to question it. Obsession with particular performanceindicators means that managers focus on fulfilling the plan rather thanconcentrating on developments in the environment.

Internal politics The assumption of 'objectivity' in evaluation ignores political battles betweendifferent managers and departments. The model doesn't describe reality therefore.

Exaggeratespower

Managers face limits to the extent to which they can control the behaviour of theorganisation. The plans may be ignored by subordinates.

Impractical The hierarchy of objectives, budgets, strategies and programmes does not reflectthe reality of most organisations who prefer simple, more easy to applyprogrammes such as capital budgeting.



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Secondly Mintzberg claims the concept is flawed in principle.

Criticism Comment

Formalisation We have no evidence that any of the strategic planning systems no matter howelaborate succeeded in capturing (let alone improving on) the messy informalprocesses by which strategies really do get developed.

Detachment:divorcingplanning fromoperations

This implies that the managers not involved in planning do not really need day-to-day knowledge of the product or market to do their jobs. But strategic thinking isnecessary to detect the strategic messages within the nitty-gritty of operations.

Formulationprecedesimplementation

A strategy is planned then it is implemented. But defining strengths andweaknesses is actually very difficult in advance of testing them. Discoveringstrengths and weaknesses is a learning process. Implementing a strategy isnecessary for learning to see if it works.

Predetermination Planning assumes that the environment can be forecast, and that its futurebehaviours can be controlled, by a strategy planned in advanced and delivered onschedule. In conditions of stability, forecasting and extrapolation make sense.However, forecasting cannot cope with high uncertainty and discontinuities (e.g.,publishers and other media owners find it hard at present because they cannotpredict the form and platforms we will be using to access media in five years'time. Permanent on line through wi-fi enabled readers? Hand-held page screens?Modified spectacles? In ear via text-to-voice converters?

3 The role of the leader in strategic management

Section overview The rational planning approach sought to identify a process by which successful strategy can be

formulated.

Many businesses succeed through the actions of its CEO or entrepreneurial individuals within it.

To some writers like Ohmae strategy comes from managers with a strategic mode of thinking.

This brings us to a discussion of whether strategy may be more to do with the leadership of peoplethan the management of processes a view advanced by Barlett and Ghoshal.

3.1 The entrepreneur in strategyMany businesses have been successful through the actions of their founders or chief executives rather thanthrough formal strategic planning.

Interactive question 1: Famous business leaders [Difficulty level: Easy]Name some corporations which have been made successful by the business leadership given by a famousindividual.

See Answer at the end of this chapter.

Business strategy


Entrepreneurs are individuals who build new businesses. An entrepreneur is not just the owner/manager ofa small business but is best regarded as a manager who pursues opportunity and drives change tocreate value.

Entrepreneurship is a style of management, with a particular mix of innovation and risk.

3.2 Ohmae's strategic thinking as an intuitive processOhmae (The Mind of the Strategist 1982) blames formal strategic planning processes for having witheredstrategic thinking.

Ohmae says strategy is essentially a creative process in which the strategist must pay attention to astrategic triangle of 3 Cs.

1. Corporate-based strategies build competitive strength by focusing on the superior competenceswhich the corporations has in comparison to rivals. He cites Sony's skills in miniaturisation ofelectronic circuitry and Coca Cola's control over distribution channels as examples of this.

2. Customer-based strategies gain superior market position by segmenting markets closely andensuring products and service are closely tailored to requirements of each segment. The ability ofMercedes-Benz or BMW to cornering a particularly valuable segment of the car industry might be anexample of this.

3. Competitor-based strategies. Close identification of the methods of rivals and exploitation of anyweaknesses in them, such as absolute cost differences or flexibility of supply. Ohmae cites the exampleof Toyota utilising its superior R&D and quality assurance systems to launch Lexus to exploit theexecutive limousine market at prices unattainable to Jaguar and Mercedes-Benz who relied on moretraditionally engineered cars and car plants.

The development of such strategies requires management to engage in strategic thinking.

Observe the problems: The manager must be actively engaged in the business and see the issuesfirst-hand (e.g. quality issues, bad customer experiences, loss of sales contracts etc.)

Ask the right question: Focus on finding a solution to a problem rather than just a remedy to asymptom. E.g. a software developer faced with late-running and excessively complex and resource-hungry final products could decide to put in extra resources to solve the symptom. In fact the problemmay be that the R&D function is divorced from the Sales function and so not concerned with time tomarket or ultimate value-in-use of its developments.

Customers

Corporation Competitors



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Group problems together: Use processes of abstraction (e.g. brainstorming sessions) to see whatproblems have in common (the key factors) and hence to deal with these. For example, an officeequipment supplier grouped the problems of excessive costs of development, limited productknowledge amongst service staff, poor sales performance and burgeoning inventories of parts andaccessories. The underlying key factor was the width of the product range. Reducing the number ofmodels available solved all the problems at one stroke.

Interactive question 2: Impact of strategic style on financial management[Difficulty level: Intermediate]

Assuming the existence of financial controls is at the heart of many accountants' jobs, what should be theimplications of a firm moving from strategic planning to strategic management for:

(a) Budgetary control and performance management

(b) Control over capital expenditure?


4 Doing without overarching visions: incrementalism

Section overview Strategic plans cannot be expected to work out as intended because management does not know

what will happen in the future: bounded rationality.

Therefore to some extent management must always be in a position to 'make it up as it goes along'.

Incrementalism describes how strategies emerge from the adjustments and bargaining of themanagement process.

Logical incrementalism suggests it is a learning process by management which discards bad ideas andadopts good ones.

4.1 Bounded rationalityStrategies are made in conditions of partial ignorance. In practice, managers are limited by time, by theinformation they have and by their own skills, habits and reflexes.

It can be argued that managers do not optimise (i.e. get the best possible solution). Instead the managersatisfices. In other words, the manager carries on searching until he or she finds an option which appearstolerably satisfactory, and adopts it, even though it may be less than perfect. This approach is known asbounded rationality.

4.2 IncrementalismIncrementalism refers to 'strategy in small steps' rather than radical shifts following the prolonged andcomprehensive search suggested by the rational planning approach.

The main reasons cited (by Lindblom) for organisations (particularly those in public administration)exhibiting this approach are:

The need to gain wide consent for changes means more radical options are rejected, or simply notsuggested

The personal career security of managers is not served by suggesting or being associated withunpopular or unsuccessful radical departures from tradition

Business strategy


A lack of external motivation for changes e.g.. lack of competition or external scrutiny

The inability to afford the costs associated with radical changes of direction (e.g. redundancy, training,capital expenditure)

The necessity to seek accommodation or compromise with interest groups makes policy-making aprocess of political bargaining.

4.3 Logical incrementalismIdentified by Quinn, logical incrementalism is a half-way house between the planning approach and theincrementalist approach.

It describes both the analytical and behavioural aspects.

Strategy is described as a learning process, by which managers have to deal with major internal orexternal events. For this reason managers deliberately keep their decisions small scale, so that thesedecisions can be tested.

Managers have a 'vague notion' as to where the organisation should be.

Strategies will be tested in small steps, simply because there is too much uncertainty about actualoutcomes.

Because precise objectives discourage experimentation by business units, these objectives arereformulated.

Managers as individuals avoid 'going out on a limb' with radical ideas in case their careers fail becausetheir ideas failed. They seek to get a consensus of support for ideas first.

5 Deliberate and emergent strategies (Mintzberg)

Section overview Mintzberg provides a framework that describes how strategic plans and incrementalism combine in

practice to form strategies.

The key point is to allow managers to 'craft' strategies from events as time progresses.

The conclusion is that a mixture of a strategic plan and management initiative will provide control butalso organisational learning.

5.1 Deliberate and emergent strategies

DefinitionsIntended strategies (which, if implemented, are referred to as deliberate strategies) are consciousplans imposed by management.

Emergent strategies are behaviours which are adopted and which have a strategic impact.



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EXTERNALANALYSIS

INTERNALANALYSIS

CORPORATEAPPRAISAL


GAP

STRATEGICCHOICE


REVIEW ANDCONTROL

STRATEGICANALYSIS

STRATEGICCHOICE

ANDSTRATEGY

IMPLEMENTATION

The diagram above shows that under an emergent approach to strategy the processes of choice andimplementation take place together. This is for two reasons:

1. Identity of decision and action. The managers thinking up and choosing the strategies are alsoresponsible for carrying them out.

2. Learning process. The choice of strategies interacts with implementation. Rather than having agrand scheme for the next five years management tries something out this year, learns lessons fromwhere it succeeds and fails, and develops new initiatives for next year.

5.2 Five types of strategiesMintzberg (The Strategy Process) identified the following.

Intended: The result of a deliberate planning process.

Deliberate: Where the intended plans have been put into action.

Unrealised: Not all planned strategies are implemented.

Emergent: Sometimes strategies are created by force of circumstances.

Realised: It can be seen that the final realised strategy results from a balance of forces of the othertypes of strategies.

These strategies are illustrated in the following diagram.

Business strategy


Strategies must still have purpose and this will be set by senior management. No actual strategy will bewholly deliberate or wholly emergent.

The task of strategic management is to control and shape these emergent strategies as theydevelop.

5.3 Crafting strategiesMintzberg uses the metaphor of crafting strategy to help understand his approach to strategicmanagement.

He uses the analogy of a potter's wheel. The clay is thrown, and through shaping the clay on the wheel, thepotter gives shape to they clay lump through a gradual process.

His thinking can be illustrated by contrasting the situation of a potter with that of a sales representativeoperating in a more commercial environment



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AU

Interactive question 3: Six Continents hotels [Difficulty level: Intermediate]To what extent does the example of Six Continents and the global hotel industry (below) illustrate themodels of strategy-making described in this chapter?


Global hotel chains

The hotel industry is embracing globalisation. International chains are encircling the world, swallowing localoperations on an almost daily basis.

Tom Oliver, chief executive of the UK group, Six Continents Ltd (formerly Bass Hotels and Resorts), says:'Brands are everything as travel becomes increasingly trans-border, hotels which aren't carryinginternational brands simply don't deliver the same rate of revenue per room'. The company was unwittinglypushed into the hotel trade by [the then] UK Trade Secretary Margaret Beckett, who thwarted the group'sambitions to become a global brewer by blocking the purchase of Carlsberg-Tetley.

The market is changing. In the US, 75% of hotels have a well-known brand, compared with just 35% inEurope. Lesley Ashplant, a hotels expert at PricewaterhouseCoopers, says: 'Europe is the single largesttourist destination in the world. It has 6m hotel rooms under fragmented ownership. There are clearopportunities in scale, in taking advantage of branding and advanced technology.'

Scale

Size is becoming important as expectations rise international business travellers want internetconnections, widescreen televisions, faxes delivered and push-button blinds in every room. All of thisrequired investment. Servicing the demands of business customers requires employing more staff than mostindependent operators can afford.

Technology

Hi-tech reservation systems are also emerging as a crucial factor. In an industry where 75% of costs are staffwages, any savings elsewhere are precious. Between a third and half of hotels' revenue comes from foodand drink, but these only contribute 20% to 30% of profit. Attempts to make hotel restaurants moreattractive have generally failed.

Yes

Business strategy


Much more profitable are the rooms themselves. The main thrust, therefore, for most operators, is onimproving occupancy. Loyalty card schemes are becoming increasingly elaborate.

Branding

There will be limits to the creeping internationalisation of European hotels. One CEO says: 'The US is awide-open country if you want a hotel, you can just build it. In Europe, there's much less opportunity fornew-builds so you get a lot of conversions, They're harder to fit into the specific model of the US chain'.

It is difficult to turn a 17th century Provenal chteau into a Holiday Inn, so some independent operators stillprosper. This is bad news for the ideal guest of a multinational chain, who likes to wake up anywhere in theworld in the knowledge that the bathroom is on the left, the blinds are blue and the phone is on the wall,six and a half inches above the bedside table.

Interactive question 4: Superware products [Difficulty level: Exam standard]Superware Products Ltd (hereafter Superware) was formed in 20X9 by three colleagues who had left amajor software house to work on the development of accounting software for small businesses. Superwarecurrently (20Y4) employs 18 staff at the company's head office in Chittagong, and a further eight regionally-based salespeople in various parts of Bangladesh.

Company structure

The three directors of Superware are Paul Smith (Managing), Karl Lagerfeld (Sales) and Christian Dior(Development). They each have a small team reporting directly to them and they meet on a daily basis ifthey are in the office, to discuss the business and to brainstorm a little over coffee. All three directors comefrom a background of software sales to small and medium-sized organisations. Chris is responsible for sixproduct development staff and two administrators. His staff work full time on developing and upgrading theSuperware product, and meet regularly with the sales staff to get feedback from customers and users. Inaddition to the eight salespeople, Karl has two sales administrators and a secretary working for him. Thesales staff meet at head office on a weekly basis and the administrators work closely with the financialaccountant. Paul takes responsibility for the remaining staff who perform general administration, receptionand clerical tasks. His only specialist staff member is Zandra who, with her assistant, maintains a high level ofcontrol over the company's financial reporting and accounts.

Planning and control

Once a year the directors, under the guidance of Paul and with assistance from Zandra, agree a full budgetfor the next twelve months. The budget is always based on the previous year's performance, withadjustments for known changes such as inflation, costs and forecasts of demand from sales staff feedback.During the discussion of the budget Zandra calculates various ratios to illustrate trends in the company'sprofitability and liquidity, and the budget is normally adjusted to ensure that trends are as desired. Whenthe budget is agreed, a copy is sent to the bank for its records. 18

Each month throughout the year Zandra produces a management report which shows performance againstbudget for every cost and revenue heading. This report, together with a commentary written by Paul, issent to each director and they pass copies to their key staff after removing any sensitive information. Fourtimes each year the remaining periods are reforecast and the adjusted end-of-year position (or out-turn) isalso compared with the budgeted position. Paul writes an additional commentary in these months whichidentifies key actions to bring performance back to budget.

The current position

The directors are presently involved in finalising the budget for 20Y4 and are concerned that the process ofbudgeting is becoming increasingly meaningless. The results for 20Y3 show a significant shortfall in bothturnover and profitability against both the budget and third quarter out-turn for the year, yet Paul is stillinsisting that the 20Y4 budget should be the 20Y3 budget uplifted for inflation and known changes. Duringthe 20Y4 audit Zandra mentioned the directors' concerns to the audit manager who suggested that you, asa recently qualified member of the audit team with an interest in strategic planning, might be able to advisethe company on how to proceed. The directors have agreed that this would be useful, and have arranged ameeting at which you can meet them and discuss the role of planning within Superware.



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Requirement

Prepare briefing notes to present at a meeting with the directors of Superware at which you will beexpected to discuss the following.

(i) The current planning process.

(ii) Weaknesses of the current planning process.

(iii) Recommendations for improvement of the planning process. Recommendations should be clearlyjustified.


6 Positioning versus resource-based views of strategicadvantage

Section overview Early prescriptions for strategy emphasised that success lay in 'fitting' the organisation to its

environment better (e.g. satisfying shareholders and customers and staying on the right side of theauthorities).

Modern resource-based views emphasise that long-term success lies in organisations, 'playing to theirstrengths' or 'competences'.

For competences to be capable of leading to superior competitive performance they must fit thepresent environment, stretch the firm to innovate and able to admit leverage to gain extra value innew lines of business.

6.1 Positioning view of strategic advantageA firm or industry faced with the imminent obsolescence of one of its core products, must decide whetherto orientate strategy around external customer needs or rather orientate strategy around its internalresources and competences. Choosing the first is an example of a positioning approach. Choosing thesecond applies the resource-based approach.

Characteristics of the positioning approach are:

A focus on customer needs and adapting products, and the process of making them, to any changesin these needs

The gaining of a superior position against rivals through analysis of the industry and marking andadopting strategies to gain relative market share or reduce relative costs

The assessment of relations with stakeholders such as government, shareholders, suppliers anddistributors to use better relationships as a source of advantage

Seeking to gain preferential access to resources such as materials, low cost labour and scarceskills.

The significant feature is the belief that successful strategy involves the business adapting to its environment.

The positioning view will be seen in this text in the work of Michael Porter (notably his five forces model ofindustries and his three generic competitive strategies) and in the sections dealing with marketing.

No writer will seriously question the need for successful products and good relations in assisting in makinga firm successful from one year to the next. However, the positioning approach has been criticised asinadequate as an approach to sustainable success over decades with particular regard to the following.

Business strategy


Product life-cycle means particular products will become obsolete so today's successful marketposition will become a liability in the future. For example, Levi Strauss jeans and apparel have declinedin popularity since they were immensely successful in the 1960's and 1970's.

Stakeholder groups, such as political parties, will decline in influence so relations with them will notsustain the firm.

Long-term technological changes will eliminate cost advantages or technical superiority of a givenproduct.

Perpetual change of the organisation's skills base and products will be disruptive and eventually leads thefirm into fields in which it has little expertise.

Worked example: Typewriters and PCsConsider the following two examples relating to former typewriter manufacturers whose products weremade obsolete by the PC. Olivetti tried, and failed, to build up a position in PCs. Remington, on the otherhand, moved into products using similar technical and manufacturing skills as were used in manufacturingtypewriters.

Although PCs and typewriters (even electronic typewriters) are used for similar word processing tasks, andboth have a similarly configured keyboard, the underlying technology producing them is fundamentallydifferent. (A PC is also more versatile than a typewriter.)

The point to grasp is that the market need the ability to type letters and reports was the same but thecompanies lacked the competences to manufacture and market PCs successfully. Olivetti tried and failed toaddress the same market need. Remington looked for different markets with which to use its competences.

You might want to consider a further development. Will the PC be used to watch television? Will televisionbecome the Internet's way into most homes? The mergers between content owners and communicationsproviders may be intended to build crucial resource competences (for example, AOL TIME Warnercombines an Internet service provider with an owner of magazines and a film company other examplesinclude Virgin/NTL and the various elements of News Corporation).

6.2 Resource-based view of strategyTechnological changes can destroy industries:

Downloads may damage the businesses engaged in the manufacture, distribution and retailing of CDsand DVDs

Mobile phones threaten the fixed telephone line industry

Genetic modification of organisms can compromise the pesticide and pharmaceutical industries.

The resource-based view is an inside-out view of strategy. Firms do not look for strategies external tothem. They develop or acquire resources and competences, create new markets, not just reacting to thosealready there, and exploit them.

Johnson, Scholes and Whittington say successful strategies require strategic capability.

Resources and competences are needed for the successful execution of defined strategies.

Fit Resources must be available to fit with the current product-market demands andcurrent needs.

Stretch This means being at the leading/shaping edge of new strategic developments in theindustry. This suggests that the organisation's ambitions cannot be met with currentresources and competences. Ambition should outpace resources.

Leverage Existing resources are used in many different ways, so that extra value is extractedfrom them.



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Creation of new markets

A fundamental point made by Prahalad and Hamel (Competing for the Future) is that markets are not 'given'. Theycan be created by corporate action. Companies do not merely 'satisfy' customer needs: they 'create' them.

For example, mobile phone ringtones drew on the mobile phone as fashion accessory, not just acommunication device. Prior to the launch of ringtones there was no ringtone market in existence.

Interactive question 5: Sony and the chicken and egg question[Difficulty level: Easy]

Sony Corporation is often cited as an example of a firm that creates industries through leverage of corecompetences in miniaturisation of electronic circuitry. This has created markets such as:

Personal audio: Initially through the transistor radio but later the famous Walkman cassette player

Home gaming: Via the PlayStation which revolutionised the graphic and interactive quality of gamesthough use of PC technology

Compact home Sony were joint copyright holder of CD technology and have produced the mainaudio/video: contender for high density DVD technology to support HD and other applications

Was it these technologies that built a whole new industry or was the industry already there?


According to the resource-based view of strategy the role of resources is more than simply toexecute strategies determined by desired positions in product markets. Rather, the focus of the strategistshould be on resources and competences. These are assets for the long term. Such a combination ofresources and competences takes years to develop and can be hard to copy.

Some of the implications are explained in the table below.

Factor Environment/ industry-based view Resource-based view

Profitability Industry profitability determined by thefive competitive forces. Position of acompany in the industry determines itsprofitability.

Corporate profitability based onsustainable competitive advantageachieved from the exploitation of uniqueresources.

Approach Outside-in, i.e. consider outsideenvironment and markets then thecompany's ability to trade in theseconditions.

Inside-out: consider key resources first,then how to exploit competitiveadvantage in available markets.

Diversity Maintain diversified portfolio of products(see BCG matrix) to spread risk andgenerate cash in changing marketconditions.

Focus only on products where companyhas a sustainable competitive advantage.'Stick to the knitting'.

Key focus Industry orientation and positioning in themarket.

Focus on core competences whichcompetitors do not possess and will finddifficult to copy.

Business strategy


7 Planning horizon

Section overview Strategic management and strategic planning are often distinguished from operational issues by the

length of time concerned: the horizon.

Most managers have the need to deliver short-term results which can take priority over longer termstrategic development of the business.

The pressure for shorter term results and shorter planning horizons can come from the ownership ofthe organisation, its capital structure, the industry it is in, its environment and the nature of itsmanagement.

7.1 Short, medium and long term planningThere terms are often used but remain ill-defined. A rule of thumb is:

Short term: Horizon of 1 3 years

Medium term: Horizon of 3 10 years

Long term: 10 + years

7.2 Short run/long run trade offManagers and businesses are frequently evaluated on short term successes such as profits. Strategic thinkingrequires that managers consider the long term growth and survival of the business.

Therefore management is required to balance short and long term considerations.

7.3 Influences on planning horizons Nature of ownership

Firms with shareholders are obliged to ensure some financial return each year to their shareholders.Making sufficient profits each year will normally be needed in order to promote shareholder value.State-owned organisations do not have this obligation (but they will have different ownership issues tocontend with, e.g. the changing nature of political agendas, different governments' attitudes to funding,state control etc).

Capital structure

Some investors, such as banks or private equity investors (sometimes called venture capitalists) do notrequire short term profits. Banks will continue to lend providing assets cover the loans and interest ispaid. Private equity investors require profits and share values to grow over a 5 10 year period togive them a substantial capital gain when they sell their holding.

Nature of industry

Industries such as aircraft development, satellite communications and oil pipelines require large capitalinvestments that take a long time to build and to pay back. Long-term plans are essential to justifythese.

Nature of business environment

In rapidly changing environments it is likely that long-term planning may be futile. For example,industries such as bio-technology, home entertainment and mobile communications where effects oftechnology and legislation are hard to predict, will tend to avoid plans and instead adopt a strategicmanagement approach within a series of short-term plans.



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Nature of management

Long-term planning is a skill and it is time consuming. Some entrepreneurial managers will avoid it , forexample because they lack the time or skill, or because they are unwilling to become 'tied down byred tape'. Others, for example the management of family firms, are reluctant to consider changing the'way it has always been done'.

Interactive question 6: McDonnell Douglas [Difficulty level: Intermediate]Consider the following:

With $14bn in sales, McDonnell Douglas was one of the US's largest defence companies. It had done a goodjob of turning around the C-17 transport plane program, which a few years earlier was nearly cancelled bythe Air Force over technical flaws and delays. However, its commercial aircraft arm, Douglas Aircraft, was adisaster, caught in the tailwinds of Boeing and Airbus. In 1994, McDonnell Douglas's board shockedinvestors by bringing in an outsider a brash, controversial former GE executive, Harry Stonecipher asCEO.

At first Stonecipher insisted that the firm was committed to building passenger airplanes. At one point hesaid the business was so good that if Douglas wasn't already in it, 'we would be looking for a way to get in'.Unfortunately, years of under-investment had resulted in planes with little imagination, and Douglas wouldneed to spend billions to catch up. Ultimately Stonecipher wasn't willing to make that investment, preferringto focus on short-term stock performance. This involved the reduction of discretionary spending on thingssuch as research and development, training and better production equipment. There was also a closercontrol of costs.

During his tenure as CEO, McDonnell Douglas's stock quadrupled (Stonecipher carries a laminated copy ofthe stock chart in his briefcase), but critics say the failure to invest in R&D would have been disastrouseventually. 'This is a company that would have gone out of business in five years', says Richard Aboulafia, ananalyst at Teal Group, an aviation research firm. 'It was headed to oblivion.'

Eventually, McDonnell Douglas merged with Boeing.

What planning horizon would you expect a firm in this industry to follow?

What factors in the competitive environment, pressure from investors or his personal incentivepackage could explain the incoming CEO's short-term approach to strategy?


8 Strategy and ethics

Section overview Morals and ethics involve doing the 'right' thing. This may not always be the same as 'best for the

individual manager or for the organisation as a whole'.

Some ethical imperatives may be enshrined in laws but ethics and law are not the same thing.

Ethical issues exist at the level of the individual, the business or, at its widest, corporate socialresponsibilities.

The desire by management to act ethically affects the scope of strategies adopted but also requiresthat management keep an eye on the ethical consequences of its operations.

Business strategy


8.1 Ethics and moralsThe meanings of the words 'ethics ' and 'morals' are intermingled and difficult to distinguish. For example,the Concise Oxford Dictionary offers the following two definitions.

Morals are 'standards of behaviour or principles of right and wrong'.

Ethics are 'the moral principles governing or influencing conduct'.

Such definitions mean that we could use the two words interchangeably.

Another area in which ethics can be invoked is Corporate Social Responsibility (CSR). CSR will bediscussed in Chapter 2.

For present purposes the field can be simplified by suggesting that business ethics exist at three levels.

1 Personal ethical behaviour

This relates to the way you as an individual conduct yourself. Bad behaviour would include bullying,stealing, discrimination against a colleague and giving away business secrets to a rival.

2 Business ethics

This is the way a firm as a whole behaves. Bad conduct here would include offering bribes to wincontracts, distorting the accounts, victimisation or discrimination against certain workers and tellinglies to regulators.

3 Corporate social responsibility

This is the belief that a firm owes a responsibility to society as well as to shareholders. Bad behaviourwould be pollution, mass redundancies and dangerous products.

8.2 Ethical stance of corporationThere is a range of possibilities:

Meet minimum legal obligations and concentrate on short-term shareholder interests;

Recognise that long-term shareholder wealth may be increased by well-managed relationships withother stakeholders (corporate governance approach)

Go beyond minimum legal and corporate governance obligations to include explicitly the interests ofother stakeholders in setting mission, objectives and strategy. In this context issues such asenvironmental protection, sustainability of resources, selling arms to tyrannical regimes, paying bribesto secure contracts, using child labour etc would be considered

Public sector organisations, charities, etc where the interests of shareholders are not relevant.

The ethical stance taken is often reflected in the mission statement.

8.3 Regulating ethical behaviourEthical business regulation operates in two ways:

1 Forbidding or constraining certain types of conduct or decisions: e.g. most organisations haveregulations forbidding ethically inappropriate use of its their IT systems. Similarly many will forbid theoffering or taking of inducements in order to secure contracts.

2 Disclosure of certain facts or decisions: e.g.. because the board sets its own pay they disclose it,and sometimes the reasons behind the awards, to shareholders in final accounts.

In your Professional Stage 'Assurance' paper you studied the following codes potentially binding on you as atrainee Chartered Accountant.



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The IFAC Code of Ethics adopted by ICAB for members

Five fundamental principles:

1 Integrity: Straightforward and honest in business and professional relationships

2 Objectivity: Not allow bias, conflict of interest or influence of others to override professional orbusiness judgement

3 Professional competence and due care: Be aware of all prevailing knowledge necessary to giveprofessional service and apply the same diligently to affairs of the client in accordance with technicaland professional standards

4 Confidentiality: Respect the confidentiality of information acquired as a consequence of professionalor business engagements and not use the same for personal advantage or that of third parties

5 Professional behaviour: Comply with laws and regulations and not to discredit the profession.

Interactive question 7: Why have ethical standards? [Difficulty level: Intermediate]The Ethical Code of the ICAB seeks to regulate the behaviour of accountants. Why does ICAB have this?


8.4 Conflict between ethics and businessPotential areas for conflict between ethics and business strategy include:

Cultivating and benefiting from relationships with legislators and governments: Suchrelationships may lead politicians to ignore the national interest (e.g. of the people who elected them)to line their own pockets.

Fairness of labour contracts: Firms can use their power to exploit workers, including child labour,and subject them to unethical treatment in areas where jobs are scarce.

Privacy of customers and employees: Modern databases enable tracking of spending formarketing purposes or to discriminate between customers on basis of their value. Staff can be subjectto background checks and monitored through their use of email and the location of their mobilephones.

Terms of trade with suppliers: Large firms may pay poor prices or demand long credit periods andother payments from weak suppliers. This has been a particular criticism of large retail food stores inNorth America and Europe who are blamed for the impoverishment of farmers at home and indeveloping countries.

Prices to customers: Powerful suppliers of scarce products such as energy, life saving drugs orpetrol, are able to charge high prices that exclude poorer individuals or nations. Examples here includeanti-aids drugs to Africa or purified water to developing countries.

Managing cross cultural businesses: Different countries of operation or different ethnic groupswithin the domestic environment can present ethical issues affecting what products are made, howstaff are treated, dress conventions, observance of religion and promotional methods.

Business strategy


8.5 Simple ethical tests for a business decisionCompliance with Codes of Conduct will be mandatory for members and employees subject to the Codes.

Ethical tests enable managers to consider ethical consequences of decisions where

The wording of codes may be imprecise

Where situations arise that are not covered in the Codes.

The Institute of Business Ethics offers three tests to apply to decisions to assess whether they raise ethicalissues:

1 Transparency: Do I mind others knowing what I have decided?

2 Effect: Who does my decision affect or hurt?

3 Fairness: Would my decision be considered fair by those affected?

8.6 Impact of ethics on strategyEthics can be thought of as impacting at several points in the strategy process.

In the formulation of strategic objectives. Some firms will not consider lines of business for ethicalreasons.

External appraisal will need to consider the ethical climate in which the firm operates. This will raiseexpectations of its behaviour.

Internal appraisal: Management should consider whether present operations are 'sustainable', i.e.consistent with present and future ethical expectations.

Strategy selection: Management should consider the ethical implication of proposed strategies beforeselecting and implementing them.



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Summary and Self-test

Summary

Strategy

Ethics

Business strategy


Self-testAnswer the following questions.

1 For each of the following issues facing an airline, identify the appropriate level of strategy.

(a) The decision whether to use permanent or contract staff to work as ground crew.

(b) The decision whether to develop a no-frills alternative airline to existing full-service airline.

(c) Buying aviation fuel futures to hedge against rising fuel costs.

2 Using Mintzberg's 5Ps model classify the following.

(a) Issuing statements to mislead rivals into anticipating new product launches with the intention toflush out their product plans.

(b) The habit of a conglomerate to buy mature businesses, turn them round, and sell them at aprofit.

(c) The decision by an insurance company to launch an on-line claims management service becausemore people are relying on the Internet and rivals have not done it yet.

(d) The belief of the Disney Corporation Inc. that parents will buy its products because the 'magickingdom' is safe for children.

(e) Supermarkets buying development land across emerging economies where authorities haveindicated future housing will be built.

3 List stages in the rational model of strategic planning.

4 What 3Cs does Ohmae say should be addressed by strategists?

5 List the five types of strategy identified by Mintzberg (hint: not the 5Ps)

6 Define 'fit', 'stretch' and 'leverage' as used by Johnson, Scholes and Whittington

7 Ashdene Homes

Ashdene Homes is a house builder, having considerable knowledge and experience in the regionaround Dhaka where the current housing shortage is centred. The company caters for the mid tolower end of the market, with prices normally below CU500,000, on relatively small and individualsites which tend to be too large for the resources of local builders but too small for the high volumenational house builders. Any mass release of land for development in the South East due togovernment initiatives is likely to be centred in one area. The development of any such land wouldtake many years given delays within the planning process.

The company, worth CU67 million, has looked like a takeover target for a while but unfortunately, thecompany's reputation for internal control has been damaged somewhat by a qualified audit statementlast year (over issues of compliance with financial standards) and an unfortunate internal incidentwhich concerned an employee expressing concern about the compliance of one of the company'sproducts with an international standard on fire safety. She raised the issue with her immediatemanager but when she failed to obtain a response, she decided to report the lack of compliance to thepress. This significantly embarrassed the company and led to a substantial deterioration in theirreputation, especially as there have been more press releases about the company's failure to adhere tothe high welfare, health and safety, financial, marketing and ethical standards that the founder practicedwhen he started Ashdene Homes.



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Requirements

(a) Outline the implications of poor ethical standards and damaged reputation on the relationshipbetween the affected stakeholder groups and Ashdene Homes. (5 marks)

(b) What are the main issues concerned with corporate social responsibility and why might AshdeneHomes choose to act, or at least claim to act, in a socially responsive way? (10 marks)

(c) Explain, with reference to Ashdene Homes as appropriate, the ethical responsibilities of anaccountant both as an employee and as a professional. (10 marks)

(25 marks)

Now, go back to the Learning Objectives in the Introduction. If you are satisfied that you have achievedthese objectives, please tick them off.

Business strategy


Answers to Self-test

1 (a) Functional strategy: concerns HRM

(b) Corporate strategy: affects shape and scope of business

(c) Functional strategy: financial strategy to hedge risk

2 (a) Ploy

(b) Pattern

(c) Position

(d) Perspective

(e) Plan

3 (a) Corporate appraisal

(b) Mission and objectives

(c) Gap analysis

(d) Strategic choice

(e) Strategic implementation

4 Company

Customer

Competitor

5 Intended strategy

Deliberate strategy

Unrealised strategy

Emergent strategy

Realised strategy

6 Fit: Resources able to support current product-market demands and needs

Stretch: Firm should have resources at cutting edge of the industry or should seek to acquire them

Leverage: Resources can be used in many ways

7 Ashdene Homes

(a) When more than one stakeholder group has reason to question the otherwise good reputationof an organisation, the effect can be a downward spiral leading to a general lack of confidencewhich, in turn, can have unfortunate financial effects. In particular, however, poor ethicalstandards are likely to affect one or more of the organisation's interactions with:

Customers Customers will expect certain standards of health and safety and ethicalbehaviour from Ashdene Homes, especially regarding its treatment of employees. Therecent damage to their reputation may reduce confidence among customers leading toreduced sales - with a subsequent impact on corporate profits.

Shareholders Investor confidence is important in public companies and any reputationrisk is likely to be reflected in market value. Shareholders may invest in buying shares, ortheir wealth, tied up in pension funds, may be invested for them by investment firms. Thegrowth in ethical funds management where investment firms guarantee their customers notto invest in ethically-unsound organisations has led to company directors addressing theissue in earnest rather than giving it cursory attention.



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Senior management Poor ethical behaviour from them creates a poor perception ofthe organisation in the market. However, poor ethical behaviour from those below can alsohave a negative impact on such executives and make them wish to disassociate themselvesfrom a failing enterprise; the loss of key talent may be sorely felt by those who remain.

Employees Although not directly affected, poor ethical standards may leave theemployee feeling that they no longer have a worthy association with the firm, which maycause them to leave or be de-motivated as a result. Also, if the organisation exhibits poorethical standards, employees may feel that they either can or even should follow suit, and ageneral decline in standards will follow.

Suppliers Also not greatly affected, but it may be the case that suppliers decide not todeal with Ashdene Homes because they feel that the poor ethical standards will in someway implicate themselves.

(b) Corporate social responsibility (CSR) is concerned with companies acting in a socially responsibleway. It generally refers to business decision-making linked to ethical values, compliance with legalrequirements, and respect for people, communities and the environment.

There is a growing view that the best-managed companies are those that are aware of theirwider responsibilities to the social community and to the environment. In order to ensure that acompany honours those responsibilities and protects its reputation, it is necessary to embedthese core values into the policies, practices and programmes of the company's systems anddecision-making processes.

The CSR issues that affect companies vary according to the nature of the company but there arefive broad areas where CSR might be relevant:

To treat employees fairly and with respect

To operate in an ethical way and with integrity

To respect human rights

To sustain the environment for future generations

To be a responsible neighbour in the community.

There are several reasons why Ashdene Homes might choose to act in a socially responsible way:

They might want to act voluntarily in order to avoid legislation. For example, to avoidexcessive pollution of the environment in their methods of working and by buying materialslocally to reduce transport use and avoid allegations of their suppliers adding todeforestation.

They might want to act in an ethical and socially responsible way by making the houses eco-friendly, reducing carbon emissions, having rigorous health and safety checks on theirbuilding sites and incorporating recycled materials where possible into the buildings.

They might want to respond to pressure from shareholders. Some institutional shareholdershave a policy of investing only in socially responsible and ethical companies.

To protect their reputation.

The risk to the company's reputation from adverse publicity about social and environmentalfactors is always difficult to assess. Ashdene Homes will be aware that adverse publicity can havea damaging effect on customer goodwill and sales and profits. Management might need toconsider CSR as a strategic issue when evaluating their strategic options.

(c) Ethical responsibilities of a professional accountant

A professional accountant has two 'directions' of responsibility: one to his or her employer andanother to the highest standards of professionalism.

Business strategy


Companies provide a Code of Ethics that all employees are expected to follow to maintain aculture of corporate ethics. Issues to be included in such a Code of Ethics are:

Avoiding conflicts of interest

Compliance with laws and regulations

Rules about disclosure or avoidance of opportunities for personal gain through use ofcompany property or their position in the company

Confidentiality extending to absolute discretion of all sensitive matters both during andafter the period of employment

Fair dealing with customers, suppliers, employees and competitors

Encouragement to report illegal and unethical behaviour

The responsibilities also include the expectation that the accountant will act in shareholders'interests as far as possible and that he or she will show loyalty within the bounds of legal andethical good practice.

In addition to an accountant's responsibilities to his or her employer, there is a further set ofexpectations arising from his or her membership of the accounting profession. In the firstinstance, professional accountants are expected to observe the letter and spirit of the law indetail and of professional ethical codes where applicable (depending on country of residence,qualifying body, etc).

In any professional or ethical situation where codes do not clearly apply, a professionalaccountant should apply 'principles-based' ethical standards (such as integrity and probity) suchthat they would be happy to account for their behaviour if so required. Finally, and in commonwith members of other professions, accountants are required to act in the public interest thatmay involve reporting an errant employer to the relevant authorities. This may be the situationthat an accountant may find him or herself in at Ashdene Homes. It would clearly beunacceptable to be involved in any form of deceit and it would be the accountant's duty to helpto correct such malpractice if at all possible.



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Answers to Interactive questions

Answer to Interactive question 1

Mittal Steel Lakshmi Mittal

News Corporation Rupert Murdoch

GE (General Electric) Jack Welch

TWA Howard Hughes

Dell Michael Dell

Tata Group Ratan N Tata

Hutchison Whampoa Li Ka-shing

Amazon Jeff Bozos

Virgin Group Richard Branson

Apple Steve Jobs

Microsoft Bill Gates

Sony Akio Morita

Amstrad Alan Sugar

Ford Henry Ford

Answer to Interactive question 2(a) Responsibility centres (budget centres) would take more responsibility for budget setting and might

become profit and investment centres instead of just revenue or cost centres. Budgets would cease tobe based on targets from a long range plan and instead would become stretch targets to improvemanagerial performance. Managers would be increasingly incentivised by bonuses based on the financialperformance of business units and of the company as a whole. Emphasis on non-financial strategictargets would increase with less emphasis on short term financial targets.

(b) Capital expenditure would be decentralised. There is a danger that capital expenditure would becomemore subject to the whims of the strategic manager.

Answer to Interactive question 3Emergent strategy Unwittingly pushed into hotel trade by blocking off purchase of rival

Unrealistic strategy Failed purchase of Carlsberg-Tetley Making hotel restaurants attractive

Deliberate strategy Upgrading of rooms

Improved cooking systems

Exclusion of independent operator by enhancing service levels and harnessing ofbrand and economies of scale

Business strategy


Answer to Interactive question 4Briefing notes

To The Directors

From The Auditor

Date Today

Subject The strategic planning process of Superware Products Ltd

Current planning process

Currently the planning process in Superware can be illustrated by use of the following model.

CONSTRAINTSAND CHANGES

CORPORATEAPPRAISAL

IMPLEMENTATIONAND REVIEWOBJECTIVES

Weaknesses

This model is commonly used in smaller organisations, and until 20Y3 was perfectly suitable for thepurposes of Superware. However, such an 'incremental' model, combined with a 'budget-constrained'management style such as that practised by Paul, does have some weaknesses in a dynamic environmentsuch as the IT industry. These weaknesses, as illustrated by Superware, are as follows.

(i) The use of corporate appraisal at the first stage tends to lead to a blinkered view of strategy,which will necessarily focus on the current products and markets of the company.

(ii) The lack of environmental analysis throughout the strategy process, with the exception of knowneconomic changes as a constraint to business, leads to opportunities and threats not being considereduntil too late.

(iii) An incremental approach which led, particularly in 20Y3, to an optimistic plan being formalisedwhich was possibly not achievable.

(iv) The modification of plans to meet personal objectives of the directors, regardless of theachievability of those objectives.

(v) The short-term nature of the process, concentrating on a twelve month planning horizon, will tendto give a distorted view of the future and lead to a lack of direction and consistency in the goalscommunicated to managers and staff.

Having said all this, the process does have one significant strength in that the focus on implementation andreview is very thorough, particularly in the revision of out-turns and the targeting of performanceimprovements.

Recommended modifications

It is recommended that the company modify the planning process in line with the following model.



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EXTERNALANALYSIS

INTERNALANALYSIS

CORPORATEAPPRAISAL


GAP

STRATEGICCHOICE


REVIEW ANDCONTROL

STRATEGICANALYSIS

STRATEGICCHOICE


The detailed content and major changes from the current process are explained as follows.

(i) External environmental analysis is a formal analysis of the context in which the company doesbusiness. It may well include studies of market size, customer needs, competitor behaviour andchanges in technology. Such a study should concentrate on major changes which will affect Superwareeither as opportunities or threats.

Examples of such changes might include an emerging customer need for a tax module to cope withpay and file, demand for an alternative platform such as UNIX, or an opportunity to launch a totallynew product line to meet unsatisfied demand.

Internal analysis of the organisation will identify the current strengths and weaknesses, not merelyin terms of the financial performance but also some of the qualitative aspects.

Examples might include the organisation and resources of the company.

(ii) Corporate appraisal summarised by SWOT.

(iii) Objectives should be agreed, taking into account the requirements of all interested parties, which areperceived as achievable by the managers and staff. Objectives should also take into account the risksand opportunities identified as a result of the environmental analysis.

(iv) Strategies can then be formulated, based on all the previous stages, to achieve the companyobjectives, protect against threats and exploit opportunities.

Examples of such strategies might be product or market development, or even diversification into,for example, management software for doctors or schools.

(v) Implementation and review of strategy should still take place as currently, but as part of theimplementation phase it will be necessary to re-evaluate the organisation structure and such tacticalissues as investment.

(vi) The time horizon for the planning process should be extended in order to give better strategicvisibility and to introduce some consistency between years. Due to the volatile nature of the ITindustry, it is probably unnecessary to plan more than three years in advance.

Although the changes outlined seem a radical departure from the process currently carried out inSuperware, the benefits in terms of business performance should be significant.

Business strategy


Answer to Interactive question 5Like the chicken and egg question this can't be answered.

Sony provided a new way to make sales by fulfilling the same need that had previously been satisfied bybooks and magazines, conventional television programming and personal conversation. So in a sensethe need was already there and an industry was already supplying it.

The value extracted from the needs through sales of players and programmes and the creation of arange of associated products, made this an industry of colossal scale and, through it, paved the way fordigital players and portable gaming consoles in which Sony retains a key position.

Answer to Interactive question 6An aircraft manufacturer should have a long-term planning horizon because the development of a newaircraft will take up to a decade and, given their huge capital costs, will need to remain in service and be fit-for-purpose, for over twenty years. An example of this is the Boeing 747 Jumbo Jet which is still in serviceand being made, having first flown in the 1970s).

The short term focus could have come from several causes:

That the style of the CEO was better at cost cutting and stealing assets than longer term strategicthought, i.e. he did not have 'the mind of the strategist'.

That the CEO realised the shareholders would not support growth because all the remainingshareholders required a dividend from their holdings in a mature business.

That it was a deliberate strategy to increase the value of stock ready for takeover by a large aircraftmanufacturer in an industry characterised by increased concentration.

That the CEO was incentivised by the value of stock (e.g. he held stock options, or had bonusesrelated to earning per share growth, share price growth or level of ROCE).

Answer to Interactive question 7The work of the accountancy profession is crucial to the effective working of the capital markets (that is themechanism for the provision of finance to business and the protection of those who supply it). Put verysimply, investors may lose financially if their investment decisions are based on inadequate information andthis would deter further investment. A loss of confidence in financial reporting could therefore underminethe economy.

Working to the highest standards of ethics and professionalism allows the public, investors and regulatorsto have confidence in the profession. Your ethical behaviour can protect not only your own reputation butthat of the profession as a whole. We have a collective responsibility to apply principles, such as integrityand objectivity, that will enable high quality financial reporting, and effective financial management andbusiness practices; to protect investors, businesses and the wider public interest.

Documents

Chap - 1 Strategy and Business