files.transtutors.com€¦ · AO/QUA/0414 – V1.0 II Acknowledgements . We are grateful to the following contributors for their authorship of the material contained in this document

AD01

Strategic Contexts

AO/QUA/0414 – V1.0

Festus Kesho - Namibian German Institute for Logistics - April 2016

AO/QUA/0414 – V1.0 II

Acknowledgements

We are grateful to the following contributors for their authorship of the material contained

in this document.

Ben Bvepfepfe FCILT

Clive Pidgeon FCILT

Nick Wright CMILT

David Green FCILT

Tony Evans MILT

© Chartered Institute of Logistics and Transport (UK).

All rights reserved. No part of this publication may be reproduced, stored in a retrieval

system, or transmitted, in any form or by any means, electronic, mechanical,

photocopying, recording or otherwise, without the prior written permission of the Chartered

Institute of Logistics and Transport (UK).


AO/QUA/0414 – V1.0 III

Introduction to Study

Welcome to the study guide for the unit AD01 Strategic Contexts, which is intended to

assist learners in successfully completing the Chartered Institute of Logistics and

Transport (UK) Level 6 Advanced Diploma.

These icons below represent key activities to be undertaken – specific activities have been

set to assist learning and references are made to the recommended textbook.

The aims are clearly set out at the beginning of each element and key benchmarks are

highlighted as tasks on each of the sections to enable you (the learner) to monitor your

own progress.

Tasks

Case study

Suggested reading

Essential Reading

Johnson, G., Scholes, K., Whittington, R., Angwin D., Regnér, P., (2013). Exploring

Corporate Strategy. (Text and Cases). 10th ed. Pearson. ISBN: 9781292002545.

Lynch, R., (2005). Corporate Strategy. 4th ed. Financial Times / Prentice Hall. ISBN:

9780273701781.


AO/QUA/0414 – V1.0 IV

Other Recommended Text Books

Ansoff, I., (1990). Implanting Strategic Management. Financial Times / Prentice Hall. 2nd

ed. ISBN: 9780134518817.

Brealey, R. and Myers, S., (2013). Principles of Corporate Finance. McGraw Hill Higher

Education. Global edition. ISBN: 9780077151560.

Burns, T. and Stalker, G., (1994). The Management of Innovation. OUP Oxford. New

Edition. ISBN: 9780198288787.

Edwards Deming, W., (2000). Out of the Crisis. MIT Press; 1st MIT Press Ed edition.

ISBN: 9780262541152.

Gardner, J.R., Rachlin, R. and Sweeney, H.W.A., (1986). Handbook of Strategic Planning.

John Wiley & Sons. 99th ed. ISBN: 9780471881278.

Hanson, J.L., (1979). Opportunity Cost. A Dictionary of Economics and Commerce. 5th ed.

MacDonald & Evans Plymouth.

Henderson, D.R., (2006). Opportunity Cost. The Concise Encyclopaedia of Economics.

Library of Economics and Liberty. http://www.econlib.org/library/Enc/OpportunityCost.html

Lewin, K. (1976). Field Theory in Social Science. Selected theoretical papers. University of

Chicago Press. ISBN: 9780226476506.

Mintzberg, H., (1978). The Structuring of Organisations – a Synthesis of the Research.

Prentice Hall. ISBN: 9780138552701.

Moss Kanter, R., (1992). The Change Masters – Corporate Entrepreneurs at Work.

Cengage Learning EMEA. ISBN: 9780415084673.

Ohmae, K. (2000). The Invisible Continent: Global Strategy in the New Economy. Harper

Business. ISBN: 9780060197537.

Peters, T., (1989). Thriving on Chaos: Handbook for a Management Revolution. Harper

Business. ISBN: 9780060971847.

Porter, M.E., (2004). Competitive Strategy: Techniques for Analysing Industries and

Competitors. Free Press; New edition. ISBN: 9780743260886.


http://www.econlib.org/library/Enc/OpportunityCost.html

AO/QUA/0414 – V1.0 V

Porter, M.E., (2004). The Competitive Advantage. Free Press; New edition. ISBN:

9780743260879.

Rushton, A., Croucher, P., Baker, P., (2014). The Handbook of Logistics and Distribution

Management. Kogan Page; 5th ed. ISBN: 9780749466275.

Skinner. J., (2006). Submission by J Skinner to Consultation on the Energy Review.

Retrieved December 13, 2006. http://www.dti.gov.uk/files/file31356.pdf

Whittington, R., (2000). What is Strategy – and Does it Matter? Cengage Learning EMEA;

2nd rev. ed. ISBN: 9781861523778.

Worsford, F., (2001). The Green Logistics Company. Croner CCH. ISBN: 9781855246140.

Learners are also advised to use the World Wide Web and read as widely as

possible, including trade publications, magazines and study guides recommended

in these study materials.


http://www.dti.gov.uk/files/file31356.pdf

AO/QUA/0414 – V1.0 VI

Study Techniques:

You should manage your time and set realistic targets for each element of the

specification. This unit consists of 60 guided learning hours. This figure is only a guide and

learners must be aware that more time may be needed in some circumstances.

Work in quiet areas, with minimal distractions.

Make clear notes and bullet points where appropriate – make use of the highlighted

sections and icons within the course manual to guide you to the key information. Refer to

the recommended reading as directed. Develop all core information with wider reading.

Always remember that you will learn better when you have support available and that you

follow the learning process of reflecting, reconstructing alternative ways and then revising

what is done or thought about the subject. Support can be available via the Institute’s

Knowledge Centre as well as from colleagues and friends. Learning skills are also

important; more information is available in the bibliography at the end of this unit.

Contact the Knowledge Centre at the Institute’s Corby UK head office for a

comprehensive source of information that will help and support you throughout

your learning.

Opening Times: 09.00 to 17.00hrs (Monday–Friday)

Tel: +44(0)1536 740167

Fax: +44(0)1536 740102

E-mail: [email protected]

Website: www.ciltuk.org.uk


mailto:[email protected]

http://www.ciltuk.org.uk/

AO/QUA/0414 – V1.0 VII

Contents

Introduction to Study ........................................................................................................... III

Essential Reading ............................................................................................................... III

Other Recommended Text Books ...................................................................................... IV

Study Techniques: ............................................................................................................. VI

List of Figures/Tables ...................................................................................................... VIII

Abbreviations ..................................................................................................................... IX

Glossary of Terms ............................................................................................................. XI

Course Overview .............................................................................................................. XV

Introduction ...................................................................................................................... XVI

1. The Global Business Environment ....................................................................... 19

1.1 Learning Outcomes .............................................................................................. 19

1.2 Introduction ........................................................................................................... 19

1.3 Theories and Models ............................................................................................ 39

1.4 Additional Global Factors and Considerations ...................................................... 49

1.5 International Agreements and Conventions .......................................................... 55

2. Resource Planning, Allocation and Use ............................................................... 61

2.1 Learning Outcomes .............................................................................................. 61

2.2 Introduction ........................................................................................................... 61

2.3 Organisational Indicators ...................................................................................... 63

2.4 Non-Financial Indicators ....................................................................................... 73

2.5 Strategic Investment ............................................................................................. 83

2.6 Cost Comparison and Choice ............................................................................... 89

2.7 Pricing Policies ................................................................................................... 101

2.8 Resource Planning for Stakeholder Objectives .................................................. 105

3. Sustainable Corporate Development .................................................................. 115

3.1 Learning Outcomes ............................................................................................ 115

3.2 Introduction ......................................................................................................... 115

3.3 Concepts of Sustainability .................................................................................. 115

3.4 The Impact of an Organisation on the Environment ........................................... 133

3.5 The Impact of Strategic Relationships ................................................................ 141

4. Competition and Risk ......................................................................................... 149

4.1 Learning Outcomes ............................................................................................ 149

4.2 Introduction ......................................................................................................... 149

4.3 Competitive Structures ....................................................................................... 149


AO/QUA/0414 – V1.0 VIII

4.4 Collaborative Structures ..................................................................................... 157

4.5 Models of Competition ........................................................................................ 161

4.6 Risk Analysis ...................................................................................................... 169

4.7 Performance Failure ........................................................................................... 175

Bibliography ..................................................................................................................... 185

Websites .......................................................................................................................... 186

List of Figures/Tables

Figure 1.1 Business Operations Model ........................................................................... 20 Figure 1.2 SWOT Analysis .............................................................................................. 39

Figure 1.3 STEEPLE Analysis ......................................................................................... 41 Figure 1.4 Ansoff Matrix .................................................................................................. 44 Figure 1.5 Deming’s 14-Point Plan .................................................................................. 45

Figure 2.1 Price/Earnings Ratio ...................................................................................... 64 Figure 2.2 Return on Interest (ROI) ................................................................................. 66 Figure 2.3 Return on Capital Employed (ROCE) ............................................................. 66 Figure 2.4 ROCE/Profit Graph ........................................................................................ 69 Figure 2.5 Earnings Yield ................................................................................................ 70 Figure 2.6 Example of a Flow Chart used for Impact Identification ................................. 75 Figure 2.7 Supply-Chain Efficiency ................................................................................. 85 Figure 2.8 Stock Keeping Unit (SKU) Matrix ................................................................... 90

Figure 2.9 Outsourcing Process ...................................................................................... 93 Figure 2.10 Power/Dynamism Matrix ........................................................................... 108 Figure 2.11 Power/Interest Matrix ................................................................................ 109

Figure 3.1 Fairtrade Symbol .......................................................................................... 125 Figure 3.2 Typical Pre-Building Project Environmental Checklist .................................. 135 Figure 3.3 Simple Strategic Alliance ............................................................................. 143

Figure 4.1 Example of Oligopolies ................................................................................ 152 Figure 4.2 The Five Forces Framework ........................................................................ 162

Figure 4.3 Porter’s Diamond ......................................................................................... 163 Figure 4.4 Porter’s Strategy Clock ................................................................................ 170

Figure 4.5 Contingency Planning Process .................................................................... 178 Figure 4.6 Contingency Plan Format ............................................................................. 180

Table 2.1 Interpretations of ROCE ................................................................................. 67 Table 2.2 ROCE Comparisons ....................................................................................... 68 Table 2.3 ROCE and Net Profit Relationship ................................................................. 68


AO/QUA/0414 – V1.0 IX

Abbreviations

3PL Third Party Logistics

ADR European Agreement concerning the International Carriage of Dangerous Goods by Road

ATP Accord Transport Perissables

BA British Airways

BSC Balanced Scorecard

BP British Petroleum

BT British Telecom

CAP Common Agricultural Policy

CBA Cost-Benefit Analysis

CILT Chartered Institute of Logistics and Transport

CMA Competition and Markets Authority

CMR Convention relative au contract de transport international de marchandises par route

CSR Corporate Social Responsibility

DCF Discounted Cash Flow

DEFRA Department for Environment, Food and Rural Affairs

EFTA European Free Trade Area

EIA Environmental Impact Assessment

EU European Union

FTA Free Trade Area

GATT General Agreement on Tariffs and Trade

GDP Gross Domestic Product

GNER Great North Eastern Railway

IT Information Technology

ITT Invitation To Tender


AO/QUA/0414 – V1.0 X

JV Joint Venture

KPI Key Performance Indicator

MDG Millennium Development Goals

MEP Member of the European Parliament

NAFTA North American Free Trade Area

NSCC The National Specialist Contractors Council

P/E Price Earning

PFI Private Finance Initiative

PPP Public–Private Partnership

R&D Research and Development

ROCE Return on Capital Employed

ROI Return on Investment

ROSF Return on Shareholders' Funds

RPC Reduced Pollution Certificate

SCOR Supply Chain Operations Reference

SIA Social Impact Assessment

SKU Stock Keeping Unit

STEEPLE Social, Technological, Environmental, Economic, Political, Legal, Ethical

SWOT Strengths, Weaknesses, Opportunities, Threats

TIR Transports Internationale Routiers

TUPE Transfer of Undertakings (Protection of Employment) Regulations 2006 (UK)

UNICEF United Nations Children's Fund

VED Vehicle Excise Duty

WFP World Food Programme

WTO World Trade Organization


AO/QUA/0414 – V1.0 XI

Glossary of Terms

ABC Analysis – Sometimes referred to as Pareto Analysis or 80/20 rule, this is an

inventory planning and control technique that aims to classify stock into categories – for

example, A category representing high volume/throughput or value items, B representing

medium and C low volume/throughput or value.

Agile Supply – The capability of a supply chain to be flexible in order to respond to

turbulent and changing customer needs.

Asset – An item that is a permanent part of the company. It has a ‘capital’ value that the

shareholders have paid for. Fixed assets are the things like buildings, vehicles, plant, and

computers that the company owns. The company also has stocks and debts, so these are

also part of the assets or ‘working capital’. ‘Intangible’ assets include the knowledge and

skills of staff and the database of customers.

Batch Size – The quantity of an individual item that is moved or produced at one time and

treated as a single entity for that distribution or production process.

Business Environment – Comprises the external and organisation’s internal factors that

have an impact on key decisions regarding strategy formulation and implementation.

Business Ethics – Behaviour or moral conduct of organisations and their employees in

pursuit of corporate objectives.

Contingency Planning – Often applied in risk management, contingency planning is to

devise or develop plans that should take care of outcomes not initially expected from

original plans.

Corporate Governance – Relates to managerial responses to systems or mechanisms

that are in place to direct and control the organisation.

Corporate Social Responsibility (CSR) – Responses by organisations through actions

and initiatives that consider economic, environmental and social demands and

expectations from all stakeholders.

Critical Path – A project management term that determines all the tasks that have no float

or margin of time. Each task follows on from the other immediately. An example is a

project which takes five days with five tasks. If each task takes a day there is no margin for

any delays.


AO/QUA/0414 – V1.0 XII

Depreciation – The annual loss of value of an asset.

Environmental Analysis – Also referred to as environmental scanning, this is a strategic

analysis process used to assess the influence of internal and external factors on corporate

strategy.

Environmental Impact Assessment – A procedure for considering the potential

environmental effects of land use change, which helps to inform decision making and

enables decisions on land use change to be taken with full knowledge of the likely

environmental consequences.

Environmental Scan – Also sometimes referred to as environmental analysis, this is a

strategic analysis process used to assess the influence of internal and external factors on

corporate strategy.

Failsafing or Pokayoke (the original Japanese name) – A system or plan that comes into

operation in the event of something going wrong, or that is in place to prevent such an

occurrence.

Fair Trade – The principle that organisations in developed countries should pay fair prices

for trade of raw materials sources from developing countries.

Geocoding – The latitude and longitude of postcodes and location names.

Green Logistics – Encompasses all attempts by organisations and respective supply

chains to measure and minimise impacts of operations on the environment.

Kaikaku – Japanese term referring to step change.

Kaizen – Japanese term referring to continuous incremental development.

Lead Time – The time from there being a requirement for goods or services to them being

available to use. E.g. for a warehouse stock item it is the time between the stock reaching

the reorder level and the time the replenishment is available on the shelf (including

ordering time, supply time, delivery time and recording time).

Lean Supply – The philosophy of providing excellent customer service with a minimum of

cost and no waste, and continuously improving the offering through company-wide

involvement.


AO/QUA/0414 – V1.0 XIII

Monopolistic Market – An imperfect market represented by many sellers supplying

differentiated products and services to consumers.

Monopsony – is a state where a business has total market domination in terms of

employment.

Network Diagram – A project management tool for drawing all of the tasks in a project as

a collection of interlinking boxes. They are linked by precedence and the scheduled time of

completion. Network diagrams can graphically represent a critical path.

Oligopoly – An imperfect market controlled by a few main suppliers.

Organisational Culture – The underlying assumptions by an organisation’s employees or

its stakeholders on the way business is conducted; these are the traditions, norms and

attitudes considered acceptable or not acceptable in an organisation.

Pareto Analysis – Sometimes referred to as ABC Analysis or 80/20 rule, this is an

inventory planning and control technique that aim to classify stock into categories – for

example, ‘A’ category representing high volume/throughput or value items, ‘B’

representing medium and ‘C’ low volume/throughput or value.

Planning Horizon – The total number of years or months over which the future plan

extends.

Pokayoke – Any mechanism in a lean manufacturing process that helps an equipment

operator avoid mistakes.

Public–Private Alliances – These are partnership arrangements between governments

and private-sector organisations where public-sector projects are funded through private-

sector funding.

Risk Analysis – The process of identifying and assessing the impact of potential factors

on performance of the organisation.

Seven Wastes Concept – These are related to the seven wastes of lean manufacturing:

Transport, Inventory, Motion, Waiting, Over-Processing, Overproduction, Defects.

Stakeholder – An individual or group of people that can be affected by or can affect the

organisation’s operations and achievement of its goals.


AO/QUA/0414 – V1.0 XIV

Stakeholder Mapping – A stakeholder management process of identifying and assessing

the power and influence of an organisation’s stakeholders in order to devise methods for

dialogue and maintaining relationships.

Sustainability – A concept that aims to achieve current objectives without compromising

the ability and capacity for future generations.

SWOT Analysis – An analysis tool that considers internal strengths and weaknesses and

the external opportunities and threats in strategy development and implementation.

Tort – A civil, not criminal, wrong; an injury against a person or property, with the

exception of breach of contract. In the UK, as in most countries, torts are enshrined in

‘common law’ which means they are not written down, but are established by court

precedent.

Units of Measure – The units in which something is counted (hours, miles, metres, kg,

tonnes, £, $, euros).

Value Analysis – A systematic approach to analysing a product or service with the

intention of improving its effectiveness.

Value Stream Mapping – A process improvement tool adopted in supply-chain operations

to redesign processes to be lean and more productive.

Work Breakdown Structure – A hierarchical diagramming of a collection of tasks in a

project, which looks like an organisation chart. Tasks are grouped together if they are

similar. One cannot view critical path or judge precedence in a work breakdown structure,

but they are simple to create.


AO/QUA/0414 – V1.0 XV

Course Overview

In this unit learners will be encouraged to examine organisational business

environments from a global perspective through case studies and models.

The unit looks at resource availability, utilisation and how managers

decide on the best approach to make the most of the limited resources

available to their organisation’s operations. Stakeholder and relationship

mapping tools will clarify the different priorities in the competition for

resources. Cost-benefit analysis is examined in order to make strategic

decisions and investment appraisal, with the principles of risk being

considered.

Appropriate strategies should be developed to assist operations

management within organisations to deliver products and services in a

sustainable way.

The final element in this unit considers the various types of competition

and their impact; it also examines contingency planning and trade-offs

between operations. The implication of performance on an organisation’s

supply-chain operations is explored.

Elements

1. The Global Business Environment

2. Resource Planning, Allocation and Use

3. Sustainable Corporate Development

4. Competition and Risk

These four elements clearly relate to strategic factors and considerations

for organisations seeking to operate in a global environment, whilst

maximising precious resources, seeking sustainability and analysing

market competition and associated risks.


AO/QUA/0414 – V1.0 XVI

Introduction

Strategy may not readily lend itself to a simple definition. It consists of

many factors and characteristics that will vary from business to business

and organisation to organisation. Strategic decisions must be considered

in the long term and measured throughout their term, irrespective of the

business sector.

In order to define strategy it is useful to consider broad characteristics that

should be present within any strategy for it to be sufficiently robust enough

to add value to a business.

Below are summaries of six general characteristics which any business

strategy must contain:

1. Strategy must incorporate the entire scope of an organisation’s

activities and the priorities of these activities. This characteristic sets

the overall parameters of the organisational structure and

involvement.

2. Strategy must match the activities of the organisation to the

environment within which it operates. This characteristic considers

the economic, political, cultural, market, competitive and customer

environments that enable the business to identify all the factors

which have the potential to impact upon it currently and in the future.

3. Strategy must match the organisation’s activities to its resource

levels and capabilities. This characteristic allows the organisation to

assess opportunities and threats related to the provision and cost of

current resource levels and any future required levels.

4. Strategy needs to have the ability to influence operational decisions

and practices and to enact change throughout the whole

organisation. This involves everything from procurement policies

through to HR policies with their ability to dovetail into the overall

strategy of the business.

5. A business strategy should be able to reflect the aspirations,

attitudes and beliefs of the people who have the power to influence

the organisation. In short, it should reflect where the strategy makers

want to take the organisation and how they intend to get there.


AO/QUA/0414 – V1.0 XVII

6. Finally, business strategy must be sufficiently robust to drive and

bring about long-term changes within organisations. It must be

properly communicated, committed to providing all the required

resources and monitored throughout.

Using the general thrust of characteristics above, Johnson and Scholes go

on to conclude that ‘Strategy is the direction and scope of an organisation

over the long term: ideally, which matches its resources to its changing

environment and in particular its markets, customers or clients so as to

meet stakeholder expectations’.


AO/QUA/0414 – V1.0 XVIII

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AO/QUA/0414 – V1.0 19

1. The Global Business Environment

1.1 Learning Outcomes

On completion of this element you should be able to:

Understand the impact of globalisation on organisational strategy;

Understand relevant international agreements and conventions.

1.2 Introduction

In the first element of this unit we will examine organisational global issues

and strategies, and look at how businesses act to use information and

some of the existing analytical models available to them in making

strategic decisions for their operations. Finally, we will scrutinise the

potential choices and possible options available in order for organisations

to achieve sustainable strategic objectives.

1.2.1 The Business Environment

Business organisations differ in many ways, but as Worthington (2006)

noted, all business organisations have one common feature, and that is

the transformation of inputs into outputs. The key issue is that this

transformation process or the business activities are performed within an

external environment that will influence the organisation’s activities.

Organisations cannot ignore these often volatile and complex external

environmental factors as they impact on the success or failure of their

operations.

The basic business operation model as shown in Figure 1.1 overleaf

reveals how the organisations interact with a number of players and

actors, in pursuit of the operations. For example, all organisations require

inputs in order to produce a service or product. Businesses organise

themselves in a way that supports their purpose in order to produce the

right products and service for the market. Businesses are operating in

market conditions that are dependent on other factors from the external

environment. The fact is that businesses are entities made up of


20 AO/QUA/0414 – V1.0

interrelated parts that are also intertwined with the external environmental

factors.

Figure 1.1 Business Operations Model

This means that organisations need to develop robust systems and

management practices that scan the business environment for

opportunities and threats that are likely to have an impact on the success

of the operations.

By scanning the business environment, managers are not only able to

identify factors within the immediate operational environment, i.e.,

competitors, suppliers, customers and labour markets, but also the

general and contextual environment, such as political, economic, socio-

cultural, technical and global factors, with the aim of making appropriate

decisions in the above interactions.

Inputs

Land, buildings Labour Raw materials Technologies Information Managerial skills

Transformation process

Management decision Employee activities Technology and operational methods

Outputs

Products and services Financial results Customer satisfaction Information Ideas Waste

The business environmental

factors

BUSINESS

ORGANISATIONS

Stop and think for a moment!!!

Even the world’s largest and most powerful organisations are affected

by the ever-changing business environment. Read or listen to current

news and you are likely to recognise some of the organisations that are

on the news reporting changes to structure, market declines or product

ranges downsizing. What factors could have influenced the current state

of affairs for the organisation?


AO/QUA/0414 – V1.0 21

It is possible that factors in the immediate or contextual environment that

we identified above could have influenced the current state of affairs and

decisions that the organisations have adopted. Therefore, analysing

business environment is an essential part of management that requires

sufficient time and effort. First, we look at the global business environment

and its influence on strategy formulation.

1.2.2 Global Factors

There are many factors

that have influenced

international businesses’

operations, but key to

this is the ongoing

economic integration and

growing interdependency

of countries worldwide.

Integration is central to globalisation of operations, which has resulted in

the widespread diffusion of products, technology, and knowledge

worldwide, regardless of where businesses are located or owned.

Many modern businesses actively develop strategies aimed at seeking out

opportunities to perform in the global context. However, it should also be

recognised that other organisations are driven towards ‘globalisation’ by

such things as changing trading patterns, political factors, cultural

diversity, market forces and customer expectations. These companies are

disadvantaged by the external pressures resulting from the associated

external factors and can suffer negatively from not having been able to

properly assess the factors before encountering them.

This ‘firefighting’ at strategic level often makes the parent organisation

vulnerable to competition, particularly to required changes which may

need to be taken into account at short notice and possibly at considerable

cost.


22 AO/QUA/0414 – V1.0

Given that the development of a strategy to enable an organisation to

operate in a global environment is a positive business factor, it follows that

the strategy will be more robust if it has been developed considering what

the main organisational drivers are and what implications there may be for

the organisation relating to each of these driving forces.

The picture is complex when considering business drivers, because one

needs to consider different levels and types of drivers. Examples of some

of the different categories of ‘globalisation drivers’ may include some, or

all, of the following:

Political;

Cultural (ethnic/social);

Cultural (business);

Economic;

Socio-economic;

Business;

Change;

Market forces;

Environmental;

Fashion.

These drivers are diverse and varied. This diversity will mean that any

strategy development will need to consider the driver source and assess

the importance to the organisation of the positive and negative elements

and implications for the organisation of each driver in turn.

If we examine each of the above areas we can expand to consider the

associated issues and implications for organisations seeking to either

enter into or increase activity on the global stage. Given the multinational

readership of this unit, it will be impossible to accurately consider detailed

issues but the principles will remain valid and examples used should be

able to be assessed against national and business strategies across all

regions and throughout all business sectors.


AO/QUA/0414 – V1.0 23

Please note that many of the driving factors are linked and interwoven with

others. For instance, political factors will have cultural, economic and

environmental links, whilst economic and socio-economic factors are also

inextricably linked.

1.2.3 Political

Because the provision of

transport and goods are

essential elements in the

development of modern

societies, it may be a good

starting point if we begin by

considering political drivers

towards globalisation using the UK/EU countries to emphasise some of

the issues.

Whatever international supply-chain-related, or transport-related,

discussions or decisions are held or made, either in Brussels or in

Westminster, these will have a direct impact upon the logistics and

transport sector. These decisions need to be considered either as issues

to be included for any future global strategy in the future, or as issues to

be incorporated as elements of an existing global strategy.

In the 1970s the UK government took the UK into the then EEC, now the

EU. Although originally considered a ‘common market’, the present EU is

now a political and economic major global trading entity. It is currently a

free trade area of 25 member states which has been developed to

strengthen the global trading power of Europe as a whole, and the

member states in particular.

The EU is able to trade globally mainly due to the formation of its

overseeing political structures and the varied and changing composition of

its ruling bodies and individual posts.


24 AO/QUA/0414 – V1.0

Whilst the EU Commission is the overseeing body in the hierarchy of EU

management, it is the Commission that develops and agrees the future

strategy of the EU, including how the EU aligns itself from a global

perspective.

All member states have to comply with the political decisions made by the

EU; although at times some member states may feel slightly

disadvantaged, the economies of scale and any trade-offs are factors of

everyday EU policy which is aimed at benefits for the Union as a whole. In

a similar way, many international supply-chain companies also form

partnerships and alliances aimed at benefiting from economies of scale

and sourcing and procurement rationalisation. Many of the major

international third- and fourth-party operators have some co-operation

policies with each other and/or practise intra-trade in exactly the same

way, albeit on a smaller scale, to member countries belonging to free trade

areas.

Ultimately, the EU and major businesses are similar in their outlooks and

their goals. The success of the EU is largely attributed to an alignment of

political will, aimed at enabling it to become a self-sustaining intra-trading

partnership that is able to employ and support all the members belonging

to it and able to trade externally as a major player on world markets. For a

logistics company to succeed, it too must employ its resources effectively,

have seamless intra-trade activity and be able to benefit through

economies of scale in major markets. The only difference is that logistics

companies and organisations have no control (or very little control) over

the political direction in which they have to operate.

Examples of how EU or UK politics affects business strategy include

conforming to new laws or directives such as the working time directive.

Many of the political factors involve safety issues (i.e. new digital

tachograph regulations and working hours rules), changes to tax rules,

and employment rights, such as the minimum wage and ageism rules. The

majority of political influences often add costs to a business operating

strategy, but must be balanced with the view that everyone benefits from a

safer and cleaner environment.


AO/QUA/0414 – V1.0 25

Please note there are other political drivers in some regions that you may

relate to; for instance, the North Atlantic Free Trade Area, (NAFTA), one of

the world's largest free trade areas, which now links 450 million people

producing $17 trillion worth of goods and services.

Another political setting is the Association of Southeast Asian Nations

(ASEAN), which was established on 8th August 1967 in Bangkok,

Thailand, with the signing of the ASEAN Declaration (Bangkok

Declaration) by the Founding Fathers of ASEAN, namely Indonesia,

Malaysia, Philippines, Singapore and Thailand. One of the aims of the

political formation of this group is given as: ‘To collaborate more effectively

for the greater utilisation of their agriculture and industries, the expansion

of their trade, including the study of the problems of international

commodity trade, the improvement of their transportation and

communications facilities…’ (Source: www.asean.org)

In addition, it is the logistics and transport sector which must

accommodate any resulting demand or loss of demand arising from

political decisions and which must operate under ever-increasing political

control and legislative constraint, whilst meeting ever-increasing consumer

expectations.

However, in addition to controls and legislative constraints, political factors

can also provide opportunities for businesses. For example, at the NAFTA

Free Trade Commission (FTC), in Mexico on 10th January, the NAFTA

Ministers discussed ways to help SMEs organisations take advantage of

the export opportunities that the NAFTA provides. This was on the basis

that SMEs faced major challenges relating to access to information on

export opportunities, hence the publication of a guide designed to answer

fundamental questions about starting to export or import within the trade

zone. The point is that these are factors within the political external

environment that managers can well use to best advantage in the design

of business strategies.


http://www.asean.org/

26 AO/QUA/0414 – V1.0

It is difficult to be specific when discussing political globalisation drivers.

Politics will ultimately have an impact upon all the other drivers, whether

these are cultural, social or economic. It is important for the strategist to

note and record political patterns, counter political change in a timely

manner and adopt political ‘best practice’ into supply-chain strategies.

1.2.4 Cultural (Ethnic/Social)

In relation to globalisation, culture

leads supply-chain companies to

consider many issues that are

closely aligned with politics.

Political alignments and cultural

alignment alliances are often

inseparable. Therefore those

organisations developing strategic

plans involving global trade must

evaluate which countries are

culturally acceptable to the organisation, including any partners, sponsors,

end users and customers.

There are many countries where Western supply-chain companies would

be openly criticised, should they seek to trade there. However, it should be

recognised that many of the debarring factors can often be minimised by

the use of third parties providing materials and goods from debarred

countries by having them made available in another country. These goods

are perhaps relabelled, or rebadged, to disguise their true origin. In such

cases, where this is done with the knowledge of the purchasing

organisation we enter the realm of ethical trade, which is covered later in

this unit.

In the strategic context, culture is a difficult factor to assess, because it is

changeable and subject to massive acceptance or rejection at short notice

and without prior notification. A single incident can make products from a

specific cultural centre simply no longer acceptable to the traditional user.

All the modern logistician can do is to recognise the changeable nature of

culture encountered in modern society, and monitor culturally associated

or sensitive issues and events which may impact upon their business.


AO/QUA/0414 – V1.0 27

Ethnic/social culture will always have some impact upon a shift towards

globalisation, because work cultures vary. Cultural issues such as

religious holidays are often difficult for Western businesses to

accommodate, because of differing national attitudes towards religion.

Nevertheless, they need to be fully assessed and analysed as they will

undoubtedly have associated cost and time factors which will impact a

global supply chain.

An example of an ethnic/social culture issue which affects the global

environment is the use of child labour in some countries which receive

outsourced manufacturing from Western businesses. Nike and IKEA have

both been accused of taking advantage of weak labour laws in countries

with cultures that customarily use child labour.

1.2.5 Cultural (Business)

In this section we need to

examine the diversity of

business culture relating to

a globalised business. In

Western business culture, it

has been surmised that we

are experiencing a ‘blurring’

of cultures, brought about by

the recent expansion of the EU. This has been caused by increased

relocation and movement of people seeking to gain from economic

improvements in different countries. Labour has been encouraged to

relocate to expanding economies to fill positions left vacant by a lack of

local human resources.

To the modern operations this influx of cultural diversity carries with it the

associated increase in diverse customer demand. It also carries

associated changes to traditional trading patterns and sources as well as

traditional working and employment patterns, particularly where large

numbers of ethnic workers may be employed. Lessons can be learned

from this cultural shift, especially if modern managers are able to

accommodate cultural diversity into the workplace.


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Business cultural diversity incorporates two extremes of corporate culture

and entrepreneur culture. Corporate culture is a more managerial style

and is most effective in larger organisations, whereas entrepreneurial

culture is more business focused and ideal for smaller firms. It is accepted

that these two extremes often exist within the same business or become

interwoven to produce a hybrid business culture within a specific business.

It also sees changes in corporate business culture to accommodate the

available human resources. This is often the case in countries such as the

USA, the UK and Western Europe, which have a rich and valuable cultural

mix within the working population.

To meet this challenge, many successful companies have changed from

traditional and autocratic styles of management to a more democratic,

participative style of management where all cultures in the business can

readily identify with the main aims and objectives of the business. It may

be argued that this cultural shift is designed to develop a sense of

belonging, and that many senior managers and directors also believe it

increases productivity and creates competitive advantage.

Cultural customer diversity is also a factor to be considered, especially

where specific cultural or ethnic groups have requirements that are not

associated with other customer groups. For instance, different food items,

clothing or packaging must be accommodated if a company is to ensure

they are satisfying the total market available to them. If cultural customer

diversity is ignored, this might well lead to the possible resistance or non-

acceptance of products and services by customers in the culturally

exclusive market being targeted by the global business.

Within business, discriminatory practices can be less readily identified

when attempting to trade globally as a manager from a developed

Western economy may not be totally familiar with cultural or religious

beliefs in certain countries. For example, some cultural groups prefer to

work with members of the same group, gender or sect.


AO/QUA/0414 – V1.0 29

One of the dangers of business culture is to assume that Western

business practice is accepted globally as the norm. With regard to

strategy, Whittington (2001) notes that Western classical strategy’s

obsession with advanced planning is not a cultural feature of Asian

countries. Their global strategies concentrate on growing market share

and taking advantage of local competencies and skills. A good example is

Toyota, which has global operations and is a net exporter of cars.

Conversely, it cannot be assumed that ‘Japanese’ business practices will

work in all cultures. For example, Just-in-Time (JIT) practised at Toyota

and Nissan in the UK utilises large goods vehicles making frequent

deliveries. This is very different from that used in Japan, which often

involves small vans making multiple deliveries every day.

1.2.6 Economic

Economics relate to the

need for a business to

satisfy demand through

supply at a minimum

cost and at maximum

profit. This economic

factor is a major factor

leading to the desire of

many organisations to trade globally and benefit from the reduced

material, labour and manufacturing costs of different countries.

By increased global activity, organisations are able to benefit from the

economies of scale enjoyed by larger organisations, thereby enhancing

their economic advantage over their competitors.

An example of an economic factor that affects the global environment is

the price and availability of oil. As a key raw material powering business,

any factor that appears to influence the availability of oil will send prices

upwards. Usually supply is not actually affected, only the confidence of

global markets. It is the possibility that supply could be affected which

influences the global economic price of oil.


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The complexity of economic markets cannot be divorced from these

unpredictable but associated factors. An understanding of economics can

be used by organisations seeking to gain a competitive advantage through

such factors as where they elect to source or process goods. Often these

choices are driven by the low-cost economy of the chosen country.

1.2.7 Socio-Economic

Economic expansion

brings social

improvement and

social improvement

drives further economic

expansion, which fuels

further demand.

Demand is the key,

because demand

requires supply and both require transport and logistics in order to be

satisfied. Social improvement is therefore having a direct influence on

economic expansion through higher demand for goods and services.

In a global context, any business considering a strategy for the future

involving the participation of a foreign stakeholder needs to consider the

social position of any overseas partners and their employees intended to

be a part of the strategy. While emerging economies are able to provide

cheap labour, if other organisations seeking to exploit low costs in the

same overseas country also enter the marketplace, this could mean that

competitors would have the same competitive advantage and expected

savings maybe lost through price competition.

In the same vein, as employees reap the benefits and gain new skills,

resulting from many global initiatives, they often aspire to improved

circumstances and relocate or drive up labour costs through their

increased expectation.


AO/QUA/0414 – V1.0 31

Currently, China may seem to be a centre of low-cost manufacturing, but

will this still be the case in ten years’ time? How long will the Chinese

government and its citizens continue to provide services at such a low

price which are becoming essential for Western business success? It is

unrealistic not to expect the fastest-growing economy in the world to

increase wage and other manufacturing costs eventually.

In addition to the socio-economic issues related to supply and demand, we

need to consider the socio-economic factors surrounding the customer.

For instance, what if a recession was experienced and the supply chain

involved was in luxury or non-essential items? How would you, as a

strategist, be able to factor this into your strategy?

The examples above highlight that socio-economic factors are both wide-

ranging and powerful. In the past they have contributed to the changing

focus of many major organisations, especially those producing or

supplying low-quality or low-cost items. The phrase ‘Made in Japan’ is an

example of the power of socio-economics, which was originally associated

with poor quality and low-priced goods, but now acts as a label for high

technology and quality products.

From a transport perspective, socio-economic factors affect the use of

buses and people’s attitude to other forms of public transport. Comparing

the attitude of rail users in the UK with those in Japan highlights this point.

UK rail services have an appalling record of punctuality with delays of ten

minutes being common, which, as passengers appear to accept it, is

something which is difficult to change. The bullet train (Shinkansen) in

Japan, by comparison, is punctual within one or two minutes. Anything

longer would not be tolerated.

All these issues have clear links to the improved socio-economic standing

of citizens and need to be included when considering a globalisation

strategy.


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1.2.8 Business

Whilst seeking economic advantage, other business considerations must

be factored in if the organisation is to maximise benefits and realise the

true costs of intended extension into a global market. For instance, when

an organisation actually succeeds in the quest to ‘go global’, one of the

benefits it will enjoy is the advantage of global sourcing. This will enable it

to source from the cheapest country at any one time. Global

manufacturing can take advantage of similar benefits in sourcing which

can help create a global brand. Businesses such as Coca-Cola, Nike, HP,

Nissan, and Microsoft consciously choose low-cost countries for

manufacturing and sourcing of raw materials.

However, whilst economic advantages may be available by operating in a

global context and many economies of scale can be gained, there can be

factors that affect the parent business in a negative manner.

For the business concerned the principal issues which may have negative

effects are:

1. extended supply lead times;

2. extended and often unreliable transit times;

3. increased inventory;

4. multiple consolidation and break bulk choices;

5. inter and intra-modal freight movements;

6. increased costs.

These negative elements need to be factored into any strategy aimed at

globalisation. The true cost associated with these negative factors can be

extremely difficult to accurately assess until they are actually encountered.


AO/QUA/0414 – V1.0 33

1.2.9 Change

It has been noted by some commentators that business

management is almost entirely the management of

change. To manage an operation involves being able to

manage the change which will be encountered.

Change in external environmental factors dictates and

drives strategy formulation and strategy implementation.

This means that strategies must be sufficiently flexible to

absorb minor and predicted changes with the minimum of

disruption and to be revised as effectively and efficiently

as possible where major unplanned or unpredicted changes require major

revisions.

Change managers accept that change is best managed where there are

clear lines of communication between all the stakeholders. Change is

most successfully implemented when it is properly communicated to

affected staff in a timely and appropriate manner. In a global context this

can be a difficult task when issues such as geography, language, culture

and work ethics may be barriers to effective and timely communication.

Change as a driver of strategy must be assessed in two ways, because

change can be triggered by internal and external factors. Therefore, both

of these factors need to be addressed in order to achieve an integrated

approach to change. Some consider that change is regularly initiated by

some form of innovative activity. However, evidence from authorities and

writers on change such as Burns and Stalker, Peters, and Moss Kanter

have noted that change may not necessarily be linked to innovation,

although innovation is an attractive aspect.

Research into resistance to change can be traced to the early 1950s and

the likes of Kurt Lewin. The classic ‘field-force theory’ operates on the

principle that the more one side pushes the more the other side will resist.

In business terms, this means that resistance is often experienced at first-

line manager level where most change has the most dramatic effect and

where most change requires most effort to cater for it.


34 AO/QUA/0414 – V1.0

When an organisation seeks to acquire a global portfolio change it will

certainly be a driver for change, and one that will require excellent change

management and an understanding of the associated benefits and

possible pitfalls.

When considering any global factor that affects strategy, the implications

of change must be considered, as implementation might cause negative

issues which could negate any benefits gained from the change in global

strategy. An example could be the appointment of a lead logistics provider

to manage all collections from a Far Eastern supplier. This move might be

resisted by local staff, who might try to control transport deliveries directly

instead of using the new logistics provider.

1.2.10 Market Forces

Market forces may appear to

be an obvious cause of

change in a global context.

However, market forces, in a

similar manner to ethnic and

social culture, can be

unpredictable, making them

difficult to predict in the longer

term. This presents problems for strategists attempting to formulate a

global policy.

Market forces include competitive forces and rely upon an organisation

being able to identify its strengths and weaknesses, its market position

and the competitive advantage it has within its markets of operation and

influence. These may be readily identified now, but they may be

unpredictable for the future. This is particularly true in volatile markets

where materials and products are derived from unstable countries where

some economies can begin to expand at an accelerated rate.

We are able to emphasise the volatility of markets by noting the effect of

market forces on the price of oil on the world market. Oil has risen in price

due to the continued growth of the Chinese economy and limits in supply

caused by events in the Middle East.


AO/QUA/0414 – V1.0 35

However, recent development on the oil markets has seen a decline in the

price of oil and is likely to have a ripple effect on some industries that rely

heavily on oil as a key input into business operations. It is important to

note that most if not all businesses depend to a large extent on fuel

supply. This had an associated effect on the price of steel on the world

market as China demanded more raw materials to build. Any global

strategies formulated without recognition of these two major factors would

almost certainly be inaccurate.

This underpins the need to have strategies capable of absorbing whatever

the effect is of rising or falling markets, and for global factors to be

constantly monitored.

1.2.11 Environmental

All supply-chain strategies

must, by their nature, have a

knock-on effect on the

environment. This is

particularly true when we

consider globalisation. It is

the environment which, in recent years particularly, has been used as both

a marketing tool and as a means whereby a company is able to

demonstrate its involvement in the present and future quality of life across

the planet as a whole. For example, many organisations aspire to the

principles of ‘green logistics’, a term used extensively as a marketing tool

and a statement of intent.

Frank Worsford (2001) stated in ‘The green logistics company’ that, in

practice, there would always need to be a trade-off between environmental

impact and commercial success. This trade-off is readily apparent if we

consider the JIT principles being applied to many successful supply

chains. It is further demonstrated by the changes in traditional modal

optimisation in order to meet ever-increasing customer service demands.

The environment is not only a business driver but a political factor. This

requires careful, often legislatively supported, management.


36 AO/QUA/0414 – V1.0

For the strategist it also requires an appreciation of the fact that many of

the cheapest global sources have the lowest environmental standards.

Conversely, developing countries often have the weak capacity of

enforcing environmental regulations. To engage with these countries in the

longer term may not be acceptable to the organisation or other

stakeholders and, most importantly, to the customer.

The environmental issues faced by global operators are both costly to the

organisation and diverse in their nature. However, they cannot be ignored.

If the strategist gets it right they can be used to give the company an

improved standing in the marketplace and a global reputation that may be

marketable and envied by competitors.

For most industries, environmental controls and standards appear to drive

costs higher than would normally be the case. However, there must be an

understanding and acceptance that in the eyes of many of the

environmental standards legislators, the environment can be used as a

political tool to be seen to meet global requirements while satisfying

domestic requirements.

This twin approach is probably more easily explained if we consider the

idea of a big ‘E’ and a small ‘e’. Many environmental issues are concerned

with big ‘E’ issues such as global warming, emissions and the ozone layer.

These issues generally lead to countries targeting reductions of emissions.

However, at the domestic level other legislation means road vehicles

suffering increased stem mileage to keep them away from city centres in

an attempt to improve the local environment (little ‘e’). This confused

approach needs to be appreciated by modern strategists and built into

strategies aimed at globalisation.


AO/QUA/0414 – V1.0 37

1.2.12 Fashion

The final driver in this list of examples is fashion. Fashions and current

trends often require new sources of materials and goods, often leading

procurement professionals further in their attempt to source goods more

cheaply and from ever more diverse regions.

The negative element of fashion is that it can be short-lived and, once

gone, it may never return. Fashion, too, is susceptible to external forces

and market volatility which can and do see products come and go in rapid

succession.

Much globalisation activity is pointed towards fashionable goods or

services, in one way or another. This makes an organisation involved in

fashion products potentially vulnerable to massive change at short notice.

Some areas are more susceptible than others; however, in global terms, it

can be almost impossible to predict where the next trend will start, where

one might source the goods or services to meet demand, or how long it

will last.

The list of strategic drivers and the links and implications for supply-chain

organisations considering globalisation is not exhaustive, neither is it

meant to be prescriptive. This list should, however, highlight the factors

that drive organisations to seek globalisation and how they can be

assessed. You should now be able to consider some of the actual drivers

described here and compare them with the diversity of drivers which may

be factors you have experienced in your own organisation.

In addition, you should now be able to recognise the link between

transport and socio-economic development as a continuing theme

throughout the above list. This link needs careful consideration from the

context of sustainability and environmental impact.

This is the first self-test task of the unit and is included, as in the tasks that

follow in subsequent units, in order to give learners an opportunity to test

their understanding of the issues contained in the unit.


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Task 1.1

For an organisation with which you are familiar, produce a list of drivers

that would be relevant to either an entry into globalisation or increased

activity in a global market.

Justify each item on the list and summarise your justified statements with

an outline assessment of how the increased transport needs could impact

upon socio-economic development in the areas concerned.


AO/QUA/0414 – V1.0 39

1.3 Theories and Models

The next subsection considers how business strategists may evaluate and

analyse the global business environment using the existing modelling tools

and techniques developed for this purpose.

There are many well-established analytical tools, not least the SWOT

analysis and the STEEPLE analysis, both of which can be applied when

analysing the business environment. However, while these may be similar

in nature, they are not intended to replace each other as they focus on

different business areas and may be applied in different business

contexts. In order to highlight the similarities and differences we will

examine each in turn.

1.3.1 SWOT Analysis

Figure 1.2 SWOT Analysis

The SWOT analysis is aimed at enabling an organisation to consider its

internal strengths and weaknesses as well as the external opportunities

and threats that it faces (see Figure 1.2). It is a useful tool that allows a

quick examination of an organisation’s internal status in relation to its

external environment.

STRENGTHS

(INTERNAL FOCUS)

WEAKNESSES

(INTERNAL FOCUS)

OPPORTUNITIES

(EXTERNAL FOCUS)

THREATS

(EXTERNAL FOCUS)


40 AO/QUA/0414 – V1.0

However, it may also be used as an ongoing monitoring tool for

organisations seeking to determine whether or not their market position is

in line with predictions and whether or not a perceived business status is

in fact an actual status. A SWOT analysis can also be used to help create

formal business and marketing plans.

Cole and Kelly (2011) discuss the application and use of SWOT in great

detail. This publication is also highly recommended for information relating

to other analytical tools, theories and models.

The SWOT analysis is a popular tool as it is simple to administer and

gives very quick results; however, SWOT does have some drawbacks. It

can be very subjective and oversimplifies the many complex factors that

affect an organisation internally and externally.

1.3.2 STEEPLE

A STEEPLE analysis may be used by an organisation seeking to analyse

the external business environment in order to make a thorough evaluation

of likely business risks relating to the following areas:

Social;

Technological;

Environmental;

Economic;

Political;

Legal;

Ethical.


AO/QUA/0414 – V1.0 41

Figure 1.3 shows STEEPLE as a diagram.

Figure 1.3 STEEPLE Analysis

The STEEPLE analysis has emerged out of what originated as a PEST

analysis, later to evolve into the PESTLE and PESTEC analyses. The

methodology of using and applying the STEEPLE analysis is the same as

for the forerunners mentioned above, but the main change is that

STEEPLE also embraces ethical considerations. This is vital for

organisations considering new and/or global markets and any related

ethical issues. It is critical when organisations intend to open new supply

chains and source goods and materials from new suppliers around the

globe. Ethical issues have become fundamentally central in policy and

strategy formulation, because of growing demands from society and

various stakeholders for organisations to demonstrate and embed ethically

responsible business practices.

ETHICAL

SOCIAL

TECHNOLOGICAL

ENVIRONMENTAL

ECONOMIC

POLITICAL

LEGAL


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Additionally, organisations considering change should always carry out

associated impact analyses. Impact analyses are used (in a similar

manner to STEEPLE) to assess and manage risks to the business arising

out of change.

A typical impact analysis would involve an accurate assessment of the

likely risk in a certain area (such as the environment) and then consider

how the organisation may go about minimising or eliminating the risk. This

would normally take the form of a report and would also contain risk

monitoring and contingency measures aimed at maintaining minimum risk

levels.

The management of change has many facets and theories relating to

convergence and divergence of activities, processes and functions. It will

remain a topic much debated and discussed. However, for the purposes of

this unit we should look broadly at convergence theory because of the

potential this theory has for business improvement, rationalisation and

reduced costs.

Convergence theory, in a management sense, means bringing together

and integrating activities and functions to enable the parent business to

control logically associated sections of the business and, by so doing,

reduce inefficiencies and management cost.

The advantages of lower costs and improved efficiency to the parent

business are clear; it requires strong and careful management if it is to

succeed and will normally encounter resistance from those who feel they

have been disadvantaged in some way by such changes.

Other management thinkers believe that many organisations find difficulty

applying convergence activity because the business is too cautious trying

to ensure nobody actually seems to ‘lose out’. Another issue regarding the

failure of convergence theory is a lack of supporting the initiative with

sufficient training and development in key areas. Problems may also be

encountered where the convergence activity involves expected cultural or

ethical convergence and where newly appointed managers continue to

show a bias to their previous skills areas – for example, in cases of

mergers or takeovers.


AO/QUA/0414 – V1.0 43

1.3.3 Other Theories and Models

In addition to the various frameworks and theories, there is much debate

relating to the effects of globalisation. Arguments for and against are

constantly published, with authors such as Hines, Ansoff, Porter and

Deming contributing to provide thought-provoking arguments and useful

management information for those involved in globalisation activity or

assessment.

For instance, Hines argues that food production is one issue that can bring

home to a wide range of people what is wrong with globalisation. Hines –

like Renate Künast, the former German Minister of Consumer Protection,

Food and Agriculture; David Baldock, then representing the Institute for

European Environmental Policy; and Caroline Lucas, a former Green MEP

– all agreed that more food needed to be grown and sourced locally. They

agreed that organisational subsidies such as the CAP and US-style

regional specialisation, and any other activities relating to long-distance

movements of foodstuffs, should be minimised through an active

programme of discouragement in order to promote ‘localisation’. This

argument will find support, but the modern logistician must be aware of all

the arguments both for and against when considering a globalisation

strategy.


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1.3.4 Ansoff

Ansoff (1990) devised a matrix theory which is another tool available to

managers involved in strategy planning (see Figure 1.4).

Figure 1.4 Ansoff Matrix

This matrix is useful for making marketing plans and encapsulates the

future vision of the company. It maps the status of various niches against

the status of a product and a market whether existing or new. The

resulting pattern provides a basis for assessing the host company's

intended method of growth and which markets it should target.

The classical way to use the matrix is to develop objectives for a business

and then establish whether those objectives can be achieved through

competitive exploitation of existing product and market opportunities (i.e. a

market penetration strategy). If there is a gap between the objectives and

forecast then the objectives can be lowered, reflecting more modest

ambitions for the company. Alternatively, it is an option for the objectives

to remain at their previous level and an action plan of correction to be

developed.

Products M

ark

ets

Market penetration

strategy

Product

development

strategy

Diversification

strategy

Market

development

strategy

New Existing E

xist

ing

New


AO/QUA/0414 – V1.0 45

The aim is to progressively narrow the gap between objectives and

forecast until a desired position is attained. However, it should be noted

that strategies geared around penetration are inherently less risky than

those geared around expansion, whilst the highest-risk strategies of all are

those based upon diversification.

Ansoff’s Matrix is often confused with Porter’s generic business strategies

(1980), aimed at sustainable competitive advantage and comprising a

‘cost leadership strategy’, a ‘differentiation strategy’ and a ‘focus strategy’.

Porter goes on to argue that successful organisations need to make the

choice of the right strategy for them and not try to follow different

strategies, as this inevitably leads to confusion and a failure to succeed

with the originally planned strategy. Porter also considers what is referred

to as the ‘strategy clock’ which, for instance, sees customers often electing

to use older, tried and tested goods when newer alternatives may be

available.

1.3.5 Deming

During the 1950s one of the early ‘quality gurus’ was W. Edwards Deming,

who developed a 14-point plan for management. This plan served as the

basis on which many American organisations were founded. In addition,

the plan has been, and continues to be, a vital element of the overall

quality and strategy debate. Deming’s 14 points are listed below in Figure

1.5:

Figure 1.5 Deming’s 14-Point Plan

1. Create constancy of purpose toward improvement of product and

service, with the aim to become competitive and to stay in business,

and to provide jobs.

2. Adopt the new philosophy. We are in a new economic age. Western

management must awaken to the challenge, must learn their

responsibilities, and take on leadership for change.

3. Cease dependence on inspection to achieve quality. Eliminate the

need for inspection on a mass basis by building quality into the

product in the first place.


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4. End the practice of awarding business on the basis of price.

Instead, minimise total cost. Move towards a single supplier for any

one item, on a long-term relationship based on loyalty and trust.

5. Improve constantly and forever the system of production and

service, to improve quality and productivity, and thus constantly

decrease costs.

6. Institute training on the job.

7. Institute leadership. The aim of supervision should be to help

people and machines and gadgets to do a better job. Supervision of

management is in need of an overhaul, as well as supervision of

production workers.

8. Drive out fear, so that everyone may work effectively for the

company.

9. Break down barriers between departments. People in research,

design, sales, and production must work as a team, to foresee

problems of production and in use that may be encountered with

the product or service.

10. Eliminate slogans, exhortations, and targets for the workforce

asking for zero defects and new levels of productivity. Such

exhortations only create adversarial relationships, as the bulk of the

causes of low quality and low productivity belong to the system and

thus lie beyond the power of the workforce.

11. a. Eliminate work standards (quotas) on the factory floor. Substitute

leadership.

b. Eliminate management by objective. Eliminate management by

numbers, numerical goals. Substitute leadership.

12. a. Remove barriers that rob the hourly-paid worker of his right to

pride in workmanship. The responsibility of supervisors must be

changed from sheer numbers to quality.

b. Remove barriers that rob people in management and engineering

of their right to pride in workmanship. This means abolishment of

the annual or merit rating and management by objective.

13. Institute a vigorous program of education and self-improvement.

14. Put everybody in the company to work to accomplish the

transformation. The transformation is everybody's job.


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The 14 points above (Deming, 1986) apply to all sizes of business and

have for many years been successfully used as a blueprint for strategic

management across business, industry and commerce.

Task 1.2

For an organisation with which you are familiar, carry out a STEEPLE

analysis and from your analysis provide justified recommendations

relating to business improvement and the reduction of business risk.

Research at least two of the named authors above and write 300–500

words on how their principles, arguments or theories complement or fail

to complement each other.


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AO/QUA/0414 – V1.0 49

1.4 Additional Global Factors and Considerations

Having completed the tasks above, you should now be in a position to

examine further factors which need to be considered when the opportunity

to trade or do business globally arises.

1.4.1 Information

From what has already been written it

should be apparent that modern

management is dependent upon

effective, reliable, robust, complete,

accurate and consistent information

flow. The challenge is to ensure that

the information they are supplied with

meets these requirements. Information comes from many sources, with

masses of information available electronically. External information

sources are more readily available as a management tool than ever

before.

Business sustainability is an important factor when planning strategies for

future direction. We have already mentioned analyses that go towards

enabling a business to identify and predict, and whilst STEEPLE is one

method of environment analysis, it is advantageous to be able to use other

tools, such as the process of environmental scanning.

The environmental scan takes into account all the things that can have an

impact on the business and involves a detailed assessment of the wider

business environment in order to try to identify what is changing and how

this might impact upon the business and the competition. This means that

the modern strategist must gather the results and findings of every

analysis undertaken, collect accurate and robust information from both

external and internal sources, and collate them to be used as an

overarching initiative aimed at ensuring business sustainability.

Modern businesses are more reliant upon information gathering than has

traditionally been the case. Many forward-looking organisations now

encourage staff at all levels to provide information to the organisation so

that it can be assessed and either acted upon, noted, or discarded.


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This shift towards information across the organisation reflects the

importance of information in relation to sustainable business and

processes such as environmental scanning.

Information flow must be at a minimum to be a two-way process.

Organisations are also beginning to appreciate that good information is

developmental and informative for all stakeholders. For example, if the

competition is about to enter into a new initiative aimed at gaining market

share then, if your staff are aware of this and the possible adverse effects

that they may suffer, they can reasonably be expected to respond to some

internal change or improvement processes aimed at countering the

opposition and maintaining your market share. In this way information

sharing and communication have an actual role in organisational learning

and become an integral element of business management.

1.4.2 Global Markets

Most professionals first considering globalisation view it from the

perspective of global sourcing. However, as discussed earlier, there are

many drivers of globalisation and many more stakeholders than perhaps

originally may have been considered. Stakeholders will come from

business, but also from the social fabric of a country and, as global trading

usually involves increased use of third parties, then intra-organisational

stakeholders must also be considered.

The fact that information is such an important element should naturally

lead the modern manager to realise and appreciate that all stakeholders

must be informed, sufficiently well for them to understand not only their

individual or group roles but also, from a logistics perspective, the overall,

wider business aims and objectives. In addition, when an organisation

expands to the global arena, global sourcing may need to be accompanied

by global marketing or even global manufacturing. Once the term

‘marketing’ is mentioned, one can immediately see where the advantages

of effective analyses and consideration of different business theories are

able to add value.


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At high levels of strategic management it is difficult to separate the

elements that form a global business environment. Such is the complexity

of business and most large modern organisations that a SWOT analysis in

isolation would be wholly inappropriate as a tool to give business leaders

an accurate and complete analysis of the business status. Modern

managers need to use an array of tools and techniques and information

from all sources if they are to keep abreast of current situations and have

any chance of accurately predicting the future options for the business.

Modern managers must be decisive, make and take bold, innovative

decisions, and monitor progress.

Monitoring business progress is also a complex area, because the

appraisal of key performance indicators will vary from business to

business. For instance, some organisations may well wish to monitor their

performance purely from a financial perspective in order to satisfy

shareholders or financial sponsors.

Whilst this would arguably form the major proportion of organisations,

other organisations, such as those operating in the public sector, may

consider customer service or legal compliance to be more important.

When dealing with global partners and organisations from a range of

cultures, markets or sectors, one will undoubtedly encounter different

priorities in the choice of business performance indicators used to

measure success and efficiency.

This view needs to be adopted when considering global business.

Traditionally, many business practices and priorities are based on custom

practice and cultural standards. However, when planning to work with

stakeholders and partners in other countries one will certainly encounter

differences and a trade-off will usually result. It is also important to note

the differing regulatory mechanisms that one might reasonably expect to

encounter in a shift to global status. For instance, bribery is not generally

seen as a factor in UK business regulation or Customs activities. However,

globally it is often an unwelcome factor, especially in developing countries,

and may need to be factored into any strategy, at least in the short term.


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Negative factors such as these tend to naturally diminish as development

is realised and the state or nation begins to seek membership of partner

organisations or form links with Western businesses that frown upon such

practices.

Finally, before looking at some of the international agreements and

conventions, we should take a few moments to consider some of the

operational factors which will accompany the overall strategy. The four

factors mentioned below are not meant to be an exhaustive list, but in

spite of planned high-level change and improved business results, key

basic business requirements will still need to be met and satisfied.

1.4.3 Time, Quality, Safety, Practicality

These four operationally focused elements are mentioned in particular,

because one should take care not to allow strategic thinking and

development to become unachievable due to a lack of appreciation of

some of the basic issues relating to business success.

Time can be seen from many angles. In global business, time is certainly

considered a factor in transit, both globally and particularly domestically

where poor infrastructure may be an issue. At the same time one needs to

consider time zone differences, time management styles, working time

practices, public/religious holidays, festival time, extended bureaucratic

and process time, plus any other time-constraining or relevant factors to

ensure one does not build in time-related non-achievable elements.

Quality is another area where the strategist tends to feel confident about

what standards are set and observed in everyday business. Quality

standards vary considerably across the world and relate to all aspects of a

supply chain from the initial quality of the raw materials or goods to the

quality of the packaging, the quality of the transport resources and

infrastructure and even the quality of human and management resources

encountered. It should be remembered that what may be considered to be

average quality may in fact be seen as top quality by a producer or

manufacturer operating on another continent.


AO/QUA/0414 – V1.0 53

Partner organisation staff safety may not be a direct issue for you, but the

safety of any of your directly appointed staff certainly will be, the safety of

the goods certainly will be and the quality of the goods must not threaten

safety to the end user. Safety and security are one side of the coin,

because the goods often need to be secured against pilferage or theft

across many modes and vast distances. Health and safety standards do

vary, as do manufacturing standards. Any goods being imported will need

to meet safety standards appertaining to the end user country and,

possibly, any countries of transit.

To summarise, it is worth considering the practicality of any decisions or

initiatives one may wish to make or develop. What may be achievable in

one country may be absolutely impossible to achieve in another country. It

could be argued that practicality relates to time, quality and safety.

Practicality is a major key to gaining acceptance of change and new

methods of working. If all the stakeholders can be persuaded that

practicality has been considered and properly communicated, it can then

play a major role in reducing the risk of resistance to change.


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1.5 International Agreements and Conventions

It is also essential for strategy formulation to consider international

conventions and agreements, as these offer opportunities and threats. Of

course, these will vary between firms and industries. Earlier on we noted

the importance of global markets to businesses, e.g. as potential markets

for products and services, and also for supply of raw materials and other

production technologies. Over some time, a number of international

conventions have been established solely for the purpose of facilitating

international business across country borders.

Examples of the types of international agreement and convention that one

may encounter, and which were alluded to earlier, include the WTO (World

Trade Organization), GATT (General Agreement on Tariffs and Trade),

and FTAs (Free Trade Areas). These are not exhaustive, but any business

organisation needs to understand the parameters of agreements and

conventions relating to all countries of operation and transit. You may

already be familiar with many UN-based conventions relating to

Convention relative au contract de transport international de marchandises

par route (CMR), Transports Internationale Routiers (TIR), European

Agreement concerning the International Carriage of Dangerous Goods by

Road (ADR), and Accord Transport Perissables (ATP), affecting the

carriage of goods and goods movements, and other conventions which

impact more directly on the movement of people, such as the Warsaw,

Montreal and Hague Visby conventions. However, whilst any of the above

conventions may apply for some or all legs of movements, they need to be

examined in more detail by businesses and clients because of their

potential to cause major business disruption.

The World Trade Organization (WTO) was established in 1995, following

negotiations called the ‘Uruguay Round’, and is the successor to the

General Agreement on Tariffs and Trade (GATT) which was formed

shortly after the Second World War. The WTO regulates the global rules of

international trade by establishing trade agreements which are negotiated

and adhered to by a large majority (around 150) of the world’s

parliaments.


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The WTO helps all member countries facing trade barriers and seeking to

liberalise or even protect trade, especially if health may be an issue. The

WTO consists of many agreements aimed at helping producers of goods,

exporters and importers to conduct their business whilst allowing

governments to meet social and environmental objectives. The WTO also

acts to settle trade disputes between member countries.

The principles under which the WTO operates are that a trading system

should be:

Without discrimination;

Freer;

Predictable;

More competitive;

More beneficial for less developed countries.

Recently, China successfully joined the WTO which reflects the status of

the WTO as an international organisation able to influence trade. Even

more recently we have seen the US removing their objection to Russia

becoming a member and Kazakhstan, with its large, rapidly expanding

economy and a close trading ally of Russia, seeking to increase the pace

of required change to enable its own application to join in the near future.

The main differences between the WTO and GATT are that the latter was

only a provisional legal agreement and the WTO is an organisation with

permanent agreements. In addition, the WTO has members, whereas

GATT only had contracting parties, and GATT only dealt with trade whilst

the WTO covers services and intellectual property as well.

The WTO rules and agreements mean that trade, particularly with

developing nations, can appear to require adherence to rules aimed at

preventing exploitation whilst preserving the national interests of the more

vulnerable nations.

For more information on the work of the World Trade Organization, please

see: www.wto.org.


http://www.wto.org/

AO/QUA/0414 – V1.0 57

FTAs (Free Trade Areas) are regions or groups of countries which agree

to permit free trade between each other. The EU and the slightly wider

European Free Trade Area (EFTA) are examples of Free Trade Areas,

although trade is restricted to a minor degree when it involves certain

goods and services. However, FTAs are not always comprised of

adjoining countries, although this is the norm. In addition, Free Trade

Areas should not be confused with free trade agreements. For instance,

Mexico recently entered into a free trade agreement with the EU in order

for Mexico to become less reliant upon the North American Free Trade

Area (NAFTA).

The principle of free trade is under free trade conditions; increased

domestic employment in relatively efficient industries stimulates increased

exports and generates the means to purchase the increased imports that

are demanded. This contributes to a higher standard of living and

increases social expectations. This principle may appear somewhat

simplistic but does have merit when examined in detail. Protectionism is

the alternative to free trade, and involves subsidising domestic industry

and erecting barriers to stop foreign businesses importing goods. This is

deemed undesirable as it interferes with the equilibrium of free and open

markets, and increases the cost of the domestically produced goods.

Adam Smith (1776) first proposed the idea of free trade in his book ‘The

Wealth of Nations’. It is free and open markets, and the movement of

labour and goods, that should determine economic activity. International

agreements and conventions are mechanisms designed to remove

barriers to free trade.


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Task 1.3

This concludes the first element of this unit. You should now check and

assess whether or not you feel able to meet the Learning Outcomes which

were detailed at the beginning of this element.

You can now check whether you have met the outcomes of this element

by considering the case study below before moving on to element 2 –

Resource Planning, Allocation and Use.

For an organisation of your choice, consider what internal and

external information sources you may use to assist a move towards

a global operation. Justify each of your selections.

Describe in 300–500 words how a manager might incorporate the

operational elements of time, quality, safety and practicality into a

strategic plan.

Write a short (300-word) explanation outlining the differences

between the GATT, WTO and Free Trade Areas.


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Case Study One

Leading convenience products rely to some degree on strong branding to

enter new markets, grow existing market share and sustain competitive

advantage. Retail food and drink brands such as McDonald’s, Coca-Cola

and Kentucky Fried Chicken (KFC) have all made an impact globally, and

can now be seen and purchased in countries where culturally and/or

traditionally they may not have been previously available.

These three examples are US-based companies that have readily taken

up the challenges associated with globalisation and global supply-chain

information flow, enabling them to minimise cultural and market resistance

to their US-originated products. In addition, these organisations have

embraced technologies and forged partnerships and business

relationships around the world to underpin their strategic direction.

Task 1.4

Produce a report of 2,000–3,000 words outlining:

What you believe the major challenges have been for the

companies above.

How you imagine they were able to accurately assess the market

potential of the different countries within which they now have

market share.

What you consider to be the major advantages and disadvantages

for the companies of developing stakeholder partnerships and

agreements with organisations within the target countries.


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Case Study Two

Passenger airlines are usually good examples of illustrating how

businesses can grow in a global environment. Choose an airline, or

another organisation of your choice, from your home country and discuss

which global factors have encouraged its growth and the development of

its competitive advantages.

Task 1.5

Use an appropriate theory or model to evaluate your chosen global

business environment.

Devise a strategy to meet your chosen organisation’s external

information needs. This can include deciding what type of

information will need to be gathered.

Critically evaluate a key stakeholder of your chosen organisation.

How will this stakeholder affect or be affected by the organisation’s

global strategy?


AO/QUA/0414 – V1.0 61

2. Resource Planning, Allocation and Use



Understand what is meant by market orientation;

Understand the resource planning required to meet the

organisation’s strategic objectives and those of different

stakeholders.

2.2 Introduction

Element 2 examines the indicators related to resource use and some of

the financial (such as pricing policies) and non-financial tools (such as

balanced scorecard) and techniques that are commonly deployed in

business today. Finally, this section examines resource planning aimed at

meeting stakeholder objectives.

In previous element 1 – The Global Business Environment, we noted that

businesses are engaged in a variety of activities to transform inputs into

outputs of goods and services. We also noted that businesses require a

variety of inputs and, for the purposes of this section, the key inputs into

the transformation or production process are people, technologies, natural

resources, capital and information. Before we discuss the performance

measures, let us look at the impact of decisions relating to the selection

and use of these key resources.

People: considered to be the most important input into the production

process, the quality and quantity of people available in an economy will

have a significant impact on the ability of performance in that economy.

The quantity and quality of people or workforce is dependent on factors

like size and age of population, wage levels, education and training,

working conditions, and welfare series, amongst many others. As noted

above, the quality and quantity of available labour will determine

performance and productivity levels of businesses. Some countries have

invested in education and training of their populations to equip them with


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the requisite skills for various crafts. In other regions, little investment has

been made from a national perspective and organisations have to ensure

that they invest in training and development programmes for their

workforce.

Technology: considered to be a key resource for most industries today,

especially in the production, electronic and engineering sectors of the

economy. Here technology denotes the sum knowledge of the means,

including capital, and methods of producing goods and services. Again, as

with people, some regions have invested in advanced technologies in their

economies and these are available to business operations. However, on a

global environment technology is also only readily available at reasonable

costs to businesses. For example, information technologies supporting

operations like administrations, communication, production, logistics and

supply-chain operations, and finance are available for business

operations.

Natural resources: include all usually put under the heading of ‘land’ in

economic discussion, and include resources like oil, minerals, timber, fish,

water, and other produce from the land. The distribution and availability of

these resources is much dependent on geographical location and there is

an uneven distribution throughout the world today. A key development is

the growing awareness of the effects of depletion of natural resources that

have led to environmental awareness amongst people today. There is

pressure from various groups, including governments, on businesses to

demonstrate sustainability of their operations in terms of preserving the

natural environment.

Strategic decisions in this aspect regard organisations’ resources as a

cornerstone to strategy implementation, because it is through these

resources that organisations generate value for the customer and

shareholders – value that is passed on to employees in wages, and to the

government in the form of taxes. Resources are also the differentiator

between organisations, giving some competitive advantage over others. In

fact, according to Ohmae’s famous three Cs, company resources are

considered a key success factor in strategy development, with a


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suggestion that only unique resources will give an organisation

sustainable competitive advantage.

2.3 Organisational Indicators

An organisation’s performance is affected by various issues, so that an

understanding of an organisation’s behaviour, the people resources and

the management of transformation activity is essential. Let’s start by

stating that all organisations need to be efficient in doing things right and

in the optimum utilisation of the resource available. It is also important that

organisations are effective in doing the right things according to overall

objectives within the specific requirement of the task, and also the

changes in the business environments. Performance should therefore be

related not only to areas of profitability, but also service delivery,

productivity, environment, health and safety.

In this unit the term ‘indicator’ is

used to describe a measurement of

performance used by businesses

and organisations, which enables

them to monitor actual performance

against planned or expected

performance. These indicators also

allow organisations and businesses

to record and log performance over stated periods and through periods of

change.

Successful businesses increasingly recognise the importance of

measuring business performance. This has led to many business sectors

developing performance metrics and benchmarks that enable companies

to assess and improve resource utilisation and overall business

performance. In addition to meeting financial performance criteria, many

companies also must meet other performance criteria relating to such

things as regulatory requirements, health and safety, and environmental

issues.

Cost-effective management of these issues is increasingly recognised as

crucial to business success, and many businesses have taken steps to not


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only identify the items requiring measurement but to also develop and

monitor the objectives of the measurement.

Three example objectives are outlined below:

1. To provide shareholders with an accurate record of Return on

Capital Employed (ROCE) for the business as a whole.

2. To identify and develop a suitable set of indicators for use by

general management in measuring the health and safety

performance of regional distribution centres.

3. To provide the senior management team with sufficient

information enabling an environmental impact assessment to add

value to the proposed expansion strategy.

These three examples show the range of potential indicators that may be

used by managers and other stakeholders to accurately record

performance in agreed target areas. We will first examine samples of

popular financial indicators, followed by a sample of non-financial

indicators. These samples illustrate some typical and frequently applied

organisational indicators.

2.3.1 Financial Indicators

Price/Earnings Ratio (P/E Ratio)

P/E ratio measures the share price divided by the net earnings (or profit

after tax) per share, as illustrated in Figure 2.1.

Figure 2.1 Price/Earnings Ratio

SHARE PRICE = £23.00 = 19.2 SHARE EARNING (after tax) £1.20

By definition this is exactly the same as dividing a company’s capitalisation

by its net profits. The importance of the ratio is derived from the notion that

it shows the degree to which investors value a company as a multiple of

previous earnings. A higher resulting number from the calculation is an

indication that investors are taking an optimistic view of a company’s

prospects.


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As with the dividend yield (see below), the only concrete figures that can

be calculated involve dividing the current market capitalisation by last

year’s recorded profits. This is an ‘historic’ P/E ratio. Alternatively, many

analysts use their future earnings forecasts to generate ‘prospective’ P/E

ratios.

P/E numbers may vary over time and also between companies. For

example, at one time on the London stock market, the Shell Oil Company

was trading on a P/E of 24, British Airways on a P/E of 31, and the

engineering group BTR on a P/E of only 11.

Some financial analysts believe that a low dividend yield suggests that the

markets are about to crash, and a high average P/E ratio is a signal of

trouble ahead. At the time of writing, the P/E ratio on the broad-based

United States share index (the S&P 500) was 27 – its highest since

records began. In relation to this, you may be able to make your own

judgement on whether or not the prediction of ‘trouble ahead’ is founded

on any hard facts or just reflects perceived confidence. However, you

should note with a degree of caution that the figure of 27 is historic.

Prospective P/Es will generally incorporate future earnings growth and will

be a little lower.

Remember that the P/E ratio on its own is meaningless; it must be

compared with (say) its own sector or with current market trends. It is

important to recognise the reasons for either high or low P/E ratios as this

measure is often used to judge the value and performance of an

organisation, especially when considering buying its shares.

ROCE – The Return on Capital Employed Ratio

ROCE tells us how much profit a business earns from the investments the

shareholders have made in the company. In more practical terms, if you

invested £500 in a savings account and had been paid £25 interest at the

end of a year, the ROCE would be 5%. This would mean that you earned

5% interest on your savings (see Figure 2.2).


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Figure 2.2 Return on Interest (ROI)

Rate of interest = Interest earned

= 25

= 1

= 5% Amount saved 500 20

For business purposes a savings account is not a true reflection, thus we

need to relate the calculation above to a business application. For

instance, if a company has a profit for the year of £250,000 and its capital

employed is £5,000,000, the ROCE for that company would also be 5%

(see Figure 2.3).

Figure 2.3 Return on Capital Employed (ROCE)

ROCE = Annual Profit

= 250,000

= 1

= 5% Capital Employed (Equity Shareholders’ Funds) 5,000,000 20

The term ‘Equity Shareholders' Fund’ is another term for Capital Employed

and has been used here because some readers may encounter the term

and the use of a Return on Shareholders' Funds ratio (ROSF) in some

parts of the world.

In accounting there are often different definitions relating to certain terms.

The use of the term 'capital employed' can mean different things. It can,

for example, include bank loans and overdrafts since these are funds

employed within a business. Be aware that there are different

interpretations of what ROCE can mean. It is suggested that you use a

definition which you are comfortable with, but be aware that others may

interpret your definition in a different way.

Table 2.1 is a guide to some of the interpretations relating to this issue:


AO/QUA/0414 – V1.0 67

Table 2.1 Interpretations of ROCE

Source and/or Definition of

Return

Definition of Capital Employed

Elliott & Elliott: ROCE = Net profit/capital employed

Capital employed = total assets

Investor Woods : Capital employed = fixed assets + current assets – current liabilities

Investopedia.com: Return = Profit before tax + interest paid

Capital employed = ordinary share capital + reserves + preference share capital + minority interest + provisions + total borrowings – intangible assets

Holmes & Sugden: Return = trading profit plus income from investment and company share of the profit of associates

TRADING capital employed = share capital + reserves + all borrowings including lease obligations, overdraft, minority interest, provisions, associates and investments

OVERALL capital employed = share capital + reserves + all borrowings including lease obligations, overdraft, minority interest, provisions

Department of Trade and Industry (DTI)

Capital employed = total fixed assets + current assets – (current liabilities + long-term liabilities + provisions)

Johnson Matthey Annual Report & Accounts

Capital employed = fixed assets + current assets – (creditors + provisions)


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Whichever way you choose to define ROCE, the critical question asked by

many investors is: ‘Could we have earned more money (profit) if we had

invested in a different business or simply put our money in the bank?’ This

is not as straightforward a question as it may at first appear, because

expanding capital employed may increase profit growth disproportionately.

A business needs to invest in resources and infrastructure to enable

growth, leading to increased profit at some time in the future. This means

that an investor needs to be aware of the position and future strategy of a

company in order to accurately assess the ROCE as a true indicator of

profit performance.

ROCE is naturally variable across industries and businesses. A typical

example for the UK is below in Table 2.2:

Table 2.2 ROCE Comparisons

Leisure

&

Hotels

International

Airline

Manufacturer Retailer Service Refining Pizza

Restaurants

ROCE 5.56% 3.16% –12.12% –0.12% 33.63% 16.17% 16.14%

Again, these ROCE values demonstrate that not every business will get

the same results for the same ratio at the same time; it depends on the

industry, the management, the economy and other factors. If we now

compare the ROCE values above with the associated profitability values

you will start to see a relationship (Table 2.3).

Table 2.3 ROCE and Net Profit Relationship

Leisure & Hotels

International Airline

Manufacturer Retailer Discount Airline

Refining Pizza Restaurants

Net

Profit

7.36% 4.05% –10.48% 1.63% 10.87% 12.63% 7.55%

ROCE 5.56% 3.16% –12.12% –0.12% 33.63% 16.17% 16.14%


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Putting the data from this table on a graph enables you to see if there is an

actual relationship between them or if it is just a random circumstance:

Figure 2.4 ROCE/Profit Graph

Tables and data above courtesy of the Institute for Learning and Research Technology,

University of Bristol.

From the graph in Figure 2.4, there does seem to be a relationship

between the net profit margin and the ROCE: the higher the net profit

margin, the higher the ROCE. The curve on this graph is not a straight line

and it might even be a true curve, meaning that the relationship is more

complex than we might think. If this is a true relationship it means that any

investor, or potential investor, hoping to use ROCE as an indicator needs

to monitor this relationship whenever assessing the profitability of a

business.


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2.3.2 Earnings Yield

The P/E ratio is sometimes expressed as an ‘earnings per share’ yield

(see Figure 2.5). In this case, instead of the capitalisation being divided by

the net profits, the earnings yield is the net profits divided by the

capitalisation (or the net profit per share divided by the price). This means

that a P/E of 19.2 corresponds to an earnings yield of 5.2%.

Figure 2.5 Earnings Yield

SHARE EARNING (after tax) = £1.20 = 5.2% SHARE PRICE £23.00

The value of using the earnings yield as an indicator is that it removes

some of the distortions generated by only looking at the dividend yield

which will be explained in more detail in the next section. However, it still

ignores ‘relative’ returns. Investors always look at the relative returns

before committing their cash to different assets.

Interestingly, investors seem to expect shares to offer a lower yield than

government bonds, because if you buy shares you also stand to benefit

from the increase in the capital value of your investment. Most government

bonds (like bank and post office savings accounts) simply pay back the

capital sum that was lent by the investor in the first place. If inflation is high

and there is real economic growth, the investor can lose out by investing in

fixed-income bonds. This typical distortion needs to be assessed by any

investor by using earnings yield as an indicator.

As a related thought, the return that bond issuers have needed to offer in

recent years has fallen dramatically thanks to low inflation in developed

nations. Ten-year UK Government bonds’ yield is now projected around

2.5 per cent in 2016 (www.bankofengland.co.uk), but yields of twice that

have been available in recent decades. If bond yields come down from

higher rates to low returns, it would be argued that this fully justifies the

drop in share earnings yields, implying that shares are not overvalued at

all. This is yet another consideration for a business investor to analyse

when considering how to earn a possible return.


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2.3.3 Dividend Yield

This is the percentage annual return you would get from investing in a

particular share today. This is the dividend per share divided by the price

of the share.

For example, a dividend of 5 pence per 100 pence share = 5p/100p = 0.05

or 5 per cent.

Tables in newspapers normally show the ‘historic’ dividend yield, taking

the past year’s total dividend payments per share divided by the current

share price. This is because only the historic dividend payments are

actually known. Investors often estimate the coming year's dividends and

talk about the ‘prospective’ dividend yield.

Over time, even if a company is

only doing moderately well, one

would expect the cash dividend

payout to increase (if only because

of inflation). The capital value of

the shares should also go up over

time, reflecting the rising dividend

payment, so the ratio of the two (the dividend yield) might, in theory, be

constant over the course of time.

In practice, dividend yields vary. In recent years, dividend yields in Britain

were said to be at their lowest since the First World War. The average

dividend yield for the London market fell to 2.77, which was even lower

than the trough of 2.85 reached before share price crashes in 1972 and

1987. Many believe that the current low yields are unsustainable and

therefore share prices will crash. Others say that shares are still attractive

despite the apparently low dividend yield because there are big hidden

returns. This argument will continue to be a factor when dividend yields

are low.


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The UK Government recently tried to encourage companies to ‘invest

more’ by taxing company dividends harshly. Companies have tended to

respond – not by retaining more of their earnings to invest, as was hoped

for, but by paying out their money to shareholders in more sophisticated

ways, in order to retain investor confidence at a difficult time. For instance,

one way of effectively paying money back to shareholders is for a

company to buy some of its own shares.

This means the total number of shares in circulation will fall, therefore

increasing the possible payout to each of the remaining shareholders. The

market price of the shares will also increase for the same reason.

Most analysts now view the dividend yield as a pretty hopeless way of

assessing how highly shares are valued historically, because of this type

of manipulation. Instead they tend to use the ‘earnings yield’ mentioned

above.


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2.4 Non-Financial Indicators

Whilst financial indicators enable investors to assess the health of a

business and likely returns for invested cash, the business itself needs to

use indicators to measure the effective use of resources and the impact

the business may have in relation to internal and external factors such as

social issues and the environment. Many businesses use a ‘balanced

scorecard’ approach to enable them to maintain a balance of effectiveness

and efficiency in a ‘trade-off’-like manner aimed at maximising the overall

effectiveness of the business as a whole.

2.4.1 Environmental Impact Assessment (EIA)

Environmental Impact Assessment is a procedure for considering the

potential environmental effects of land use change. EIA helps to inform

decision making and enables decisions on land use change to be taken

with full knowledge of the likely environmental consequences. Within the

UK, the Department for Environment Food and Rural Affairs (DEFRA) is

the competent government authority for applying new EIA regulations to

projects for changing the use of land. The regulations only apply to

projects likely to have significant environmental effects, such as major

development projects relating to the construction of buildings, airports,

roads or other similar projects that have a big effect on the environment.

In other countries EIA systems are also clearly set out in clear and specific

legal frameworks; for example, in Australia the various regulations outline

separate EIA systems; in New Zealand the regulations provide clear,

broad frameworks for EIA whilst allowing local authorities discretion in the

operations. It is important for strategic planners to familiarise themselves

with the requirements of the various regulations on environmental impact

assessment, as these could have a major influence on both planning and

implementation of strategies.

Sorensen and Moss (1971) and Warner and Preston (1973) believe that

there are three principal methods for identifying environmental effects and

impacts.


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2.4.2 Checklists

Checklists are comprehensive lists of environmental effects and impact

indicators designed to stimulate the analyst to think broadly about possible

consequences of contemplated actions. This strength can also be a

weakness because it may lead the analyst to ignore factors that are not on

the lists (often called 'tunnel vision'). Checklists are found in one form or

another in nearly all EIA methods. One of the most comprehensive is

published in the United States (AEC, 1973).

2.4.3 Matrices

Matrices typically employ a list of human actions in addition to a list of

impact indicators. The two are related in a matrix which can be used to

identify (to a limited extent) cause-and-effect relationships. Published

guidelines may specify these relationships or may simply list the range of

possible actions and characteristics in an open matrix, which is to be

completed by the analyst.

2.4.4 Flow Diagrams

Flow diagrams are sometimes used to identify action–effect–impact

relationships. An example is given below in Figure 2.6 (Sorensen and

Moss 1971), which shows the connection between a particular

environmental impact (decrease in growth rate and size of commercial

shellfish) and coastal urban development. The flow diagram permits the

analyst to visualise the connection between action and impact. The

method is best suited to single-project assessments and is not

recommended for large regional actions. In the latter case, the flow

diagram display may sometimes become so extensive that it will be of little

practical value, particularly when several action alternatives must be

examined.

Methods for prediction cover a wide spectrum and cannot readily be

categorised. All predictions are based on conceptual models of how the

universe functions; they range in complexity from those that are totally

intuitive to those based on explicit assumptions concerning the nature of

environmental processes.


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Provided that the problem is well formulated and not too complex,

scientific methods can be used to obtain useful predictions, particularly in

the bio-geophysical disciplines. For example, given the climate

(particularly the wind) at a representative site, together with information on

time of day, topography and chimney specifications, the patterns of

ground-level pollution concentrations around a chimney can be estimated

(mean values for various averaging times, as well as frequency

distributions).

Figure 2.6 Example of a Flow Chart used for Impact Identification

(Source: Sorensen and Moss, 1971)

Methods for predicting qualitative effects are difficult to find or to validate.

In many cases, the prediction consists of indicating merely whether there

will be degradation, no change, or enhancement of environmental quality.

In other cases qualitative ranking scales (from 1 to 5, 10 or 100) are used.

A listing of recommended methods for solving specific environmental

problems would seem to be desirable as some methods are more relevant

than others. However, a compendium of methods, even with numerous

footnotes and words of caution, is likely to be a snare for the unwary non-

specialist. The environment is never as well behaved as assumed in

models, and you should be discouraged from accepting off-the-shelf

solutions.

A commonly used method for estimating the relative importance of

minimising the environmental impact, using several different minimisation

alternatives, is to rank all alternatives within groups of impact indicators.

This permits the determination of alternatives that have the least adverse,

or most beneficial, impact on the greatest number of impact indicators.


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Normalisation and mathematical weighting are also used in EIAs in order

to allow you to compare indicators numerically and to obtain aggregate

impacts for each alternative:

a. the impact indicator scales must be in comparable units;

b. an objective method for assigning numerical weights must be

selected.

In the Battelle system, Dee et al. (1972) suggest that environmental quality

is scaled from 0 (very bad) to 1 (very good) by the use of 'value functions'.

'Very bad' and 'very good' can be defined in various ways. For a qualitative

variable such as scenic beauty which has been ranked from 1 to 5 or from

1 to 10, the scales are simply transformed arithmetically to the range from

0 to 1. For quantitative variables such as water or air quality, 'very bad'

could be the maximum permissible concentrations established by law,

while 'very good' could be the background concentrations found at great

distances from sources.

These complex disciplines, which go on to form environmental impact

assessments, are becoming increasingly a part of business expansion and

strategic decision making, particularly in heavily populated areas where

social and economic standards are relatively high.

2.4.5 Social Impact Assessment (SIA)

Environmental assessment has for many years had a social element

because obviously the two subject areas are inextricably interwoven and

associated. However, whilst assessing the environmental impact has

developed relatively rapidly, assessing social impact has been more

problematic. For years, people wanting to measure and report real

performance in corporate social responsibility (CSR) have tried to develop

a methodology that could be applied in an attempt to establish the social

effects of business change. SIA is the process of analysing, monitoring

and managing the social aspects and consequences of development and

business operations.


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There are strong suggestions that SIA creates a more positive contribution

towards beneficial stakeholder engagement. For instance, analysts argue

that SIA is a part of the democratic process that can assist in ensuring

equity and transparency of decision making, because it is a form of

assessment whereby the identification of the likely impact of development

or strategy is assessed to ensure that future benefits will outweigh the

costs of a proposed project. By adopting a participatory process, SIA can

also lead to better decision making by accessing and incorporating local

knowledge, further strengthening business–society relationships.

Recently a method has been found which is termed ‘The Social Footprint’.

The Social Footprint, produced by the Centre for Sustainable Innovation,

is a methodology which is seeking to find acceptance within businesses. It

is a corporate sustainability measurement and reporting method aimed at

quantifying the social impact of organisations on people and producing the

true bottom-line-oriented measures of this impact. It takes an approach

that will be familiar to some as the 'ecological footprint' where impact on

the environment is assessed. The Social Footprint focuses on the concept

of 'social capital'.

Unlike environmental or natural capital, which is limited and which cannot

easily be created by humans, social capital is produced by people and can

be grown virtually at will. The ‘Social Footprint’ methodology is not

supported by many analysts who believe it is impossible for it to be applied

to real-life, complex issues. However, it is included as many of you will

encounter support for it in modern business and you should be aware of

the both the pros and cons in order to make a reasoned judgement from

an informed position.

The tool is based on what is described as the 'quotients approach', taking

any aspect of behaviour and checking whether it is sustainable relative to

the impact of the intended change by the business seeking to establish a

‘social footprint’.


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For instance, if a large business was considering expanding in an area

where it would have a growth impact on the local population, the housing,

schools, hospitals and domestic service provision would all need to be

assessed in order to establish whether or not such expansion was actually

sustainable, and a likely social timetable would be needed to enable the

growth and service provision to be sustainable.

SIA has another dimension; that is, it can also facilitate and contribute

towards conflict management. It can be argued that most long-term

projects have the potential for conflicts amongst the varying demands or

expectations of different stakeholders. Conflicts, if not properly managed,

can lead to further impacts on business–societal relationships. There is

scope for SIA, with its emphasis on participatory interaction, to protect,

manage and resolve conflicts and their likely negative impacts on strategy

formulation and implementation.

Many analysts believe this approach to be too simplistic. While seeming

theoretically reasonable, the ‘footprint’ methodology is beset with

difficulties when it is applied to more complex examples. In support of this

argument analysts have used Wal-Mart as a case study, and its

contribution, or lack of it, to the achievement of the Millennium

Development Goals (MDG).

The MDG have been agreed by the UN and most nations as the top

development targets, covering areas such as eradicating extreme poverty.

In addition, the UN has identified a threshold of 0.7 per cent of GDP from

developed nations in order to achieve these. Every citizen has a per capita

share of the responsibility to meet these goals. Wal-Mart employs over a

million US citizens. Therefore it is reasonable to ask whether or not Wal-

Mart is contributing its pro rata share of the US contribution to fully fund

the MDGs.

In reality, Wal-Mart apparently contributed to the MDGs only through their

payment of federal taxes. Academics argue that the idea that any

organisation is responsible on a per capita basis relating to its workforce is

simply nonsensical.


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Governments take responsibility for national goals and may find resources

for these from the places where those resources are best found, but they

are not obligated to spread them across the population.

In addition, nothing in this approach factors whatever impact, positive or

negative, Wal-Mart has through the basics of its trade. The fact that it

sources goods from many developing countries may be a factor that

creates jobs and wealth in those countries. There may be other aspects of

the way it operates that would create further problems in those countries,

particularly where genuine sweatshops operate. In any case, quantifying

such impacts to feed into the equation is difficult.

The simple assumption that everyone bears equal responsibility for

everything is too simplistic. Governments understand, for instance, that

wealthy people should contribute more to meeting such goals than people

on a minimum wage. Any measure – even one fully funded by the

government, measured against a workforce like Wal-Mart's where people

are predominantly at the lowest end of the pay scale – would come up with

a deficit.

Many analysts believe that the Social Footprint proposes a simplistic

equation that is bound to mark companies down for behaving

unsustainably without providing a real metric that measures the effect of

social behaviour. You should consider true social impacts against a wide

range of social criteria, including sustainability in all its facets. It may be

that to combine the impact assessment of business change into a single

all-embracing impact assessment is the only valid option available to many

businesses.

2.4.6 Balanced Scorecard (BSC)

Balanced scorecards are seen by many as a typical ‘trade-off’ activity

seeking to balance the performance of the organisation and all associated

stakeholders in such a way as to maximise efficiencies, effectiveness and

profit for the business overall. It is a system that allows the monitoring of

business performance by using performance indicators aimed at

complementing financial performance.


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It does this by measuring and monitoring operational efficiency, employee

performance and innovation, customer satisfaction, and financial

performance. By doing this the parent organisation hopes to be able to

create a link between long-term strategies and short-term actions.

There are three main types of BSC: a Stakeholder BSC, which measures

stakeholder performance; a KPI BSC, for measuring and monitoring KPIs

(Key Performance Indicators) aimed at assessing business performance;

and a Strategic BSC, for allowing the business to see how a strategy is

performing in relation to business performance. The three types may be

used individually or together, but all three types of scorecard cover internal

and external factors and will always be pointed to four key areas:

1. Financial performance;

2. Customers;

3. Internal business processes;

4. Learning and growth.

These four vital areas can be used by the business management team to

not only assess the business performance in real time, but also to

measure how the business performs in relation to the competition and the

overall market. At the core of a balanced scorecard should be the sharing

of the corporate vision, as it is the corporate vision that should set the

strategy and the strategy should ‘drive’ the components of the scorecard.

A comprehensive BSC should aim to:

Include financial and non-financial measures;

Focus management activity on key performance indicators;

Align departmental goals with corporate strategy;

Link measures throughout the organisation;

Allow senior management to consider all measures together;

Reflect your commitment to customer service;

Be managed to prevent the proliferation of unneeded measures;

Be shared with as many staff as is practicable.


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Examples of measures that might be used by a bus operator using the

balanced scorecard approach could be:

Financial measures such as revenue per bus, per passenger or per

day;

Customer measures such as number of passengers per journey,

per day or for the whole business per day;

Business process measures could include bus fuel economy,

efficiency of vehicle washing and preparation or times spent in

traffic jams;

Growth measures could include sales of monthly bus passes or

revenues attracted for advertising on bus billboards.

The key to successfully using a balanced scorecard approach is ensuring

that measures used are relevant and reflect the organisation’s strategy.

You should now be able to judge which of the indicators discussed can be

used to measure the effective use of resources in a strategic context.

This concludes the subsection relating to organisational indicators. Some

tasks below are aimed at measuring your understanding of this element.

Task 2.1

For a business of your choice, use any available information to

assess the organisation’s financial performance using the ROCE.

(Hint – an annual report may help here.)

Write 300–500 words to list and consider the 10 most likely

environmental and social impact areas for a major land use change

project of your choice.

If you were asked to produce a balanced scorecard, using KPIs from

your organisation, what KPIs would you develop or use, and why?


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2.5 Strategic Investment

This section moves on from

organisational indicators to

briefly examine the two main

facets of strategic investment. It

is essential that business

analysts are aware of the real

options for strategic investment approaches so that strategic investment

decisions adopt appropriate decision criteria. First, we look at

benchmarking and then the strategic issues relating to cost-benefit

analysis.

2.5.1 Benchmarking

Benchmarking is seen by many industry professionals as essential to

organisations seeking to establish a true and accurate picture of their

standing within a particular market in relation to the best current

standards.

Whilst benchmarking is now commonly adopted by organisations seeking

efficiencies and improved performance, some businesses regard any

comparisons of information as the disclosure of an organisation’s

competitive advantages to rivals. This is mentioned as a cautionary note in

order that you will not be surprised should you encounter resistance when

proposing benchmarking activity. Benchmarking is equally an important

tool for strategic investment decisions. For example, FTSE, Dow Jones

and Johannesburg Securities Exchange (JSE) are some of the financial

performance indexes that can be used to select useful benchmarks from.

Martin Christopher (2005) states that three ideas lie at the heart of

competitive benchmarking. Firstly, it is the customer’s perception of

performance that is paramount. Secondly, organisations must not only

compare themselves with the immediate competition, but also the ‘best in

class’. Thirdly, it is not just outputs that should be measured and

compared, but also the processes that produce that output.


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Examples of benchmarking in the industry can include direct comparison

with competitors. For example, in the UK, Virgin Trains would compare

their passenger satisfaction surveys with those of Great North Eastern

Railway (GNER). They could also benchmark the same metric against the

bullet train in Japan, as they are an example of best practice in the rail

passenger industry.

Conversely, benchmarking is not restricted to similar industries. You may

wish to benchmark customer satisfaction with a ‘best of breed’ business

that might have nothing to do with the current industry. For example, Virgin

Trains might compare their customer services against the Hilton

International hotel chain. By examining Hilton International’s customer

service practices, Virgin Trains might discover a feature or process that

could enhance their service offering.

Benchmarking can only be successful if the organisation has a clear

understanding of what it is trying to achieve by benchmarking key activities

and processes. Identification of these key processes can be problematic,

but the Supply Chain Council produced a model for this purpose, known

as Supply Chain Operations Reference (SCOR). SCOR was developed

around four major processes:

1. Plan;

2. Source;

3. Make;

4. Deliver.

Within these four major processes it embraces the key end-to-end supply-

chain activities ranging from initial customer demand to final payment for

the goods and services. In this way, SCOR is designed to standardise the

supply-chain measurement process.

Benchmarking in the logistics sector has developed to concentrate on

process improvement. In order to do that, key processes within the supply

chain have to be identified where there are opportunities that can lead to

improvements in the four major processes listed above.


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Once the key processes have been identified, the next step is to analyse

the processes in order to further identify the critical customer/supplier

relationship points within the processes. Once these critical points are

known and prioritised, the organisation is able to research customer

perception and levels of service, the competition and ‘best in class’ to

develop process control improvement solutions.

Allied to the principal prioritisation of benchmarking activities and remedial

actions, the organisation must analyse which processes are able to bring

about increased value at optimal cost. This is necessary in order that the

organisation is able to focus where maximum value can be added to the

four key areas in a logical and sequential manner. Often, supply-chain

efficiency is measured using a simple time-based formula as shown in

Figure 2.7:

Figure 2.7 Supply-Chain Efficiency

VALUE ADDED TIME X 100 END TO END PIPELINE TIME 1

This formula examines the added-value time achieved in relation to the

overall pipeline process time, thereby maximising efficiency overall.

However, in order to accurately establish the times, all the supply-chain

processes must be accurately mapped and recorded.

2.5.2 Cost-Benefit Analysis (CBA)

Cost-benefit analyses have, for many years, been a feature of public-

sector improvement and transport provision projects where benefits to

society or social groups were assessed against the cost of some form of

service provision. More recently, cost-benefit analyses (CBAs) are being

used in industry to assess the value of making a change against the cost

of change.

Costs are either one-off or may be ongoing, whilst benefits are generally

enjoyed over a period of time. We build this effect of time into the analysis

by calculating a payback period. This is the time it takes for the benefits of

a change to repay its costs. Many companies look for payback over a

specified period of time – e.g. three years.


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In its simplest form, cost-benefit analysis is carried out using only financial

costs and financial benefits. For example, a simple cost-benefit analysis of

a road scheme would measure the cost of building the road, and subtract

this from the economic benefit of improving transport links. It would not

measure either the cost of environmental damage or the benefit of quicker

and easier travel to work. This simplistic approach is not seen as sufficient

by many in today’s complex business arena. A more sophisticated

approach to cost-benefit measurement models is therefore required to put

a financial value on intangible costs and benefits.

Care must be taken using this approach due to the subjective nature of

this type of analysis. For example, if a road is planned to be built through

an area of natural beauty at a cost of £25,000,000, is that the only cost? If

the landscape is given a worth of (say) £250,000,000 because of its

environmental importance this would greatly increase the cost of the

project. Additionally, how can you put a monetary value on stress-free

travel to and from work, which is what the road is intended to bring about?

CBA Example

If we examine an example from industry, many of the issues appear to

become clearer. A more detailed explanation of cost-benefit analysis can

be found in ‘Principles of Corporate Finance’ (Brealey and Myers 1999).

If a transport director is deciding whether to invest in new vehicles, he

needs to consider cost versus benefit, and payback. He is aware that extra

vehicles will be able to cover more billable journeys more effectively, can

give a better standard of service and operate more economically in many

areas such as fuel and servicing. However, the drivers will need training to

maximise the benefits of the new vehicles.


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The financial cost-benefit analysis is shown below (please note cost

figures are for indicative purposes only and these are likely to be different

according to markets and time frames):

Costs:

Investing in two new coaches and a transit van:

36-seater coach lease cost per month: £800;

52-seater coach lease cost per month: £1,000;

Transit van 3½ tonnes GVW lease cost per month: £600.

Training costs:

Driver familiarity training – 3 people @ £ 100 each.

Other costs:

Lost time: 20 man days @ £ 100 / day;

Lost sales through disruption: estimate: £1,200;

Lost sales through inefficiency during first months: estimate:

£1,500.

Total running costs per year: £28,800

Total other costs: £5,000.

Benefits:

Improved fuel economy: £2,000 / year;

Improved customer service and retention: estimate: £5,000 / year;

Less down time due to servicing and breakdowns: £8,000 / year;

Improved tyre safety and reduced wear: £5,000 / year;

Extra sales generated by running two extra bus routes: £32,000 /

year;

Extra sales generated by running extra delivery run: £20,000 / year.

Total Benefit: £72,000 / year

Payback time: £33,800 / £72,000 = 0.469 = approx. 6 months


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Payback time is often referred to as the ‘breakeven point’. In the example

above, breakeven is reached after six months. The breakeven point is

seen by some senior managers and directors as being at least as

important as some of the benefits because, if the business has had to

borrow, they will need to minimise the amount of interest to be paid to

effect the change. The breakeven point can be found by plotting costs and

income on a graph of increased output against cost. Where the two lines

intersect is the breakeven point, giving the management team an ability to

monitor actual breakeven against expected breakeven.

Cost-benefit analysis is a powerful, widely used and relatively easy tool for

deciding whether to make a change, but the subjective nature of some of

the estimated items must be appreciated and taken into account.

Task 2.2

Examine a typical supply-chain business such as a clothing retailer, or a

transport business such as a train or bus operator.

Using the criteria explained, try to identify the areas which it may be

most advantageous to benchmark. Give reasons for your choices.


AO/QUA/0414 – V1.0 89

2.6 Cost Comparison and Choice

As economies and businesses become ever more focused on a ‘global

approach’, they are increasingly required to make choices aimed at

reducing cost in relation to increased competition. This was the initial

driver of third-party provision in the logistics sector which continues to

drive activities such as low-cost sourcing, offshore sourcing and continued

analyses of the question of in-house versus outsourcing of non-key

activities. Remember that each option carries choice, cost and in many

cases a risk of inadequate supply. There is always some form of trade-off

to be made when deciding whether to ‘make or buy’ within a supply chain.

The key point to note is that it is often impossible to make a ‘like-for-like’

selection because each supplier will inevitably differ in some way or

another, either in value-added activity to suit your particular need, or by

providing some sort of service enhancement within the terms of supply.

2.6.1 Low-Cost Country Sourcing

Low-cost strategies, which form an integral element of many logistics and

supply-chain strategies, often rely upon low-cost country sourcing. This is

because the goods suited to this strategy tend to be fast-moving and low-

value items. Typically, they would be the items found in the first sector of a

Stock Keeping Unit (SKU) matrix aimed at assessing product demand and

product profit contribution (see Figure 2.8 overleaf).


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Figure 2.8 Stock Keeping Unit (SKU) Matrix

This matrix puts the low-cost items, often sourced through a low-cost

country sourcing policy, into the number A box (bottom right). Because

profitability is low and volumes are high, strategy is to opportunities for

cost reduction. This is relatively straightforward. Rather more complex are

the many issues surrounding low-cost country sourcing, such as the

ethical and cultural issues mentioned earlier, as well as issues relating to

inventory levels, reliability of supply, quality and customer service

requirements.

Often low-cost country sourcing encounters customs controls, complex

transport, cultural and ethical factors which may deter customer service

delivery. Importantly, it is accepted that, whenever possible, high-volume

fast-moving goods should be sourced as close to the end user as

possible. This means that by using a low-cost country to provide goods

there needs to be a trade-off; for example, the trade-off comes from the

increased value of inventory caused by longer lead times, the increased

cost of transport, potential damage, pilferage and compliance with

international regulations and conventions. For many organisations careful

analysis is required to avoid the intended low-cost advantages being

seriously eroded or cancelled out by the negative associated factors.

Hig

h

Pro

fit

Co

ntr

ibu

tio

n b

y S

KU

Volume by SKU Low High

B

Provide High

Availability

D

JIT Delivery

C

Review A

Seek Cost

Reduction


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2.6.2 In-House and Outsourcing

It should be noted that the in-house versus outsourcing argument has

many trade-offs and the popularity of one over the other seems to depend

on high-profile successes or failures. If a business has decided to

outsource, the next decision is how far to extend the relationship with the

new external provider. Many organisations have attempted to reduce their

costs through outsourcing non-value-added activities; however,

outsourcing plays an essential role in the success of organisations only

when applied properly.

Increasingly, partnerships are brought into existence because of

outsourcing arrangements that are being created between a parent

business and the third-party logistics service provider. These partnerships

are often formed in two distinct stages. The first stage may be expressed

as the ‘contactor’ stage and the second stage as the ‘partner’ stage. The

first stage will ensure that the potential partner is able to operate as a

contractor. When this is assured, the partnership may then be developed.

Partnerships can be forged from the very start, but the contracts for this

type of relationship naturally contain much involved detail relating to

possible contractual shortcomings.

Whatever relationship a business seeks to develop with its contractors, it

must, once formed, be monitored and controlled to ensure that it is still

delivering the intended benefits. This means that any organisation

considering making savings or benefiting from outsourcing must have a

properly developed and agreed system for monitoring performance

against set criteria.

These may be seen as key performance indicators, because they should

be related to key business standards such as customer satisfaction,

service levels, cost and quality. All these factors require an organisation to

have a properly formed process aimed at moving from in-house to

outsourced activities.


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In all circumstances, any process aimed at outsourcing must be logical,

sequential and timely. The process needs to be managed in logical stages

and time must be allowed to implement, review and measure stages and

progress. For example, the first stage in the process includes setting clear

objectives, identification of the key activities for outsourcing, assessment

of the financial plan, and risk associated with outsourcing activities. This

would be followed by the selection and ranking of appropriate suppliers.

The final phase, and probably the most important, contains the proposed

methods of executing the outsourced activities. This involves getting the

right team in place, setting the right organisational culture, performance

monitoring, and quality and conflict management.

The basic process is outlined in Figure 2.9 shown overleaf.

The detail in Figure 2.9 is a high-level list of the major activities that need

to be sequential if the planned change is to be successful. These activities

must serve themselves as the basis of the relationship between customer

and supplier, and must be shaped to ensure that the partnership adds

value and both parties are seen to benefit. Any business partnership must

consist of honesty, integrity and an agreed level of quality.

There should also be some shared risks involved if both partners are to

operate as equals.


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Figure 2.9 Outsourcing Process

Should improvements and increased profitability be realised, they will in

turn allow both partners to consider future development. This development

may involve such things as:

Reviewing strategies;

Improving IT systems;

Centralising distribution;

Centralising, expanding or automating warehouse operations;

Moving into global operations;

Improving stock control;

Introducing technology;

Reducing lead times and other efficiency improvements.

The key point of outsourcing must be to ensure that the partnership must

involve all parties equally; it must be open and honest, and benefit both

parties.

This point is also relevant in the context of globalisation as home-based

providers have to provide the same levels of service as their competitors

in whichever country they may be based.

Outsourcing Process

Decide company strategy

Decide logistics strategy

Review options

Produce an Invitation to Tender (ITT)

Evaluate and negotiate

Implement the agreed changes

Manage the contract

Measure performance


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In relation to the reasons why companies considered entering into

potential ‘win-win’ partnerships, a survey undertaken by the Centre of

European Logistics showed that 64% of companies said that cost

reduction was their main reason for entering into alliances. 60% said that

service improvement was an important criterion. 34% said that the need

for greater strategic flexibility was the main reason to outsource. The same

survey showed that 52% used price or cost as the principal criterion. 39%

of companies felt specialist knowledge to be the most important criterion,

and an equal 39% said that service improvement was important. 31% of

companies wanted to use the existing distribution network operated by the

potential partner and only 29% expected the potential partner to set up a

tailored network to meet their individual needs as the main selection

criteria.

The figures above show that outsourcing partnerships have to be

individually forged to ensure the desired outcomes expected are realised

and that both parties are able to reap the rewards of a strategic alliance.

2.6.3 Offshore Sourcing

Our final cost comparison option is to look at offshore sourcing as a

strategic method of reducing cost. Offshore sourcing is predominantly

used for sourcing IT-based solutions and is now commonly used for call

centre outsourcing. However, it is also starting to encompass other

markets where organisations need to outsource quickly and are able to

look at offshore sources, especially in countries such as China and India,

which by their very nature are able to react rapidly and produce quantities

at very short notice and at low cost, often as a ‘one-off’.


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For many UK businesses offshore sourcing is changing rapidly, as its

success drives up salaries and associated costs all being linked to the

economic success of offshore sourcing. Hence many organisations are

struggling to maintain contractual obligations as the outsourced vendor

seeks to allow market forces to dominate and often simply ignores

contractual issues and decides to work for the highest bidder. An

American organisation seeking to remain anonymous, which suffered just

this fate, recently produced an article (2005) giving four tips to companies

seeking to source offshore.

1. To get high-quality staff and decent service levels from top-tier

vendors, customers should expect to pay in the $24 to $30 per hour

range for offshore labour.

2. In master service agreements, companies must include minimum

turnover or rotation levels to prevent bait-and-switch as much as

possible. They also must include language that specifies the seniority

and experience requirements of the vendor staff.

3. Companies should include language in their contracts that prevents

the vendor from declining individual work requests or statements of

work, as well as from changing the rates for specific work requests.

This will make it much more difficult for the vendor to legally breach

its contract.

4. Companies that are in aggressively priced contracts should be

prepared to protect themselves from the questionable vendor tactics

described above.

These four tips reveal the point that offshore sourcing is a volatile area,

with the volatility appearing to be largely as a result of the sourcing activity

itself. Other experts report that almost half of all offshore sourcing projects

fail to achieve the full potential for cost savings.

They affirm that the client company needs to clarify goals and

expectations, establish rigorous project management disciplines and be

particularly robust in their management of communications.


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An organisation considering offshore sourcing should analyse its

expectations by asking the following questions:

What do we hope to gain from outsourcing – cost reduction,

business transformation, process streamlining?

What vendor identification criterion is appropriate?

Are our internal costs a true reflection of our expected savings?

How will we manage the ‘hands-on’ elements of the outsourcing?

Should we or could we get a better deal at home?

Other industry professionals warn against outsourcing products and

services that are highly regulated and those that need to be with the

customer exceedingly quickly, and believe that organisations need to

clearly define what needs to be outsourced and why, if they are to avoid

rushing into something that fails to deliver, either in part or in full. Many

professionals suggest that anyone considering offshore outsourcing

should not forget that the project will require managing, and companies

cannot abdicate all responsibility to the outsourcer.

Offshore sourcing is not all dangers and pitfalls, and it is possible for it to

result in benefits and advantages beyond just cost saving. This is

particularly true when offshore sourcing is used for ‘one-off’ contracts or

orders as it means that the parent organisation does not have to

temporarily recruit and acquire associated assets to meet a fluctuation in

demand only to find that they become overstaffed and forced to reskill or

use people in roles for which they may not be totally suited.

Communication is the key. However, communication can be hampered by

cultural as well as physical distances. Establishing and maintaining clear

lines of communication is vital for the success of offshore sourcing.

Importantly, as offshore outsourcing is often seen as a threat to the

employer’s native workforce, both internal and external communications

play a key role in the success or failure of this relatively modern

phenomenon.


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2.6.4 General Considerations

Most decisions to outsource are driven by costs, or scarcity of materials,

products or services within a market or industry sector. That scarcity may

not be physical; it may be a scarcity of availability at a competitive price or

at a required quality or cost. As more and more companies are

outsourcing as growing means of delivering products and services to the

markets, this has had significant impact on employee relations.

Scarcity breeds innovation as organisations seeking to maintain customer

loyalty have to be even more innovative in relation to sourcing. This

innovation has led to enrichment and increased value within the logistics

and transport sectors as well as increased choice and increased options

for customers. These factors mean that we now see many more

alternatives in our quest for effective solutions aimed at business

improvement.

Alternatives carry slight differences and cost is one of the differentials that

will always figure predominantly. What is often less clear is that when you

have an opportunity to evaluate alternatives you need to calculate the

‘opportunity cost’ of each alternative.

Opportunity cost is the value of the next-highest-valued alternative use of

that resource (Hanson 1979, Henderson 2006). Every business or

economic decision involves some consideration of opportunity cost. Every

time we make a decision, there is an alternative opportunity which has

been sacrificed when taking that option.

For example, the opportunity cost of not purchasing an extra vehicle is the

cost of losing extra revenue if you do not have a vehicle to collect

passengers or make deliveries. If the opportunity cost is greater than the

cost of the extra vehicle, you should purchase it. Whatever the final

decision, you will have made a sacrifice. The next-best investment would

have to pay back more than the opportunity that is lost.


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Opportunity cost in action can be illustrated in transport planning

decisions. National governments often have to rule over major transport

planning infrastructure projects such as light rail transit systems in major

metropolitan areas. A recent example (Skinner 2006) involved the

Department for Transport in the UK, which ruled that it would not support

the building of a light rail system in the major north-eastern city of Leeds,

UK. Local government authorities were hoping that the scheme would help

to improve the transport system in the city. The UK Transport Secretary

said that the cost of building the network had increased from the original

budgeted figure of £355 million to £486 million and that this money would

be better spent on investment in buses, as this would represent better

value for money for the public.

The Transport Secretary was saying that the value of the alternative –

buses – was deemed higher than the value represented by a light rail

system. The opportunity cost of the tram system was too great and they

used this as a justification for preventing the scheme from going ahead.

In arriving at this judgement the Transport Secretary will have considered

the number of people served by a tram system as opposed to buses

(buses can get to more people in more places), i.e. buses are more

flexible in the way they can be used and are cheaper to provide. Some

calculation of the benefit to the public in relation to the cost would have

been made on this to support the judgement.

In the north-western UK city of Liverpool, the City Council has agreed to

underwrite a scheme to develop a tram network for Merseyside. The

government are to be asked to release £170 million earmarked for this

project. Along with funding from Merseytravel and the European Union

(EU), it is hoped that there will be enough investment to start the project.

It could be asked whether the decision in Leeds would have had any

impact on the decision in Liverpool. Each decision would have to be taken

on its own merits and the issues in Liverpool and the costs might be

different to that in Leeds.


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So it cannot be assumed that, because the opportunity cost was

considered too high in one place, this automatically translates to a similar

situation. It does serve to highlight the importance of opportunity cost and

how it can affect people’s lives in many different ways.

Relating these news stories from industry is not difficult, but the increasing

number of alternatives available to us when considering change means

that opportunity costs have to be assessed and compared if the best

alternative is to be identified.

You should now be able to compare the revenue streams and profit

potential from alternative resource strategies.

Task 2.3

We will now consider pricing policies and related business risk. These are

dependent upon market conditions and segmentation and are areas where

an organisation seeks to gain a considerable amount of its competitive

advantage.

Identify two different organisations that have different sourcing

strategies.

Explain, in approximately 600 words, where the strategies differ, why

you believe each has the strategy it has, and what benefits you believe

are directly derived from each chosen strategy that may enable the

organisations concerned to realise competitive advantage.


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2.7 Pricing Policies

In order to sell goods and services effectively, an organisation’s prices

need to be set wholly in tune with the segments of the market in which it

operates. Many supply-chain planners are involved in work aimed at

identifying and developing policies that align their supply-chain processes

with those of their customers. This alignment allows the organisation to

accurately identify to what market segment the various customers belong

and to develop customer-facing service levels appropriate to the segment

concerned. By taking this into account, many customer businesses may

appear similar. There are often only very slight differences between these

businesses.

These differences form unique niches; these are known as market

segments and focus on a specialist or unique activity demanded by that

small market. An example in the public transport sector is the luxury coach

market. Passengers travelling between major cities expect a higher level

of travelling comfort compared with travelling within city limits. Luxury

coach travel is therefore a market segment of the public transport market

and customers have special requirements and expectations of the

services offered.

2.7.1 Price Discrimination

By accurately analysing market needs, a discriminatory pricing policy can

be developed to meet specific market service level requirements and

segmented demands, whilst maximising profitability.

Price discrimination accurately identifies market segments. Depending

upon the segment of the market within which an organisation operates,

service providers often find that they need to vary prices and charges in

line with costs incurred, resources required and profitability, if they are to

attract new customers and retain existing customers.

For instance, a new customer may expect discounts in the early stages of

a contract as an inducement to transfer business to a new supplier. High-

volume, high-turnover customers will expect to pay less than smaller

customers with lower stock turnover.


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In addition, a customer with specific requirements relating to things such

as packaging, presentation, timed deliveries, or geographical locations will

expect to pay a premium on the service or goods supplied.

Frequently we come into contact with pricing policies in our daily lives

where we pay premium prices at high season for things like holidays and

take advantage of discounted ticket prices to travel off-peak. This sort of

price discrimination is a common feature in the leisure and travel

industries but not so readily obvious in the supply-chain sector until we

relate it to factors such as:

Bulk;

Seasonality;

Availability;

Sourcing strategies;

Market share;

Skills availability;

Product specification;

Differentiation;

Added-value services.

The short list contains factors which could contribute to price

discrimination and different pricing policies. They all have the potential to

lead towards a market situation where a supplier organisation may be able

to set different prices for relatively similar products and services in order to

maximise profits and optimise resources and cost. Most commonly, bulk is

the leading price discriminatory factor within a market segment.


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2.7.2 Business Risk

The explanations above may seem reasonable, thus it might be less

obvious if we add the consideration of business risk into pricing policy.

When seeking to minimise business risk, we find that many organisations

formalise the customer differentials by offering different agreements based

upon customer segmentation. In this context, Rushton et al. (2010) believe

that there are four principal types of charging and pricing structures

relating to supply-chain operation and third-party logistics provision:

1. Fixed price agreements – Where an agreed price is paid for

services and/or goods provided. Common pricing units include

singularly or a combination of things such as: price per delivery or

collection, price per carton, price per pallet, price per kilometre, etc.

This policy is widespread in the third-party logistics sector and is

deemed appropriate for relatively low levels of business.

2. Bespoke price agreements – Based upon an initial unit price and

agreed, guaranteed volumes or throughput and levels of resource

utilisation. This policy is aimed at minimising the adverse effects on

resource utilisation associated with supply-and-demand fluctuations

brought about by such things as seasonality. It also provides the

customer with options to flex throughput to serve volatile markets

without incurring high initial surcharges.

3. Cost-plus arrangements – Cost-plus arrangements allow for an

agreed profit percentage to be paid to the contractor over and above

costs incurred. These arrangements are not particularly popular with

contractors, who feel there is no incentive offered to improve service

and, should demand slow and costs fall, suffer from reduced profits.

4. Open-book contracts – Contracts run under an ‘open book’ see the

client company paying all the contract costs plus an agreed

management fee to the contractor. In this situation the third-party

logistics provider allows the client to view their accounts and all of the

costs they incur for the client as an ‘open book’. This type of pricing

agreement is only really suitable for dedicated contracts.


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They are monitored against a pre-set budget which may provide for

performance or budgetary incentives. They are sometimes seen as

leading to inherent inefficiencies as market conditions change during

the contract term and there is a tendency for the provider to cover

charge for services when the opportunities arise.

The four types of pricing policies above are an indication that both client

and contractor realise the risks to their businesses need to be identified,

analysed and considered when entering into contractual alliances. In

addition, the pricing of products and services requires pricing policies

which take account of market segmentation and price discrimination

techniques.

Task 2.4

Write 300–400 words to explain the choices available to a large

organisation seeking to outsource call centre activity. Include what

you consider to be possible pitfalls.

When considering a policy of ‘open book’ as an element of a third-

party logistics provider contract, discuss the related possible

advantages and disadvantages for both the client company and the

contractor. Include in your answer why inefficiencies may arise.


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2.8 Resource Planning for Stakeholder Objectives

Any organisation will have both internal and

external stakeholders who have the

capacity to affect performance and service

levels. In this section we discuss how

stakeholders may be categorised in order to

define and maintain appropriate stakeholder

relationships. We will then move on to

consider stakeholder objectives and

examine a stakeholder mapping model.

The modern view is based on the premise that organisations will maintain

dialogue with all stakeholders with benefits arising both in the long run and

on a short-term basis. It is further argued that the survival of corporations

is affected not only by shareholders, but also by the actions of and the

relationship with other stakeholders. Freeman (1984) defined ‘stakeholder’

as ‘any group or individual who can affect or is affected by the

achievement of the activities of an organisation’. Corporate planners have

grouped stakeholders into: ‘primary’, i.e. those that are close to the

business and have some form of contractual relationship with the

organisations, e.g. customers, employees, suppliers; and ‘secondary’,

such as those who do not have any contractual relationship with the

organisation, but are very important for the image and reputation of the

organisation, e.g. media, NGOs and other civil society groups.

For purposes of this discussion we will group our stakeholders into

‘internal’ and ‘external’ stakeholders. Internal stakeholders within an

organisation are usually comprised of groups of employees as opposed to

individuals. An individual is not able to have a marked impact upon an

organisation, but this is not the case for a stakeholder group. Stakeholder

groups arise because most employees readily identify themselves within

stakeholder groups related to different disciplines, different levels of

organisational influence, at different locations and even on different work

rotations.


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Often internal stakeholders belong to more than one group which may

mean that they contribute to the influence and carry expectations of more

than one group.

Internal stakeholders are obviously ‘closer’ to the core business but,

because of various alliances, it is unwise to try to categorise them rigidly

against the formal structure of the business or in a stereotypical manner.

By accepting the informality of some stakeholder groups you will be able

to more easily assess their influence within an organisation. In addition,

many stakeholders may belong to more than one internal stakeholder

group. Therefore it is important to try to assess where there may be

stakeholder group alliances. This is particularly important when

considering major change as groups may unite to resist change. For

instance, it would not be unreasonable to see internal stakeholders

representing drivers and maintenance workshops united against any

proposal to outsource distribution. In addition, a whole multidisciplinary

workforce at a site may unite where it is proposed the site closes or

relocates.

External organisational stakeholders include such groups as shareholders,

investors, trade unions, civil society groups, media, government,

regulatory bodies and suppliers. Appearing to be less able to have a

meaningful impact within an organisation, external stakeholders are often

able to seek and develop alliances with internal groups and may also be

able to restrict growth and development. For instance, customers may

seek to influence new scheduling or changes to products. Trade unions

are clearly able to influence strategy and policy by influencing the

workforce.

The complex nature of stakeholder relationships creates stakeholder

conflict as well as stakeholder alliances. This is largely due to a difference

of stakeholder expectation surrounding such issues as the pace,

importance and priorities associated with strategic change. For example,

staff and trade unions may well be happy with work practices that they

have enjoyed for a number of years.


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However, when a strategy of change is communicated, involving a revision

of work practices leading to redundancies, but increased salaries for those

remaining, there is the potential for immediate conflict. The trade union

and the staff affected and perhaps family, social or welfare groups will

seek to minimise the redundancies. Shareholders, customers, senior

managers and those staff deemed ‘safe’ will largely support the proposals,

even though some may not openly voice this approval.

2.8.1 Stakeholder Mapping

The acceptance of the differences of expectation, stakeholder alliances

and stakeholder influence are important when considering the impact of

change. There is often a need for stakeholder mapping and identification

of trade-offs, aimed at reducing resistance to change and conflicts of

expectation between many of the stakeholder groups in order to deliver

the change as effectively as possible. A modern strategist must try to map

stakeholders’ expected reaction to proposed change.

This needs to be done in order to ensure that an accurate judgement can

be made relating to three important questions:

1. If the proposed change goes ahead, what is the likelihood of each

stakeholder group and stakeholder alliance seeking to influence to

resist the change?

2. How powerful is each stakeholder group or alliance of groups, and

can their will to resist or alter planned change be assessed?

3. What impact may the expectations of stakeholder groups and

alliances have on future planned change?

These three questions are largely based upon an assessment of

stakeholder power. Stakeholder power in this context is not necessarily

related to a hierarchal power, but to the power each group has to influence

others to assert their own expectations.

There are two common stakeholder mapping tools: the ‘power/dynamism

matrix’ and the ‘power/interest matrix’. Both are discussed later:


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2.8.2 The Power/Dynamism Matrix

The power/dynamism matrix is used to assess the potential power wielded

by each group in the matrix and defines the stakeholders in Group D as

the most potentially dangerous or supportive (see Figure 2.10).

This normally means that it is this group who are used, either wittingly or

unwittingly, to assess the likelihood of support or resistance to change.

Group C comprises stakeholders potentially able to be convinced by

management that their expectations will be met. Groups A and B, while

seemingly unimportant in relation to their influence, should always be seen

as valuable allies as they often form ‘the silent majority’. Should these

groups become disaffected without their support, change may not be

achieved in the manner originally intended.

Figure 2.10 Power/Dynamism Matrix

High

Low High

Po

we

r

Dynamism

C

Powerful but Predictable

D

Greatest Danger or

Opportunities

A

Fewer Problems

B

Unpredictable but

Manageable


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2.8.3 The Power/Interest Matrix

The power/interest matrix is used to assess the levels of interest of the

stakeholder groups and the type of relationship that will need to be

developed in order to implement the intended strategy (see Figure 2.11).

Group A are mostly passive. Group B require to be kept informed and

monitored in order that they do not develop into stakeholders requiring

Group C satisfaction. Although requiring more attention than the

stakeholders in Group B, those in Group C must also be prevented from

moving into Group D and developing disproportionate influence. Finally,

reaction to potential change by the stakeholders in Group D must be

catered for to both satisfy and prevent them from influencing stakeholders

in any of the other groups.

Figure 2.11 Power/Interest Matrix

(Source: Johnson et al., 2008)

These two matrices could be deemed unethical, particularly if they were

developed and deployed in order to bring about some cultural or political

shift that was not aimed at business improvement. They do identify and

assess the influence of all stakeholders in order that strategic change may

be developed, proposed and implemented in the most effective and

efficient manner whilst seeking to minimise adverse effects and

perceptions both within and external to the organisation.

INTEREST

PO

WE

R

C

Keep satisfied

D

Key players

B

Keep informed

A

Minimal effort

HIGH LOW

HIGH


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Task 2.5

Case Study – Exel PLC

The logistics giant Exel PLC was formed by the merger of Exel and Ocean

Group. This merger was strategically aimed at ensuring Exel could

maintain its dominant position in existing markets and expand further in

global markets.

One of the results of this merger was that the newly formed Exel

PLC signed a 10-year contract with Accenture to outsource its

accountancy function. This outsourcing was projected to deliver a

40% cost improvement in Exel’s operational sector.

List what performance indicators Exel might have developed with

Accenture to enable actual savings to be measured.

How might Exel’s revenue streams have changed when, as a

logistics provider, it merged with a major shipping company?

Accounting may not normally be a discipline that is outsourced.

Why do you feel it is not often outsourced and, in addition to cost

savings, why do you think Exel felt able to outsource this function?

Stakeholder partnerships are seen as a joining together of equals.

Discuss whether or not you feel that Exel and Ocean saw each

other as equals when considering the merger.

Produce lists of both the internal and external stakeholders you would

expect to be associated with a multinational supply chain operating in a

manufacturing sector.

Once you have your lists, use both the power/dynamism matrix and the

power/interest matrix to categorise each stakeholder group.

NOTE: Remember to consider stakeholder alliances and include them in

your matrices.


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Case Study – Outsourcing and Workplace Relations

Capgemini is one of the world's foremost providers of consulting,

technology and outsourcing services. Present in 40 countries with more

than 130,000 employees, the Capgemini Group helps its clients transform

in order to improve their performance and competitive positioning.

Outsourcing of services to Capgemini often requires compliance with the

Transfer of Undertakings (Protection of Employment) Regulations 2006

(TUPE), (UK). The purpose of TUPE is to protect employees if the

business in which they are employed changes hands. Its effect is to move

employees with their existing contracts, and any liabilities associated with

them, from the old employer to the new employer by operation of law.

The transferees become employees of Capgemini whilst either remaining

in their former employer’s workplace or being relocated to a more suitable

location if required. Capgemini says their clients have reported benefits of

outsourcing including:

expertise from a company that specialises in that job function (e.g.

IT);

industry contacts that a client organisation may not have;

innovative solutions that may not be possible if the function/service

was kept in-house; and

it can deliver as good or a better service at a lower cost.

Good communication at an early stage is essential if employees are to

understand the TUPE process and engage with their new employer.

Ongoing open communication helps to build good relationships between

employees and their new managers, which can benefit both the individuals

in their career with the new employer and the organisation.


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The main common concerns of TUPE include the following:

Job security – Will my job be relocated overseas (e.g. India)?

Terms and conditions – will I still work at the same site? Will I have

to work longer hours?

Health care provision – will my cover be as good?

Company equipment, e.g. IT, cars – will I have to get used to new

equipment?

Pensions – will the terms be as good?

Changes to day-to-day routines, different forms, procedures, etc.

Trade union’s fear over changes to their recognition agreements.

How Capgemini manages the process

When employees TUPE transfer to Capgemini, the transfer process is

explained clearly at an early stage through roadshows at which employees

that have already been through the process, as well as the Capgemini

management team, talk about their experiences. This is then followed up

by one-to-one meetings which give transferees the opportunities to

discuss any personal matters. Transferees retain their terms and

conditions, even if they move jobs once they arrive, unless they wish to

transfer to Capgemini’s terms and conditions. At the outset of an

outsourcing deal, a detailed process of reviewing employment contracts

with HR colleagues from the outsourcing organisation is undertaken to

identify where the differences between contracts lie. It is important that

Capgemini fully understands the contracts they are inheriting as they may

have to manage them for many years until an employee leaves the

organisation. Union representatives feel that it is important to be involved

at this stage as they have an in-depth understanding of their terms and

conditions. They also feel that it is important for the outsourcing

organisation to recognise their responsibility in ensuring that their

employees are treated well in the future by making sure that Capgemini

fully understands the terms and conditions of their employees, and any

agreements with unions / employee groups that are in place.


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The tasks and case study above bring us to the end of element 2 where

we examined many of the issues and areas relating to resources and

options open to strategists seeking to sustain or improve their market

position. In element 3 we will move our attention to examine sustainable

corporate development.


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3. Sustainable Corporate

Development



Understand the impact of an organisation on the environment;

Understand the impact of strategic relationships.

3.2 Introduction

In this element we will examine and consider some of the concepts

relating to sustainability, the impact of strategic relationships, the impacts

that organisations have upon the environment and the impact that the

environment may bring to bear on organisations. We will also attempt to

assess the importance of ‘sustainability’ as a key strategic tool available to

strategy and policy makers, and the potential benefits sought by

organisations who seek a sustainable organisation with clearly defined

aims and objectives towards sustainable growth.

3.3 Concepts of Sustainability

In modern businesses it is no

longer seen as sufficient simply to

survive within a market or even

survive at a profit. What is sought,

as a very minimum, is a

sustainable position within a

market. In order to achieve this

minimal requirement an organisation needs to consider sustainability in a

wide range of contexts. Sustainability within a market requires the

organisation to be sustainable in their corporate strategies in relation to

what has been termed the ‘three Ps’. These relate to profits, planet and

people in its management processes, working practices, business culture,

staff skills, customer base, supplier base, environmental standards and

even its political standpoints or legal compliance standards.


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Traditionally, sustainability has been held to be connected and related to

organisations’ survival within the environment. This viewpoint is simply too

narrow for the concept of sustainable business and supply chains where

competitive advantage needs to be sustained in all three aspects raised

earlier and, in order for that to be possible, all business and supply-chain

factors need to be sustainable. Sustainable approaches to corporate

strategy require organisations to achieve market or economic growth

taking into account the social and environmental consequences or impact

of their operations. This brings into focus a steady interest amongst

business, government, civil society and academic researchers in the

debate surrounding the role of business in society, which is often referred

to as corporate social responsibility (CSR). This means that whilst

organisations are expected to mitigate the impacts of their operations on

the environment and communities, they are also expected to adopt CSR to

contribute towards sustainable development, defined as ‘meeting the

needs of today without compromising the ability and capacity for future

generations’.

If we consider that ‘survival’ indicates a position where an organisation is

holding on for its very life and ‘survival with profit’ indicates that whilst

holding on it is managing to show a profit but nothing else, we can see that

neither are comfortable positions for organisations. Importantly, neither are

they comfortable for shareholders and investors who want to see the

added factor of growth, at least in relation to their investment. Customers

will expect improved service and efficiencies, and suppliers will expect

increased business, neither of which can be realised without growth. So

CSR has become a boardroom agenda item with the business community

coming to terms and accepting that management has a wider remit in their

decisions and management practices. The notion here is that the business

world is part of the natural and social world and therefore sustainable; or

survival of the organisations is dependent on the three pillars of social

issues, environmental issues and economic issues.


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These competitive advantage requirements were seen by Grant (1998)

who believed that there were three factors leading to the sustainability of

competitive advantage:

1. Durability;

2. Transferability;

3. Replicability.

Durability refers to the organisation or product within a market, whereas

transferability and replicability reflect the difficulty and cost to the

competition of acquiring the skills and resources to develop a similar

product. These terms can also be used to evaluate whether the

organisation is sustainable.

It may become apparent that the need for sustainability runs directly

through an organisation. It is apparent that to survive (and not to progress)

is not a sustainable strategy and that profit without growth is not adequate.

When an organisation stands it is actually losing market share and

influence as competitors move forward and erode any competitive

advantage enjoyed by the organisation concerned. In order to look at

sustainability in both internal and external environments it may help if we

separate the internal and external factors and deal with them

independently.

3.3.1 Internal Sustainability

If growth is the key, then it follows that successful strategies must contain

a growth element. Competitive advantage can be maximised if growth can

be achieved in the most cost-effective manner available to the

organisation concerned. For instance, an organisation that strives to

provide a quality working environment for its staff could reasonably expect

to enjoy low staff turnover. If this can be achieved then the costs

associated with recruitment, selection, induction and training are lowered.

In turn, organisations that share success with staff, reward effort and

recognise the individuals, teams or sites concerned should reasonably

expect increased staff loyalty. Also, through effective communication, staff

with raised awareness will recognise how the strategic needs impact upon

operational activities.


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It is a relatively new concept within management to assess the potential

and actual benefits available from the internal factors of sustainability but

one that some professionals believe has been in place, with the benefits

not being fully recognised, for many years. For example, most modern

managers see succession planning as an issue that directly aligns with

sustainability. However, the concept of succession planning originally

focused upon an organisation seeking to develop the ability to cover key

roles at times of fluctuating human resource supply. This is an example

that demonstrates the past ‘short-sighted’ approaches to issues that are

not in themselves sustainable in the modern work environment, and that

wider-ranging sustainable solutions are now integral to successful

strategic development.

If we agree that effective, modern succession planning may act as a

positive internal aid towards organisational sustainability, other internal

factors aimed at sustainability within the workforce include such things as:

Flexible work/life employment patterns;

Reward and recognition schemes;

Internal communication channels;

Physical resource strategies;

Ethical management;

Business and team cultures and branding;

Internal customer awareness strategies;

Developing a ‘safety culture’;

Training and development.

Evidence of a succession plan could be used to evaluate the internal

sustainability of the organisation. The list above demonstrates some of the

everyday patterns of working life which may enable an organisation to

improve the efficiency and cost-effectiveness of its human resources and

develop a sustainable organisation.

The following internal sustainability policies encourage business continuity

and hopefully create a learning organisation. This will improve the

organisation’s ability to sustain its business activities in the long term.


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3.3.2 Flexible Work/Life Employment Patterns

These are constantly being developed and updated in order that

organisations are able to attract and retain the most suitable staff for the

intended tasks. Job share schemes, ‘flexi-working’, annual and standard

hours schemes, and rotational shift patterns all give concessions to the

employees aimed at allowing them an improved work/life balance. Many of

these schemes also allow the parent organisation to deploy staff into the

most suitable activities for the business. For instance, ‘twilight shifts’ for

many young parents enable a family partner to increase their earning

potential whilst the other parent is able to attend to the needs of a young

family. Job share schemes often enable the organisation to retain skilled

staff in key areas who may otherwise leave the company because of

changed circumstances.

Flexi-hours are enjoyed by many employees who appreciate an

opportunity allowing them to save time and cost of travel whilst improving

their domestic lifestyles. Annual Hours and Standard Hours schemes aim

to rotate working patterns, enabling flexible off-shift arrangements to be

organised, and to reward staff in relation to team effort and improve overall

team efficiency.

3.3.3 Reward and Recognition Schemes

Schemes acknowledging the contribution of staff have enjoyed varying

degrees of success. Where they have been introduced, schemes have

been met by suspicion and resistance by a workforce sceptical about the

true intentions behind their introduction. This problem has diminished as

different schemes have enjoyed success and given that workforces are

much more mobile, awareness of successful schemes has spread. With

that awareness has come acceptance that many organisations understand

that if staff are to be retained they have expectations relating to fair

remuneration and individual workers expect recognition for their efforts.


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3.3.4 Internal Communication Channels

Effective communications form an integral element of all business

improvement strategies. Internal communication channels are particularly

valuable in organisations where strategies may be formulated at one

location and apply to other locations. In these cases, if clear

communications are not a positive factor then staff, unsure of the future

direction or prospects for employment, may seek to find alternative

employment. In other cases rumour and gossip may lead to industrial

unrest, performance decline and resistance activity wholly based on

fictitious expectation. From a strategic viewpoint, sustainable

communications must run through the organisation and be free to permit

communication across all levels and in all directions.

3.3.5 Physical Resource Strategies

Strategies aimed at ensuring cost-effective resource utilisation are linked

to sustainability because they enable competitive advantage and growth

through improved levels of throughput, increased efficiency, fewer

breakdowns and less downtime. They also fit into organisations as

motivational factors because many staff will see the introduction of new

technology as a personal investment and will welcome the opportunity to

operate modern, highly sophisticated and high-productivity machines and

equipment.

Clearly, issues relating to asset acquisition will form a major part of how

physical resources are sourced, but as a tool towards sustainability,

physical resource strategies cannot be denied. Some organisations have

incorporated into their corporate strategies how to deal with ‘operational

waste’, adopting approaches like the 3 Rs: reduce, reuse, and recycle.

Organisations see more benefits accruing to their operations in a variety of

ways. The true cost of waste is higher than most people think; including

the cost of material production, purchase and transport, skip hire, and

landfill taxes, it actually amounts to around 15 times the cost of disposal

(The National Specialist Contractors Council, (NSCC) UK, 2007).


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3.3.6 Ethical Management

The ethics within an organisation is a factor that clearly sets out what is

seen as acceptable and what is not within the workplace. This is not in the

context of purely conduct issues, but expands to consider policy

statements and codes of conduct within organisations. Cole (2004)

explains that the spotlight on business ethics was perhaps most sharply

focused following the Enron and World.Com accounting scandals. It is true

to say that these scandals involved both internal and external ethical

issues, but also clearly demonstrate that organisations need ethical

internal policies and management of those policies if they are to be

sustainable.

3.3.7 Business and Team Cultures and Branding

Culture and branding are included as internal factors because they are

internal motivators aimed at enabling agreement at one or more levels.

Japanese organisations have led the way in relating business culture to

effective branding when companies such as Honda and Nissan brought

their individual cultures to the UK workplace. This revolutionised the view

workers had of the parent company both as an employer and as a part of

the social structure of the workforce.

Within organisations this type of ‘motivational branding’ can be used within

teams or departments to improve performance and bring a sense of

having to perform at a level clearly aimed to support fellow team members

and bring credit to the team.

3.3.8 Internal Customer Awareness Strategies

Internal customer strategies have been developed in many modern supply

chains and businesses, especially where the workforce may have little or

no contact with external customers. These internal customer strategies are

designed to develop the idea that in every department within an

organisation’s operations there are internal customers, and to recognise

that it is a customer of other departments. By adopting the operations

model, it is clear to imply that a department or function’s performance

(output) is in actual fact another department’s or function’s input into its

own transformation process.


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This calls for appreciation of the importance of individual performance

within the overall operations of the business. This also calls for customer

service to be embedded into the grains of all processes of the business.

Some companies have developed continuous improvement cultures into

their operations with a view to enhancing the quality and innovativeness of

the various activities in the business operations. Such strategies have

enabled some businesses to maintain a high standard of internal process

improvement and improved staff morale.

Once staff have an awareness of this internal ‘customer culture’, they

should be better able to understand the need for intra-organisation co-

operation and, where necessary, accept and understand the need for

trade-offs which may not seem to benefit them directly.

3.3.9 Developing a ‘Safety Culture’

This may seem something of a diverse subject in relation to sustainability.

However, in the modern industrial sector poor safety standards can both

undermine staff morale and throw into dispute many of the ethical policy

statements and initiatives referred to already. Organisations sufficiently

bold enough to encourage a safety culture, where staff at all levels are

able to comment on safety in their specific areas of operation and

influence, should reasonably expect some measure of repayment through

improved company loyalty, improved safety standards, fewer accidents,

improved process implementation and an improved sense of belonging.

3.3.10 Training and Development

Training and development is seen by some professionals as a ‘double-

edged sword’. While a progressive and skills-enhancing activity aimed at

equipping an organisation’s staff to enable future expansion and to allow a

seamless shift into new technologies, it also gives staff expectations and

aspirations which, if not fulfilled, can lead to frustration and discontent that

acts against the organisation. There must be a developmental aspect of

any strategy formulation but it must be measured and timely and not be

used as a means to pacify need without strategic payback.


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From the list and explanations above these factors are largely

motivational. Senior managers striving for sustainability should endeavour

to evaluate all possible internal functions, processes, policies and

operation in order to develop sustainability as a means of maintaining and

improving competitive advantage.

To undertake an evaluation of the level of internal sustainability policies an

organisation has in place, it is advisable to use the criteria of durability,

transferability and replicability and test them against each of the internal

factors mentioned in this section.

Task 3.1

3.3.11 External Sustainability

From the list of internal factors found in the section on internal

sustainability, you could argue that some of them have an external effect

outside of the organisation. This can often be the case in large

organisations and managers need to be aware that in an integrated

business the boundaries between internal and external sustainability may

often not be clearly defined.

Consider the intended strategy of an organisation with which you are

familiar and identify at least five internal factors which you consider to

have the potential to impact upon the sustainability of the organisation.

Prioritise and justify each of your selections.


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If we repeat the process used to evaluate internal sustainability you will be

able to examine some external sustainability factors using the following

external factors:

Environmental assessments and audits;

Political, cultural and social positioning;

Customer service analyses and audits;

Flexible work/life employment patterns;

Reward and recognition schemes;

External communication channels;

Physical resource strategies;

Ethical management;

Business culture and branding.

This illustrates the range of factors that should be considered in relation to

sustainability and how some factors dovetail into both internal and external

sustainability factors.

3.3.12 Environmental Assessments and Audits

This is possibly the biggest single factor, in relation to the evaluation of

external sustainability, for much of the transport and logistics industry.

Many organisations use an environmental audit or assessment as a

marketing tool to highlight the company as environmentally sensitive and

able to consider and respect the impact of its operations and policies

relating to the environment in the medium to long term. Increasingly, the

environment features more prominently as a major factor for international

companies.

This is the case for many retail organisations seeking to reduce cost by

sourcing globally and trading in goods and materials which may have been

sourced from environmentally sensitive areas of the world, or be made by

environmentally excessive protocols and processes. Such is the power of

the environmental lobby that strategists need to constantly review overall

aims and objectives to ensure that the operation as a whole aligns with

current and future environmental thinking and acceptability.


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Given that the environment is an emotive and therefore subjective topic,

strategists must also monitor pressure groups, which may generate

negative impressions of the organisation’s environmental position.

This standpoint is often vital in providing competitive advantage in

sensitive markets within some of the more environmentally aware trading

nations, regions and major organisations. Ongoing environmental

assessments will clearly incur large cost, as will activities aimed at

reducing or eliminating environmentally harmful practices and procedures

highlighted in an environmental audit. However, as a potential trade-off the

benefits may well outweigh the costs and effort, and each individual

organisation must act independently to meet market demand in as

environmentally acceptable a manner as possible.

Some professionals argue that the environment is perhaps the most

important external sustainability factor because it is becoming more

commonplace that organisations need to assess the impact they are

making on the environment. Traditionally, many people consider the

environment to be at the very heart of sustainability and have inherent

expectations that successful organisations, and those seeking to increase

market share, are also environmentally focused. This is demonstrated

clearly in the UK retail sector by retailers pronouncing their ‘environmental

credentials’ in relation to sourcing, such as B&Q who source forest

products only from regions with renewable forest strategies, and the Co-

operative Society who actively promote that they source goods under the

Fairtrade agreement whenever possible (see Figure 3.1).

Figure 3.1 Fairtrade Symbol


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The Fairtrade system, originally aimed at ensuring that tea, coffee and

chocolate producers in the Third World received a fair price for their

products, now extends beyond the wholesale and retail sectors within the

UK and is growing into the societal fabric of many communities. An

initiative started in 2003 and gave London Fairtrade city status. This has

been mirrored by other UK towns and cities, leaving many organisations

with no alternative but to raise the profile of their environmental activities in

order to maintain their competitive advantage in this area. Clearly, the

environment is a sustainability factor with many positives for proactive

environmentally conscious organisations.

3.3.13 Political, Cultural and Social Positioning

Positioning an organisation for particular external markets and suppliers

needs to be considered in a similar manner to environmental

assessments. Modern organisations cannot swim against a tide of public

opinion which may be generated from trading with politically unacceptable

nations and states, trading with some cultural groups or conducting

business at inappropriate social levels. Each organisation must assess

these factors and consider whether the political, cultural and social

position of their suppliers and customers is acceptable and fits with their

global strategy.

Of the three areas above, political and social positioning are commonly

controlled by various forms of legislation. Cultural fit is a more difficult

matter for strategists because of the constant change of attitudes towards

equality, working patterns and social acceptability. It is compounded by

the move towards internal trading or global trading where strategy shapers

may be drawn from different cultures and backgrounds, each having

different levels of cultural expectation, acceptability and tolerance. For

instance, some cultures, particularly those from Latin European extraction,

produce more risk-averse managers than other cultures. Western cultures

tend to produce managers who have a more ‘planned style’ of cultural

management. Japanese culture is prepared to adapt strategy to local

situations with the acceptance that uncertainty exists as an ever-present

factor.


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If one argued that many of the cultural fit elements are internal factors, it is

probably true to say that they could live in either sector because of their

potential to impact externally. This again demonstrates the complexity of

sustainability and the rigour with which successful organisations must act

in order to use sustainability to enhance competitive advantage.

Evaluation of the factors that affect political, cultural and social positioning

will reveal the level of external sustainability engaged by the organisation.

3.3.14 Customer Service Analyses and Audits

These are other areas where one could reasonably express an opinion

that these activities have taken on such significance that they now

resemble a discrete discipline in many customer-facing organisations.

Customer service analyses are undertaken not only to extract information

relating to how well the supplier organisation may be performing, but also

to monitor customer performance against contractual and non-contractual

performance indicators.

The importance of customer analyses becomes more apparent when

competitive advantage is directly linked to resource optimisation. If

customers fail to perform in a manner expected, or even demanded, by a

contract, then the supplier organisation needs to respond rapidly with a

revision of the contract, including possible termination, and with some form

of tariff revision. When customers outperform expectation they will

certainly expect some form of reward, usually in a reduced tariff or

improved service standard.

It is now a common practice to analyse and audit customers. Customer

organisations which outsource have attempted to reduce their vulnerability

to market fluctuation by engaging more than one service provider. This not

only encourages different logistics providers to demonstrate a service

advantage and value, but also means that customer organisations are

able to ‘play off’ suppliers and are not as strictly accountable to a sole

provider as they may be otherwise.


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3.3.15 Flexible Work/Life Employment Patterns

Flexible patterns were included as internal factors. However, in the

external context organisations that are able to flex conditions of working

are more likely to be able to flex service standards for their customers to

meet demanding service levels and changes brought about by market

forces. In addition, many customers seek to align themselves with

progressive suppliers and subsequently use this alignment as a marketing

tool.

3.3.16 Reward and Recognition Schemes

Such schemes can be used to stimulate customer and supplier

performance and are used extensively to reward those customers and

suppliers able to provide services at a minimal cost to an organisation. It

should be recognised that reward and recognition schemes also operate

at a political level where incentive schemes and funding are made

available by national, regional and local governments to stimulate external

investment into regions suffering from poor economic performance or

other forms of investment shortfall. This form of reward and recognition

has been used extensively by organisations in order to drive down cost

and improve their market performance. For example, many Japanese and

Korean-owned companies were encouraged into the UK’s South Wales

region after the demise of the UK coal industry, in order to take advantage

of the availability of former mine workers. Retail organisations such as

Tesco, and major manufacturers such as the international brewer

Interbrew, were also encouraged into South Wales, close to both Welsh

and English markets, for the same reason and given similar incentives.


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3.3.17 External Communication Channels

At first glance this may appear less obvious as a sustainability factor.

Without clear, open and honest communication between supplier,

manufacturer, delivery and customer organisations, none will be able to

make any timely response to forthcoming change. This may well cause

catastrophic damage and loss of business when one supply-chain

organisation ceases to function as expected or decides to diversify without

informing the other supply-chain stakeholders. This becomes an obvious

factor when the media reports that the closure of a large organisation is

expected to decimate the local economy in the area of closure. This

‘knock-on’ effect is often more dramatic in relation to small and medium-

sized organisations.

However, given the sensitive nature of major closures it must be expected

that information relating to many major changes will be commercially and

politically sensitive and therefore not readily available. Maintaining open

relationship and clear communication channels with commercial and social

groups in all areas of operation will provide information that can be used in

the event of major change, allowing a suitable organisational response.

3.3.18 Physical Resource Strategies

These strategies can be seen as an external sustainability factor because

of the impact they may have on customers and suppliers who may need to

ensure that systems are compatible and that equipment is able to function

across all the supply-chain links. This includes external-facing resources,

such as vehicles, ships and aircraft, which are often painted with a

customer’s livery to reflect the customer’s business image. This means

that replacement and procurement strategies need to be formulated not

only to reflect the operating organisation but also in conjunction with

customers seeking a liveried identity.


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3.3.19 Ethical Management

This is both an internal and external factor, given the sensitivity of many

markets. Externally, organisations cannot ignore cultural sensitivities such

as human rights issues, child labour, poverty and deprivation if they intend

to grow their business in the developed world. Currently the general belief

is that organisations capable of exploitation should not act on it. Where

that duty is abused or ignored, consumer and political backlash may

follow. This sort of backlash has already seen Fairtrade become an

increasingly important factor for many businesses and has seen quotas

and agreements being formalised aimed at reducing child labour

exploitation.

3.3.20 Business Culture and Branding

The final item on the short list of external factors is included as a reminder

that customers and suppliers like to be seen to be associated with

successful organisations. Few would argue that ‘success breeds success’

and this adage carries over into strategies for sustainability. A strong

brand enables organisations to recruit the best staff available and to use

the brand as a marketing tool, enabling them to charge premium prices. It

is not difficult to identify leading brands, organisations and companies who

actively market the strength of the brand to gain competitive advantage

through either price discrimination or limited availability.

You should now recognise the tools needed to evaluate the external

positioning of the organisation in relationship to its sustainability. Using

the criteria of durability, transferability and replicability, you can now

undertake an external audit of sustainability. Once completed, you will be

able to view both internal and external audits and assess the

organisation’s sustainability policies overall.

Task 3.2

Consider the intended strategy of an organisation with which you are

familiar, and identify at least five external factors which you consider to

have the potential to impact upon the sustainability of the organisation.

Prioritise and justify each of your selections.


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In summary, sustainable organisations need to be able not only to react to

changes both within and externally, but also to be proactive in their

strategic planning and willingness to embrace change. What should also

have become clear is that organisations seeking sustainability must also

regard all market-led information, and internal issues and factors, as

potential areas for consideration of impact either towards enabling

sustainability or endangering it.

In assessing the potential that an organisation has to shape the

environment and thereby, to some degree, shape its own sustainability

within the environment, senior managers and strategists need to seek out

opportunities that can enhance the potential sustainability of the

organisation. They must assess all internal and external factors and seek

out strategic relationships, never standing still but continually shaping the

organisation for the future.

You can now combine all assessments with an added ‘impact versus risk’

assessment to clearly identify and evaluate the positives and negatives

associated with any strategic change, and enable the organisation to

respond to the factors which have the greatest potential to impact upon

the present and future strategic direction, aims and objectives.

For illustrative purposes, Table 3.1 overleaf could be used to support

decision making from a risk analysis process that identifies and classifies

the potential and impact of risks.


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Table 3.1 Risk Assessment

Likelihood or

probability

Impact or consequences

1 Insignificant

2 Minor

3 Moderate

4 Major

5 Catastrophic

A Almost certain

B Likely

C Possible

D Unlikely

E Rare

Task 3.3

In 500–800 words, explain how the organisation may minimise or

maximise any of the identified associated impacts relating to the

sustainability of the organisation.


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3.4 The Impact of an Organisation on the

Environment

Given that the environment

is at the very heart of

sustainability, it is only

proper that we consider it

worthy of detailed

assessment. In this respect

we will examine how

organisations may reduce

their impact upon the environment, and how organisations discover new

ways of meeting environmental challenges and at the same time develop

in a sustainable manner.

As with sustainability, the environment may also be seen as having

internal and external dimensions, and strategists must consider both of

these factors when considering how any planned changes to the business

may impact upon the environment as a whole. There is also an increasing

amount of legislation that also requires close attention to avoid costs

which have to be met for any non-compliant activity under the provision

that the polluter should pay.

The law, certainly in the developed world, has the ability to enforce

reasonable environmental standards in relation to external pollution,

especially pollution of the atmosphere, water and noise; light pollution and

visual intrusion are catered for under legislative regulations. It is

worthwhile concentrating on the advantages, other than ‘environmental

badging’, there may be for compliant businesses and organisations

seeking to benefit from investment in environmental initiatives.


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3.4.1 Industry Standards

By reducing energy consumption, organisations can benefit from not

having to pay for excessive waste disposal and avoid taxes such as the

‘Carbon Tax’. There are also government-led schemes to promote the use

of low-emission vehicles in the form of Euro III and Euro IV compliant

engines which, in the UK, are effectively able to operate at a lower level of

vehicle excise duty (VED) upon production of a Reduced Pollution

Certificate (RPC). State schemes like this also apply to smaller low-

emission vehicles and vehicles that can use gas or electricity as an

alternative to petrol or diesel.

Businesses which are able to change their working patterns may also be

able to achieve reduced cost by shifting activities such as distribution to

night-time operation, incurring fewer delays caused by congestion. Not all

operations are suitable for out-of-hours operations, but those that are,

such as retail time-sensitive goods and parcels operations, have for many

years enjoyed the savings associated with uncongested roads and fewer

delays.

The examples above demonstrate that organisations need to constantly

seek out advantages to ‘trade off’ the ever-rising costs of compliance.

Effective management of the environment may be achieved through

adherence to standards such as ISO 14001, which clearly provides

organisations with a set of ‘best practice’ standards that, once

implemented, may be monitored.

Figure 3.2 overleaf illustrates a set of 13 typical questions that would need

to be asked when considering building a new warehouse or plant close to

a residential area. These types of questions should be asked before any

purchase of land is made or work is undertaken.

These are sample questions based on a general proposal to erect a

building. They demonstrate the impact on ‘the environment’ as a whole

which needs to be considered and not just the ‘greener’ items that

naturally spring to mind.


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Figure 3.2 Typical Pre-Building Project Environmental Checklist

1. Does the projected building fit within the proposed site?

2. What is the access like for the construction and afterwards, for

the operation?

3. What buildings are close by and which way are they facing?

4. Are there any features on the site that might be either

incorporated into the project (e.g. trees) or need to be moved or

protected in some way (e.g. historic monument)?

5. How will the neighbours and the public at large view the

development?

6. Have you considered the surrounding area and its features?

7. How will your proposal blend with the existing environment and

buildings?

8. How does the level of the site compare with the surrounding land

levels?

9. What depth is the water table and what is the structure and

nature of the soil and sub-soil?

10.Where are the nearest services and what drainage services will

you need?

11.Are there any restrictions on the materials you intend to use in

the construction?

12.What laws and bye-laws might need to be considered?

13.Are there any other local features or factors that might need to be

considered during construction and afterwards?

(Copyright 2003 The Learning and Skills Council)


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3.4.2 Alternative Schemes

Many organisations may benefit from achieving an industry standard.

However, there are others which for differing reasons seek to comply

without joining a formal scheme. In these cases, within the UK, the

Department for Environment, Food and Rural Affairs (DEFRA) has

guidelines sufficient for organisations to use to reduce energy

consumption and drive down waste production. These guidelines ask

organisations to carry out mini-environmental audits on certain aspects of

their business activities and to ask themselves questions such as the

following:

What impact does your operation have on the environment?

What type and quantity of waste do you produce?

Where is your waste taken to and how it is processed?

What is the current best practice in relation to pollution control?

What modes of transport are used in your operation?

What packaging do you dispose of and is the disposal compliant?

How do you monitor your environmental compliance standards?

Are senior management actively involved in environmental

management?

How do you intend to improve your environmental performance?

These types of question are all aimed at helping organisations to ask

pertinent questions regarding the environment. Where they cannot be

answered sufficiently to assure compliance or efficiency, organisations

must seek further assistance through appropriate government agencies.

Within most industries, many of the market leaders recognised that

efficiencies were essential to their success. For many years leading

businesses have formed strategies that included monitoring inefficiencies

within their supply chains. This has been especially common in the

transport sector where fuel usage, tyre wear, maintenance costs, accident

damage, vehicle utilisation and routing are monitored to minimise waste

and inefficient activity.


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DEFRA has also provided further guidance on managing consumer

demand by encouraging the purchase of sustainably sourced products or

the most nutritious food in order to help to deliver environmental and

health goals.

Using the guidelines suggested by government agencies, such as DEFRA

in the UK, can be a useful tool to assess the environmental impact of a

transport or logistics operation.

3.4.3 Examples and Exceptions

A logistics or transport operation should use different transport modes to

optimise the available infrastructure and reduce their costs. As many

supply chains become extended and more efficiencies are demanded,

some of the traditional modal usage has been replaced in the drive for

‘efficiency at any price’.

For instance, during the fuel crisis in the UK in 2001, many of the leading

retailers temporarily used airfreight to import food items into the UK.

Airfreight is not suitable for the transport of tomatoes due to the high

commercial cost and low value of the product, but, under commercial

pressure, it was seen as viable in the short term.

Following the fuel crisis, many UK retailers continued to use air transport

for the movement of perishable goods, trading off cost and environmental

considerations against demand and customer expectations.

In another example, the Karachaganak gas field in Central Asia, which is a

major contributor to the economy of the Republic of Kazakhstan, will

transport by air heavy machinery from around the globe in order to prevent

the loss of production estimated at many millions of dollars per day – the

reasons to justify the use of air being the impact upon the regional and,

possibly, national economy if not resolved as quickly as possible.

A UK example is the Royal Mail who recently ceased to use rail as a mode

of transport for intra-UK movements and now uses only air and road. This

move was brought about by the inefficiencies and poor service level

compensation costs stemming from the use of rail.


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Rail service levels were not sufficiently high to enable the Royal Mail to

meet the service levels targets set by the postal control authorities. The

need to meet targets and improve efficiencies outweighed the cost of the

modal switch. However, air is still required in order for Royal Mail to meet

targets and delivery times set by the UK Government.

3.4.4 Business Perspective

While the environment is a major factor in a logistic or transport operation,

there can be circumstances where environmental best practice may not be

economically enforceable. In the case of the Royal Mail, it seems a

contradiction that a government, clearly wishing to be seen as a supporter

of environmental measures, sets targets requiring bulk mail movements by

air.

There is ongoing activity by many governments across the world, including

grant aid and business subsidies, aimed at persuading businesses to

review transport and energy use to seek out alternatives to traditional,

high-energy operations. Governments are encouraging innovation and

alternative renewable energy sources to be used by businesses seeking

low-energy-use solutions.

Even governments themselves are not immune to environmental scrutiny.

For instance, the UK has the Environmental Audit Committee based in the

House of Commons which has a remit to consider to what extent

government policies and programmes contribute to environmental

protection and sustainable development. Additionally, governments are

expected to audit departments' performance against targets set by elected

officials, and to report successes and failures back to the governing body.


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Waste minimisation is suggested through the use of lean principles

outlined by Taiichi Ohno's Seven Wastes (1988). This aims to reduce

waste at all stages of a supply chain and includes:

Unnecessary transport of materials;

Inventories beyond the absolute minimum;

Motions of employees;

Waiting for the next process step;

Overproduction ahead of demand;

Over-processing of parts;

Producing defective parts.

Further waste reduction schemes are also commonplace. For instance, all

forms of unitisation save both energy and packaging. While reverse

logistics acts to re-deploy resources and to centralise controlled waste,

these practices have been embraced as useful tools able to reduce

operational costs still further.

Within the organisation there should be a general awareness of the impact

of activities on the environment. This should be sufficient for all staff to be

able to comment on potential improvements to waste reduction. There is

also a requirement under Health and Safety legislation which may not

appear to be directly linked to the environment. This is the requirement for

a safe workplace with efficient, well-maintained equipment with up-to-date

facilities which will use less energy and produce less waste.

It is also possible to apply the seven wastes concept to assess urban

transport planning. Does the proposed transport plan encourage any of

the seven wastes? Or has passengers’ use of the public transport services

been improved and made more efficient? The tangible benefits of less

movement and the use of existing facilities encouraged by avoiding some

or all of the seven wastes will be a reduction in fuel usage and the saving

of passengers’ travel time.

You should now be able to assess the impact of the organisation on the

environment, using tools such as the seven wastes as a checklist to audit

the effect of logistics and transport activities on the environment.


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Task 3.4

Produce an environmental checklist for an operation with which

you are familiar.

Use the seven wastes to help you compile the checklist. Comment

on any items in your checklist that are linked to set industry

standards or legislative compliance.

From the checklist you produce, develop a system for monitoring

environmental performance and taking remedial action where it

may be required.


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3.5 The Impact of Strategic Relationships

Strategic partnerships and alliances can be used as an external method of

moving towards and assuring sustainability. They are commonplace

throughout many industries especially within the transport and logistics

industries. The successes of Exel PLC which, from the very beginning,

sought to form strategic partnerships with customers and suppliers as it

expanded to become the largest of the UK’s logistics providers is one such

example. Most local transport authorities form strategic partnerships with

various transport providers to guarantee continuity of service in a town’s

urban transport system.

If we continue to examine Exel, we will see that they have not only

benefited from close relationships, but also from such things as cultural

alignment, strategic dovetailing, improved information flow and economies

of scale. This acknowledgement of the power of strategic relationships

resulted in the merger with Ocean Group giving Exel a truly global

capability and creating one of the world’s largest global supply-chain

management companies.

At a conference in 2002, an Exel spokesman stated that the merger was

taken in response to market forces that continued to react to very strong

economic pressures for outsourcing and global supply-chain services.

Supply chains were continuing to get longer. They were seeing

manufacturers of electronic components and other goods move into Asia

and Latin America – places where manufacturers could secure more

efficient and lower-cost production. This was having the effect of

lengthening supply chains and putting supply-chain businesses in greater

demand in terms of its products and services. The spokesman went on to

say that because the merger gave Exel increased scope, improved

flexibility and improved competitive advantage the outlook was very

positive. Strategically, Exel wanted to develop the group in line with their

core strategy which was built around a strong customer focus, thereby

enabling them to build deeper and stronger relationships with many

different customers in all their markets. Additionally, Exel wanted to

increase the services they provide to their customers, as well as

expanding the global coverage in different regions of the world.


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Exel, and logistics businesses in a similar position, recognised that

sustainability was about economic growth and acted in a most timely

manner to effect the required change in order to secure their future.

Recently this resulted in DHL taking over Exel PLC.

In demonstrating how one organisation has maximised the use of strategic

partnerships we must not forget that operations on the scale of Exel and

DHL, and almost any size of corporate partnership, will require careful

strategic management in order to maximise the benefits and minimise any

adverse effects, environmental, economic, social or cultural, which may

arise from such an alliance. The strategic tactics demonstrated by Exel are

not solely the province of larger organisations; similar strategies can be

used by smaller transport and logistics businesses.

Successful organisations seek sustainability through competitive

advantage and this often requires some form of trade-off activity in order

to ensure that competitive advantage is not gained by any unacceptable

behaviour of stakeholders. This has the effect of creating alliances and co-

operative activities aimed at minimising any adverse effects resulting from

strategic relationships. Many leading organisations now include social

development programmes as an element of their strategic objectives when

considering expanding into poorer or relatively underdeveloped countries.

This activity counters any claims of exploitation but ethically it is also an

investment in the future as it enables the organisation concerned to

develop a societal acceptance in the country or region. This goes a long

way to underpin any economic advantage that may be the only

quantifiable result of an investment aimed at reducing cost.


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3.5.1 Third-Party Logistics Providers and Other

Relationships

Whilst major global and international partnerships on the scale of BP,

Exel, Honda and Sony are notable, it is also worth considering what

advantages and disadvantages there may be between more

straightforward strategic partnerships when two or more businesses come

together to formulate a combined strategy for the future. This type of

simple strategic relationship is most commonly found in small to medium-

sized businesses, where each of the organisations involved is seen as

critical to each other’s success (see Figure 3.3). Other types of strategic

alliance are between large and small organisations. These are often

preferred by large firms, as they can exert power over the smaller

business to guarantee low prices and a flexible service. The advantage to

smaller firms is the guarantee of regular revenues, which leads to cost

savings and lower risk.

Figure 3.3 Simple Strategic Alliance

Customer

3PL

Provider Supplier


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In the case of a simple third-party logistics partnership, there may be

similar social considerations, perhaps relating to out-of-town shopping,

local employment and skills availability. The majority of the advantages

and disadvantages are commercially related and focus around

interdependence. Any new strategic relationship can incur acquisition,

development and ongoing IT support costs. Additionally, there could be a

rationalisation of computer networks, retraining of staff, cultural alignment,

possible redundancies, recruitment, and customer and supplier

rationalisation. The interdependence between strategic partners requires

commitment and investment if it is to produce the desired win-win result

for all concerned.

Partnerships and alliances also come in different forms. For instance,

there are joint ventures whereby partners come together for a specific task

with no intention of forming a long-term relationship. The use of

intermediary organisations enabling temporary access to markets and

business sectors by acting as gatekeepers is another form of partnering.

These sorts of temporary alliances may also be formed to provide skills in

new areas and access to new markets.

Case Study

Next Wave Partners has combined with CMS Network (London) and

Secured Mail to create ‘The Delivery Group’, which will provide mailroom

outsourcing and automated downstream access mail and e-commerce

logistics services for its clients. Secured Mail and CMS will continue to

operate under the same trading names and be run by the same teams.

Both businesses will, however, have access to a broader product range

and customer base and look to increase the range of services offered.

Through alliances and acquisitions, where appropriate, the group aims to

maintain a strong market presence by expanding the product range

offering that meets customer needs in the changing marketplace.

(Source: Logisticsmanager, 2015)


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3.5.2 Public–Private Alliances

Often governmental public-sector activities combine with the private sector

in order to achieve some major infrastructure improvement or

enhancement. Examples include major civil engineering projects, such as

dams, airports, tunnels and bridges. Many governments encourage

partnerships on these projects with the private sector.

In the UK, public–private partnerships (PPPs) bring public and private

sectors together in long-term partnership for public projects. Governments

elsewhere in the world use similar arrangements.

The Private Finance Initiative (PFI) is a procurement mechanism by which

the public sector contracts to purchase quality services on a long-term

basis so as to take advantage of private-sector management skills. This

includes concessions and franchises, where a private-sector partner takes

on the responsibility for providing a public service including maintaining,

enhancing or constructing necessary infrastructure.

The full range of PPPs in the UK is explained in the Treasury publication

‘Public Private Partnerships: The Government’s Approach’ (2000). Most

governments worldwide use some form of public–private partnership, but

the actual arrangement will be unique to that nation. Successful PPP

projects have also been recorded in Hong Kong and Australia, with

observations made that the key success factors in these projects were the

commitment and responsibilities of the sectors in risk allocation and

sharing amongst the partners.

All types of change have costs and effects, in areas ranging from effects

on local economies and markets to internal resistance to change. These

all need to be managed and evaluated for risk if the organisations

concerned are not to face some previously unexpected adverse result of a

strategic relationship. While there may be unexpected advantages from a

relationship, these are usually more easily and readily managed than

those requiring damage limitation.


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The whole purpose of any strategic relationship must be to gain some

form of competitive advantage for the organisations concerned, while at

the same time ensuring the correct levels of investment are made to

permit the future strategy to become a reality. All the organisations

involved will find a need to change and adapt, and must be prepared to

adapt a culture of best-practice working for the newly formed relationship if

it is to succeed.

You should now be able to assess various internal and external

relationships that are often formed with logistics and transport businesses

and recognise the trade-offs of such partnerships. The key to successful

strategic relationships is identifying areas where the different

organisations’ skills complement each other. The Exel merger with Ocean

Group and then DHL occurred because Exel wanted a global network so

they could work with longer supply chains as more of their customers

outsourced goods globally. Ocean Group’s competitive advantage, being

primarily a freight forwarder, was its global delivery network and keeping it

filled with freight. Empty ships and containers mean reduced profits

through higher costs. Both organisations had something to offer one

another and both would benefit. Thus a merger took place allowing both to

take advantage of these factors.

By examining the core competencies of potential strategic partners and

recognising areas that can ‘dovetail’ with each other, you will be able to

identify strategic partnerships which should be successful for both parties.


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Case Study – Energizer

Energizer combines a strong commitment to work/life balance with a

pragmatic understanding of the difficulties involved in providing flexibility

and meeting business needs. The company has offered some flexibility

around working hours for a number of years but has recently taken a more

systematic approach. ‘We tried to write a flexibility policy,’ says HR Co-

ordinator Karen Johnson, ‘but everyone is so individual we decided to

come back to our core value of communication. As well as having regular

team and one-on-one meetings, we use our company newsletter to share

stories around flexibility and we also started a cross-functional team to

look at employee satisfaction, including work/life balance.’

‘One thing that we hoped to improve through our flexible approach is a

better understanding of what issues our team members are facing. We

found that when we were not communicating effectively we were having

increased absenteeism. Flexibility works, however you have to be seen to

be managing people who aren’t managing the flexible work model well.

We need people to tell us in advance if they can’t be here. To make it

work, everyone has to play their part in communicating.’

An example of one staff member who had always been quite reliable

suddenly being regularly absent from work without any explanation is used

in this case study. It emerged that the employee’s family situation had

changed and he was having difficulty managing his family needs

(especially transporting children to school) with work commitments.

Energizer gave him two weeks’ leave to allow him to deal with the

changes to his situation and get back into a routine. He is now working

well within the flexible framework.

Staff are also encouraged to talk with their manager if they are having

difficulty managing personal and work/life issues. Managers are also

required to ask team members if they have work/life balance issues and

this has become an integral part of the twice-yearly formal review process.

This is a way, it is assumed, in which the organisation can encourage

people to ask for what they need.


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The adoption of flexible working is paying off for the organisation and its

employees. There is low staff turnover and a significant decrease in

absenteeism.

Case Study – Transport for London

Transport for London is a UK local government body tasked with offering

sustainable passenger and freight transport to the people of London. Key

to the success of Transport for London are its attitudes to sustainability

and effort that goes into assessing the impact of various transport

schemes such as congestion charging and the special technology used by

passengers to charge fares, the Oyster card. Research information about

Transport for London’s successes and answer the following questions.

Identify and evaluate Transport for London’s sustainability strategy;

Recognise and evaluate how Transport for London contributes to

sustaining the environment in London;

Assess the impact of the various partnerships and relationships in a

logistics or transport context.

Task 3.5

The completion of this task closes the third element of the unit and we can

now move on to the final element where we will consider, amongst other

things, competition and risk related to different types of businesses and

how risk may be analysed.

Consider an organisation of your choice and, given its current

performance and direction, identify at least two potential strategic

partnership organisations which may provide win-win sustainable futures

for all concerned.

Use 600–800 words to explain the reasons for your selections,

identifying the ‘win-win’ factors for each organisation involved.


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4. Competition and Risk



Understand alternative models of competition;

Understand the types of significant performance failure.

4.2 Introduction

The final element of this unit examines the areas of different types of

competition and the inherent associated risks each one possesses. It also

looks at alternative means of collaboration and the potential impact of

supply-chain dysfunctionality, and considers the need for risk assessment

and contingency planning.

4.3 Competitive Structures

In addition to external

environmental analysis

alluded to earlier, it is also

necessary to examine further

the degree of competition

with markets or market

segments. Applying

microeconomic theory,

market structures depend to a large extent on the degree of concentration

of buyers and suppliers, with most markets being somewhere between the

two extremes of perfect and monopoly markets. Every business sector has

its own structure, often formed over many years. These structures take the

form of monopolies, cartels, oligopolies, monopsonies, perfect and

monopolistic structures, and have sometimes been shaped by strategic

alignments and partnerships. In this section it will help if we consider the

associated risks, including any legal risks, and benefits from the various

structures.


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4.3.1 Monopolies

A monopoly is defined as a situation where there is only one seller or

supplier of a good or service, and therefore faces no competition. For

example, Ross Perot, who founded Texas Instruments, made his fortune

by being an exclusive supplier of computer services to the US

Government. This enabled Texas Instruments to charge whatever prices it

wanted for its services and products, as no competitors would undercut

them.

The statutory definition in the UK of a scale monopoly is 25% of the

relevant market. Within the UK most monopolies require some form of

licensing and are closely monitored. Most countries control monopolies

through legislation, either to break them up or form them.

Disadvantages of monopolies have been studied by the economist Harvey

Leibenstein (1966), who invented the term ‘X-inefficiency’. Leibenstein

(1966) was concerned by the fact that preferred behaviour is not

maximising in nature and the cost of policing is often more than the

benefits. Leibenstein thought that in many large organisations there was

‘organisational slack’. For instance, organisational slack could be

illustrated when a manager receives a sports car as a company car when

they would have been satisfied with a standard saloon car. Leibenstein

believed that organisational slack exists because of a lack of knowledge.

There have been a number of measures of X-inefficiency; R. Frantz (1987)

estimated that over 50 empirical studies support this theory.

X-inefficiency affects many state-owned businesses. State-supported

motor manufacturers such as Renault illustrate this effect clearly. Renault,

now facing real competition, has cut its workforce considerably.


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As well as failing to be productively efficient, monopoly is also criticised for

being allocatively inefficient. This type of efficiency is concerned with

whether resources are used effectively to produce the goods and services

demanded by consumers.

For instance, in 1993 Mercedes announced it was going to remove many

of the features on its S-Class cars as consumers indicated that they

wanted a cheaper Mercedes without gadgets. The result was a new car,

the A-Class. Marketing strategists believe that competition forces firms to

be alert to consumer preferences and to produce goods at competitive

prices.

This is supported if we consider that the shift to the Mercedes A-Class

would probably never have happened had Mercedes had a monopoly. As

monopolies do not face competition, they do not have to be allocatively

efficient.

Advantages of monopolies include dynamic efficiency and economies of

scale. Dynamic efficiency is concerned with how resources are allocated

over a period of time and takes practical form in that large and

monopolistic organisations are able to invest in research and

development. Large monopoly businesses benefiting from economies of

scale must be of the most compelling arguments for their existence since

lower prices can then be passed on to the consumer. Unfortunately,

monopolies do not tend to do this and instead keep the excessive profits.

Within the UK, the role of the Office of Fair Trading (OFT) is now assumed

by the recently created Competition and Marketing Authority (CMA), which

monitors markets to ensure that sustainable economic growth is delivered

through positive competition that makes markets perform well for

consumers, businesses and the economy.

(Source: https://www.gov.uk/government/organisations/competition-and-markets-

authority)


https://www.gov.uk/government/organisations/competition-and-markets-authority

https://www.gov.uk/government/organisations/competition-and-markets-authority

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4.3.2 Oligopolies

Oligopolies are becoming predominant in modern business. The term

‘oligopoly’ refers to a market structure where an industry is dominated by a

small number of large sellers. Because of their size, these sellers are also

dominant buyers in the marketplace. This is termed 'oligopsony'. The

industries are often referred to as an oligopoly as there are a few large

players that dominate the market.

Figure 4.1 illustrates some examples of industries dominated by an

oligopolistic market structure:

Figure 4.1 Example of Oligopolies

Groceries – dominated in the UK by Asda/Wal-Mart, Tesco,

Sainsbury’s and Safeway/Morrisons.

Brewers – Interbrew, Scottish and Newcastle, Guinness, and

Carlsberg Tetley have a four-firm concentration ratio of 85%.

Fast food outlets – McDonalds, Burger King, KFC.

Bookstores – Amazon, Barnes & Noble, Blackwells,

Waterstones.

Music retailing – HMV, Virgin, Tower, Amazon, MVC.

Banks – NatWest, Barclays, HSBC, Lloyds TSB, Santander.

Electrical retail – Dixons, Currys, Comet.

Electrical goods – Sony, Hitachi, Panasonic, Canon, Bush, Fuji,

Apple.

Mobile phone networks – O2, Vodafone, Orange, T-Mobile.

Home DIY – B&Q, Focus, Homebase.

(Source: www.bized.ac.uk/educators/16-19/economics/firms/activity/structure)


http://www.bized.ac.uk/educators/16-19/economics/firms/activity/structure

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Other examples can be found in the oil and gas industries, e.g. Shell, BP,

Mobil, and Total; and the humanitarian sector, e.g. Red Cross

International, World Food Programme (WFP), and United Nations

Children's Fund (UNICEF). There are oligopolies in automotive industries

depending on the level of analysis.

Advantages for oligopolies are that they do not suffer the same degree of

scrutiny as monopolies, and they are able to collude with each other to

agree such things as geographically advantageous markets and to use

product differentiation instead of price-cutting in order to maintain

profitability.

Disadvantages include the need for aggressive advertising, the inability to

gain monopolistic economies of scale and the fear of collusion shifting

them into a cartel. Cartels are discussed in more detail in the next section.

4.3.3 Cartels

A cartel is a collusive oligopolistic activity to form or establish some central

body with responsibility for setting the industry price and output. Cartels

are often classed as illegal in many countries including the UK.

When businesses engage in collusion they may agree on prices, market

share, and advertising expenditure, ensuring that the cartel can maximise

profits by behaving as a monopoly. However, having agreed on the cartel

price the members may then compete against each other using non-price

competition to gain a bigger share of the market, or they may decide to

share the market between them. In either case the consumer interest is

not seen to be served. In the UK, Virgin and British Airways (BA) airlines

agreed on price fixing, a case that ended up in court resulting in a heavy

fine for BA, whereas Virgin decided to come clean by admitting collusion in

price fixing.


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4.3.4 Monopsonies

A monopsony is a state where a business has total market domination in

terms of employment. In real terms it can mean that a major employer in a

certain area is able to pay below-average wages, because they have total

dominance of the labour market. It also leads to a position where skills in

certain areas become aligned to the sole business activity, leading to

extremes of hardship should the business or industry in question relocate

or close. This has happened in the UK with the demise of the coal industry

in South Wales.

4.3.5 Perfect Markets

Perfect competition, an economic theory that is the basis of supply-and-

demand theory, is thought to exist when changes in price or demand are

immediately reflected by suppliers so a point of price equilibrium is

achieved. The key to perfect competition is the universal availability of

information, ease of entry to the market, and no supplier or buyer

dominating the market. In the real world these conditions are not met.

Perfect information is the most obvious condition which is not met.

Organisations spend a considerable amount of time keeping information

from competitors. Also, some markets have dominant buyers or suppliers.

In an ideal or perfectly contestable market, the costs of entry and exit by

potential rivals are zero. In such cases the possibility of earning economic

profits attracts new firms to enter, thus driving profits down to a normal

level.

4.3.6 Monopolistic Market

These various market distortion factors lead to a situation where imperfect

competition exists and the supplier, the customer, or both are

disadvantaged in some way. Many businesses are now operating in

environments that are neither perfect nor pure monopolies and the pricing

activity is not the only criterion for survival. Other actions that businesses

are taking include product differentiation, and linkages with companies

through some alliances and joint ventures. This market situation is often

referred to as a monopolistic type of market condition.


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Differentiation is a key generic strategy proposed by Michael Porter in his

four generic strategies that organisations are likely to adopt. Refer to

element 3 – Sustainable Corporate Development earlier.

The economists argue that the threat of this happening ensures that firms

already in the market will keep prices down so that normal profits are

achieved, and produce as efficiently as possible taking advantage of

economies of scale and new technology. If the existing firms did not do

this, entry would take place and the organisation would face new

competition.

The different competitive structures formed in industry often reflect the

historical development of an industry. However, while monopolies and

monopsonies are generally declining, oligopolistic and monopolistic

markets appear to be in the ascendancy and strategists need to consider

the plus and minus factors of entering into markets where imperfect

competition has such power.

You should now be able to recognise different types of competition

existing in markets and be able to assess the risks and benefits of these

market structures. What is clear is that the total number of organisations in

one industry may influence the level of buying power of their customers

over their suppliers. It also goes without saying that this mix of

organisations in an industry will influence the level of profitability and

therefore the competitive strategy that is likely to be adopted.

Task 4.1

In 500–600 words, consider the rise of oligopolistic and monopolistic

businesses in the grocery sector and the retail book sector.

Explain the advantages and disadvantages for the businesses identified

and the customer base.

Include in your answer any collusive activity that you may have

identified.


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4.4 Collaborative Structures

Earlier we examined strategic partnerships and alliances. We have also

considered alternative alliances and market positioning all aimed at

enabling business to increase market share, recognising that some forms

of business positioning carry both positive and negative factors which

strategists need to identify, assess and act upon as necessary.

Whilst it is appreciated that many forms of business alliance will require

official authorisation or licensing, and others will certainly attract close

scrutiny where collusion may be suspected, disproportionate control over

a market may result from some form of mutually beneficial ‘partnership’

being regulated. You should recognise that other collaborative options

exist and many short-term options are available to meet a specific

organisation’s needs.

Strategic long-term options not covered include the forming of co-

operatives. This is a form of collaboration for the mutual benefit of the co-

operative members. They agree to certain specific benefits in order that all

members benefit from advantages brought about by the formation of the

partnership. An example of this is economies of scale, which the co-

operative gains as a larger trading entity. These economies can then be

passed back to co-operative members.

Third-party and lead logistics operations fit into a strategic partnership

category. Third-party logistics operators are common, but lead logistics

activities were initially viewed by some with a certain amount of

scepticism. The concept does have merit for some applications and has

been seen to operate successfully.

Joint ventures (JVs) for both long- and short-term projects are another

possible collaboration open to businesses seeking to exploit a preferred

option for a specific purpose. PPP and Private Finance Initiative (PFI) are

commonly acknowledged as joint ventures, but the sponsors of projects

requiring multi-skills expect businesses tendering to use the formation of a

JV in order to improve their chances of successfully tendering for the work.


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More recently, the use of franchising schemes has seen oligopolies

formed which, by definition, fall somewhere between a partnership, a co-

operative and a joint venture. Franchising certainly enables smaller

business units to benefit from a strong brand but the franchisee is

restricted under the conditions of the franchise in how they conduct their

business.

Any co-operation between different organisations is fraught with danger

and ethical management is an absolute necessity. There needs to be

willingness by all stakeholders to adapt and be flexible in order to produce

the desired result as efficiently and effectively as possible. The inability to

demonstrate flexibility by some larger partners has led to joint ventures

and some collaborative activity being dominated by one of the

stakeholders who, perhaps because of their size, see themselves as the

‘senior partner’. It should be recognised that true partnerships are those

collaborations that involve equals. If there is to be a senior stakeholder this

must be clearly defined and agreed before any formal business formation.

Finally, short-term collaboration may take the form of subcontracting

activity, specific contracts, secondments, agents, consultant engagement

and temporary licensing. Modern businesses need to seek bespoke

solutions more often as customers expect innovative and cost-effective

solutions to their specific needs and wants. While strategy is defined as

long-term and because many markets and sectors are so volatile,

strategists are finding a need to develop sufficient flexibility into strategy to

ensure they are still meeting customers’ needs. This often means they

need to be able to produce short-term ‘one-off’ solutions to negate short-

term issues or develop short-term solutions.


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Task 4.2

You should now be able to recognise a number of common

competitive structures and their associated risks and benefits.

Examine the following organisations and categorise their

competitive structures from within their own marketplace:

Stagecoach Wincanton Aer Lingus

In approximately 300 words, identify a co-operative and itemise the

advantages and disadvantages to the members. From your lists,

consider alternative collaborative solutions that may increase the

advantages and minimise the disadvantages. Give reasons for

your selections.


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4.5 Models of Competition

We have been considering competitive advantage throughout this unit and

possibly the best-known author in relation to successful competitive

strategy development is M.E. Porter. Porter argued in his book

‘Competitive Strategy’ (1980) that there are three fundamental avenues

open to businesses, known as the generic strategies, which are seeking to

gain sustainable competitive advantage.

1. A cost leadership strategy – where a business sets out to be the

principal low-cost option and sell or produce goods and materials at a

slightly lower level than industry norm, but in large quantities, thereby

benefiting from volume sales.

2. A differentiation strategy – which enables sellers and producers to

realise above-market, or premium, prices for goods and materials

because they are of a higher-than-normal standard. The premium

price is in recognition that the materials and goods are ‘different’ from

others which may be available.

3. A focus strategy – which recognises that many businesses are

unable to compete across the full market range and therefore need to

focus on a segment of the market. Focus strategies can be either

‘cost focus’ (seeking cost advantage in a certain market segment) or

‘differentiation focus’ (seeking differentiation in a chosen market

segment).

Porter also developed the concept of five forces acting on businesses to

create a certain level of competitive rivalry. This idea was based on the

economic model of perfect competition mentioned earlier and is illustrated

in Figure 4.2.


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Figure 4.2 The Five Forces Framework

(Source: Porter, 1980)

You can judge the level of competitive rivalry in any market using this

model by considering the level of bargaining power held by suppliers and

buyers, the level of threat of substitutes and the barriers to entry. You can

then grade each to create a competitive rivalry score; in other words, how

intense the competition is likely to be with given markets. This model is

very popular with managers as it is similar to the perfect competition

model which is instantly recognisable by most.

The downside of using a tool such as Five Forces is the difficulty of

judging the level of bargaining power and threats posed by the

competition. An analysis using this model can be very subjective.

Competitive Rivalry

Potential Entrants

Buyers

Substitutes

Suppliers Bargaining

power

Threat of

entrants

Bargaining

power

Threat of

substitutes


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Porter’s message to strategists seeking to expand into new markets,

relating to these three strategy channels, is to be aware that profitability

over the long term will be more readily assured if businesses selecting a

strategy channel follow their selected strategy and do not allow

themselves to develop a hybrid which seeks to take elements from any of

the other options.

Porter believes that national advantage can be obtained by key factors

which form a diamond pattern (see Figure 4.3). He states that a secure

home base is essential for successful organisations seeking to expand

internationally.

Figure 4.3 Porter’s Diamond

(Source: Porter, 1980)


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Porter writes that businesses need to ensure that national market

conditions, national efficiencies and competitive advantage need to be in

place before any business seeks to expand internationally or globally. By

ensuring each of the four diamond points are considered, Porter believes

that a business is better able to assess whether or not it actually

possesses the national advantage it needs to underpin an expansive

strategy.

Porter is not the only authority on competitive strategy. For instance,

Kotler and Armstrong (1990) considered that being competitive means

more than producing or supplying products. It also includes delivery

standards, after-sales activity, customer service standards, staff skills,

staff competencies and the general reputation of the organisation.

Support for this viewpoint may be easily found if we consider products and

businesses such as BMW and Volvo cars that make no apology for trading

on their differentiated values. It is differentiation which sets products and

businesses apart in a competitive context. This is evidenced by the initial

meteoric growth of Japanese cars in Western markets, largely due to the

higher standard of specification when compared to alternatives available

at the time.

Kenichi Ohmae, often referred to as ‘Mr Strategy’, is another noted force in

strategic development. He expounds that globalisation will rise beyond

businesses and permeate into and eventually fuse with national and

international economies. He believes that ‘business strategies do not

come from rigorous analysis but from a thought process which is basically

creative and intuitive rather than rational’. He goes on to explain in his

book ‘The Invisible Continent’ (Ohmae, 2000) that the world of business is

changing into an ‘Invisible Continent’ in which businesses operate as if it

were indeed a newly discovered continent.


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His belief, as stated in the book, is that the ‘Invisible Continent’ has four

dimensions:

The Visible Dimension (physical things to produce and buy);

The Borderless World (inevitable globalisation);

The Cyber Dimension (the internet and mobile telephones);

The Dimension of High Multiples (exaggerated values put on some

stocks by the stock market).

Within this four-dimensional ‘Invisible Continent’, Ohmae explains that the

governance of the new continent is a particular concern because he sees

that there is a form of new ‘Cold War’ being waged by businesses, as

opposed to governments.

This is a battle to educate the citizens of the new continent in such a way

as to gain and sustain competitive advantage.

What we can see is that competition strategies and survival strategies

come in a host of guises but largely acknowledge that all successful

organisations need to consider ever-widening factors if they are to

continue to enjoy success. Survival modelling is now becoming

commonplace in many organisations considering the future in ever more

volatile and unpredictable markets. So, for Kenichi Ohmae, a key factor for

success is ability to analyse the ‘competition’, one of the three ‘Cs’ of his

success factors. For example, what resources do competitors possess

that we may lack; which companies have the lowest or highest cost

structures; which companies dominate the market; and what distribution

structures are available within the markets? As observed earlier, the

organisation’s survival depends on how it can beat or at least survive

against the competition, and what resources does it possess to make this

survival possible? It can be argued that for those engaged in survival

modelling, accurately predicting the future is a major issue to corporate

survival and therefore ensuring a real-time enterprise is vital to competitive

advantage. This is reinforced by the belief that organisations are virtually

unable to accurately know what lies ahead with any real certainty,

especially in modern market conditions.


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Organisations espousing this belief conduct corporate modelling using IT

applications aimed at enabling them to produce timely budgets, react to

changes in organisational objectives, and offer the flexibility to assess

different scenarios and the effect on the organisation’s performance.

Advanced scenario modelling provides the ‘what-if’ capabilities to examine

multiple scenarios to help fine-tune assumptions about projected resource

usage, performance and milestones leading to improved decision making.

In doing this, they produce multiple profiles for different scenarios

attempting to remove any guesswork and unsubstantiated expectations

from the budgeting, planning and resourcing processes.

Modelling a scenario certainly provides the ability to take a live plan offline,

adjust it to reflect new business priorities and review the impact across the

whole organisation, and it could be used to replace the original plan or

strategy. In this way organisations are able to react to changes in strategic

direction or new competition entering the market, or, more importantly,

they can see the effect of such ‘change’ as part of the whole corporate

perspective.

What is clear is that most organisations will encounter difficulty modelling

competition in markets and modelling for the future. These areas are rich

in modern concepts and beliefs, some of which will undoubtedly have

merit for strategists seeking to direct and manage organisations towards a

successful and sustainable future.

There are problems in using these strategic models of competition such as

Porter and his peers. It assumes that strategy and competition is

prescriptive and the adoption of these models provides an instant answer

to an organisation’s competition problems. If this was really so easy, all

organisations would be able to eliminate competition and be very

profitable.

The problem is that the environment in which businesses operate is

constantly changing, and new ways of delivering service and products are

constantly being developed. Music producers like EMI and Warner

Brothers are finding their traditional route for distributing music to

consumers is being undermined by the Internet.


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How is it they have not been able to use a tool such as scenario planning

or Porter’s Five Forces to predict the changes happening in the recorded

music marketplace? The ultimate issue is that no one can accurately

predict the future, and these models and tools can only be used as an

indication of what might happen.

Task 4.3

Explain, in no fewer than 600 words, whether or not you agree with

Ohmae’s theory that businesses are conducting a ‘Cold War’

aimed at educating the customer base. Include in your explanation

justifications for your agreement or disagreement with this

viewpoint.

Use Porter’s Five Forces model to measure the level of competitive

rivalry in the mobile phone market in your part of the world.


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4.6 Risk Analysis

Risk analysis is an integral component of strategy formulation. Whilst

strategies are normally engineered to bring specific results, any

organisation developing strategy must also consider the associated risks

of all available options open to the organisation. Risk assessment acts to

evaluate risk through the formulation, implementation and operational

phases of strategic change.

It could be argued that all strategic analysis contains an element of risk.

Risks relating to shareholder profitability or cost-benefit are not

considered. This section will only examine business risk.

There are many different types of risk analysis. In addition to option

feasibility analysis and profitability analysis, other examples include

financial risk and sensitivity analysis, which reflect business risk. Resource

deployment analysis, funds flow analysis, reflect feasibility analysis and

reaction analysis centre on external stakeholders.

The final range of risk analysis will always depend upon the individual

business circumstance and strategy, but those listed above are seen by

many professionals as being relevant in a majority of cases and are

commonly deployed.

In respect to strategy failure, many professionals regard pricing options 6,

7 and 8 contained in Porter’s ‘Strategy Clock’ in Figure 4.4 to be examples

of pricing strategies with a high risk of failure.


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Figure 4.4 Porter’s Strategy Clock

Needs/Risks

1. Low price / low value Likely to be sector specific. 2. Low price Risk of price war and low margins. It

needs to be a market leader. 3. Hybrid Low cost base and reinvestment in low

price and differentiation. 4. (a) Differentiation without price

premium

(b) Differentiation with price

premium

Perceived added value by the user, giving

market share and benefits.

Perceived added value to obtain premium

price.

5. Focused differentiation Perceived added value to a segment,

justifying premium price.

6. Increased price / standard product Higher margins unless competitors do

the same, risk of losing market.

7. Increased price / low values Only really possible in monopoly

situations.

8. Low value / standard price Loss of market share.

The examples above are of high-risk strategies with a high risk of failure.

Should they not actually fail but succeed, they have the capacity to bring

disproportionate reward to the parent organisation. For that reason alone,

high-risk strategies should not be ignored but the risks must be assessed

and analysed in detail.

Options 6, 7 and 8

(see below for

labels) are

destined to fail

standard


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4.6.1 Analysis of Return

If we consider the analysis examples listed below in Figure 4.5 we can

examine risk relating to business risk. Later, we will also consider

examples of feasibility risk analysis and stakeholder risk analysis.

4.6.2 Preferred Option Analysis

This analysis assesses the potential returns which may be associated with

the different options available to an organisation seeking to develop new

strategies. Naturally, economics makes these options complex and

dependent upon corporate standpoints and cultures. However, these

analyses must be included if the development of new strategies is to

include potentially radical and perhaps previously unrealistic future

direction or actions.

4.6.3 Profitability Analysis

This includes complex analysis of payback predictions, a forecast on the

Return on Capital Employed (ROCE) and investment appraisal using

discounted cash flow (DCF) methodology. Like most financial analysis,

profitability analysis focuses on business profitability in relation to physical

and relevant tangible activity, and not the conceptual or intangible.

4.6.4 Business Risk Analysis

In addition to analysis which is aimed at return, there are other business

elements which require scrutiny.


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4.6.5 Financial Risk Analysis

Usually concentrating on the risks to company financial ratios, these risk

analyses particularly focus upon the business’s liquidity ratio, which has

the power to influence potential investment and potential partners, and the

risks associated with whether or not the business meets the expected

breakeven point as predicted.

4.6.6 Sensitivity Analysis

Analyses the effects of a diversion away from the predicted path, for

various reasons, and the likely risks to the organisation if the original

targets or predicted levels of output or market share are not attained as

predicted. Much of this analysis activity is conducted using IT packages

able to include an overall risk sensitivity assessment based on various

scenarios relating to a range of predictions, forecasts and expectations,

and varying degrees of under- and over-performance.

4.6.7 Resource Deployment Analysis

Resource deployment analysis focuses on the capability of an

organisation’s resource when assessing potential strategic options. They

identify any shortfalls but also provide preferred options to enable

resource sourcing and funding strategies to be aligned with central

strategic direction. Managers carrying out this analysis will undoubtedly

face the dilemma of having to decide the importance of resource

alignment in relation to current and future markets.

4.6.8 Funds Flow Analysis

Unlike resource deployment analysis, this analysis concentrates on

financial feasibility. A funds flow analysis seeks to identify what funding

may be required in relation to the development and deployment of a

strategy and where those funds may be sourced. It also assesses how

expected increases in working capital may affect capital funding, and the

impacts of tax liability and investor liability.


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4.6.9 Reaction Analysis

A reaction analysis is used to assess the reactions of various stakeholders

to proposed new strategies. This analysis may be extremely complex and

is a good example of a risk analysis requiring bespoke solutions for the

organisations concerned. Reaction analysis considers the reaction of staff

to strategies which may be directed towards new markets, new products,

joint ventures, strategic partnerships or relocation. If appropriate, they

would also consider trade union reaction and even local, regional or

national government reaction.

Shareholder confidence and shareholder reaction to strategic

announcements are often included in this sort of risk analysis, as is the

reaction of suppliers, customers and market competitors. All stakeholders

need to be included, depending upon their power to divert or block any of

the strategic proposals.

Realistically, a reaction analysis forms part of an impact analysis. In

relation to customers, suppliers and market, impacts are often IT-based

and used to model future scenarios and build in trade-offs sufficient to

ensure maximum damage limitation is achieved.

The various types of risk analysis (profitability, finance, business,

sensitivity and reaction) are only examples but they do reflect types of risk

and the need for businesses intending to invest in the future to conduct a

‘what-if’ analysis and model alternative outcomes based on properly

selected strategic options.

Task 4.4

On occasions, high-risk business strategies succeed while other high-

risk business strategies fail. Using two high-risk business strategies with

which you are familiar, objectively assess why, in your opinion, one

could succeed while the other could fail. Include in your answer what

you think would be the most appropriate business risk analysis related to

each strategy for them both to succeed.


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4.7 Performance Failure

The risk analysis

examples above are

available to assist the

business in assessing the

degree of risk in relation

to possible strategic

choice. They all consider

what may happen and

some give ‘best and

worst case’ scenarios. However, while the organisation may be able to

assess the risks and dangers, it has still to develop the necessary

countermeasures while undergoing change. The countermeasure must

carefully monitor actual performance against the expected performance

and if necessary ‘flex’ the proposed strategy to meet some unforeseen

obstacle or additional element of risk.

Many organisations now believe that it is necessary to develop much

wider performance indicators to cover all the areas of performance which

may be associated with major business change, in order to assess

performance and enable timely corrective actions to be taken. We have

already covered some of the more readily identified performance areas

such as financial performance, in relation to investor, business and

shareholder funding and reward. We have also considered customer and

staff reaction relating to customer support, market share, productivity and

industrial relations. Other significant areas requiring scrutiny include

quality, reputation, legal and regulatory factors associated with the risk of

performance failure.

For instance, quality may be a contingency factor where there is market or

customer reaction to poor quality, quality or price market misalignment, or

over specification or quality perceptions surrounding new or revised

products or services. In these cases contingency plans must be developed

to redress the balance.


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Examples of the inability to respond to charges of poor quality and quality

perception may be evidenced by the demise of the British motorcar

manufacturing industry, and Ratners, the former high-street jewellers.

Charges of poor quality may result in a loss of reputation in the

marketplace. Certainly both the British car industry and Ratners were

unable to recover their reputations. Other examples could be said to apply

to such organisations as the old British Rail Freightliner services and the

defunct airline Dan-Air. Both organisations were in a monopolistic position

for some of their services, in spite of having reputations as poor service

providers and seeming unable or unwilling to change. Subsequently, both

repeatedly failed to provide cost-effective, efficient or value-added

services and went out of business.

The risk from regulatory or legal matters and compliance is different

depending on the potential risk in different industry sectors. However,

where health and safety are concerns, organisations need to prioritise risk,

especially where safety of the public is concerned, or where poor staff

safety may affect organisational performance if they are to avoid the loss

of reputation and be branded as unsafe. Increasingly regulation and

legislation are impacting organisations and strategy formulation must

consider the increasing organisational burdens in these areas when

contemplating any long-term change.

Planning contingencies associated with failure or shortfall may appear

negative, but if it is not undertaken an organisation is totally vulnerable

when departures occur and may be prone to some form of unplanned

reaction which may not subsequently prove to be in the best interests of

the organisation.

Due to the individual nature of businesses and business risk it is almost

impossible to produce a ‘one size fits all’ contingency plan that would be

relevant across industry as a whole. Contingency planning should relate to

all possible stakeholder sections and groups and should be conducted

using an objective methodology. As a guide to compilation of a

contingency plan, some generic contingency planning advice and

guidelines are outlined in Figure 4.5.


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4.7.1 Contingency Planning

Contingency plans should be formulated in the context of an overall

strategy action plan describing actions which will be taken over the critical

period.

Most contingency plans

will be reactive, to be

used only if and when

needed. In a limited

number of cases covering

the most severe risks a

more proactive approach

may be needed, including

ongoing monitoring of the

situation over the critical period. A number of the issues arising during the

preparation of contingency planning have already been discussed. The

following section brings together the principal considerations which are

required for the preparation of contingency plans.

The contingency planning process is dealt with most easily by breaking it

down into a number of steps as illustrated in Figure 4.5.


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Figure 4.5 Contingency Planning Process

1. Define scenarios

What are the risks and how may they occur?

‘What if… ?’

2. Identify triggers

What events will trigger the introduction of a plan?

How will they be recognised?

Will there be any warning?

Can regular monitoring improve warnings?

3. Define actions

What actions will be needed if the problem occurs?

How long can these actions be maintained?

What will be the cost?

What resources will be needed?

Can plans be laid now to improve the effectiveness of any

actions?

What advance training might be required?

4. Define roles and responsibilities

Who will take the decision to launch the contingency plan?

Who can grant the necessary resources promptly?

Who will carry out the actions?

Who will decide when to stop?


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Once individual plans have been prepared, it may become clear that it will

be possible to consolidate plans with similar actions. For purely practical

reasons the number of separate plans should be kept to a minimum.

Where appropriate, plans should be tested by simulating and modelling

the scenario which they are intended to cover. This may show up

weaknesses in the plans and modifications may be necessary.

The preparation of contingency plans should not be undertaken solely by

individuals. A combination of skills and experience is needed if a ‘rounded’

view is to be attained. Those preparing the plans should ideally work in

small groups with a facilitator and a recorder, and are likely to find

brainstorming techniques valuable.

4.7.2 Contingency Plan Format

There is much flexibility in the

structuring of contingency plans and

the following format is intended to be

a guide only. Whatever format plans

are prepared, they need to address

the same key issues and have a

structure similar to that found in

Figure 4.6:


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Figure 4.6 Contingency Plan Format

(Adapted from a Manchester University briefing note – 2000)

Introduction – Containing a description of the risks for which the plan

has been developed, an account of the risk analysis undertaken, and the

reasons why the plan is needed.

Scope/Scenario – The nature of the failures that the plan is, and is not,

designed to cover.

Trigger/Initiation – The events which will indicate that a failure has

occurred, how the plan is to be initiated once these events have been

detected, and who will be responsible for initiating the plan.

Actions – The specific actions to be undertaken. Where appropriate,

references could be made to standing instructions.

Resources – Staffing and other resources likely to be required if the plan

is initiated.

Training – Training needs associated with the implementation of the

plan (where possible, training should be carried out in advance).

Duration – The expected duration of the plan, and of individual

elements, should be estimated (this, together with any resource

requirement, will give an indication of the likely cost of implementing the

plan).

Roles and responsibilities – The roles and responsibilities of those

involved with the plan should be defined.

Priority – The relative importance of the contingency plan should be

assessed in comparison to other plans. This may be important if more

than one contingency plan is initiated and there is some conflict over

resources.


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Task 4.5

Case Study – Barriers Engineering Firms are Facing in Developing Economies

Exporting has been the fastest-growing mode of international market entry

for both service and physical product sectors. This case study is based on

an explanation about the encountered barriers with Middle East-based

companies that develop their market from national boundaries to regional

and international markets of engineering services. Engineering services

have seen a rapid growth in recent years; many countries provide

engineering services along with their production of industrial products as

the global demand for engineering services is increasing, especially in less

developed regions. The Middle East region is known as a developing area

which suffers from insufficient infrastructure such as dams, powerhouses,

transportation facilities, extractive industries and factories. Many Western

engineering service companies target this region because of huge

availability of natural resources, such as minerals, oil and gas, and their

market share in this region is greater than that of local companies. The

case study uses three companies in one of the major oil-producing

countries in the Middle East. Data is collected from these companies

represented by the letters X, Y and Z instead of their names.

Once engineering service organisations establish themselves in the

overseas market, they should build a good and reputed corporate image.

The corporate image of engineering service companies increases their

competitive capabilities and also enables them to offer higher prices for

their projects.

For an organisation and strategic proposal of your choice, assess

the business risks associated with the proposal and prioritise the

risks in order of potential severity.

For each risk identified, produce a contingency plan based on the

structure above.


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A strong corporate image in international markets offers opportunities for

capitalising on economies of scale, developing global markets and helping

to establish a firm's visibility and position in the minds of the international

market. As the engineering project contracts are usually valued at millions

of dollars, the corporate image creates trust and a sense of quality, and

tightens the competitive position of the firm. Instead of the importance of

corporate image, no clear strategy was found to build a strong brand in the

X, Y and Z companies.

The risk factor is derived from different sources. The Y Company

managers emphasised the financial dimension of the risk and introduced

the fluctuation of exchange rates as one of the most threatening

challenges in their international operations. This situation could result in

economic instability in the host country; therefore, insurance covers

become an essential tool to overcome this type of risk.

The government agencies could be a mediator to make companies aware

of assistance provided by the national government. It seems that

government assistance facilitates exporting. The Z Company managers

believed that the government provided assistance, but may have had

some expectations which are not economical for companies, such as

reducing prices or performing extra tasks after project completion.

Engineering service companies advised the government to establish semi-

government agencies that provide professional assistance, especially in

identifying foreign opportunities and negotiation about them.

The crisis in the Middle East region is the other source of operational risk;

issues such as the Arab Spring, Persian Gulf challenges, clashes in the

West Bank and Gaza, and Iran nuclear programmes increase the

business risk in the Middle East region, but these risks have both negative

and positive effects. It is notable that along with the increase of business

risks many global companies have decreased their operations in the

Middle East; therefore, an opportunity is provided for local companies to

gain more market share.

The X Company reported many new projects in the region due to these

events. The risk factors are cited by nearly all previous researchers.


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Engagement in exportation often requires extensive expenditures in

finding overseas opportunities, negotiation with stakeholders, adapting the

export strategy and so on. The working capital is a criterion for choosing

an engineering service company, because working capital determines the

ability of a company to perform engineering projects. The managers in X,

Y and Z stated that their companies lost some projects each year due to

the shortage of working capital. It may be the result of financial crisis in the

world that influenced all industries and governments from an external

perspective, and also resulted from weak financial management from an

internal perspective.

The main barriers identified in this study are strong international

competition, quality standards, corporate image, business-associated risk,

lack of government assistance and shortage of working capital. These

barriers hinder engineering service companies from operating in

international markets, but the perception of these factors and their effects

could be different according to the competencies and capabilities of the

company.

Engineering service companies from the Middle East region could benefit

from the concept of networking or strategic alliance. Strategic alliances

empower them to operate on a global scale, as well as Western

companies. Advantages of networking enable them to cover the business

risk and provide enough working capital.

(Source: Seyed Hossein Jalali, 2013)

Task 4.6

Explain in no more than 3,000 words the key factors that organisations

intending to pursue and expand operations in the Middle East region

should consider in order to develop and implement sustainable business

strategies in the region.


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NOTE: In your paper you should consider such things as:

Global factors and markets, etc. (element 1);

Organisational indicators, resources and pricing (element 2);

Organisational issues, sustainability and business relationships

(element 3);

Competition and risk (element 4).

Having completed this case study, you have completed the unit AD01

Strategic Contexts.

Congratulations!


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files.transtutors.com€¦ · AO/QUA/0414 – V1.0 II Acknowledgements . We are grateful to the following contributors for their authorship of the material contained in this document