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CIMA PAPER 6 – STRATEGIC LEVEL

Management Accounting Business Strategy

SMART Revision notes

Prepared by Darren Sparkes

Email: darrensparkesnotes@sky.com

CIMA P6 – Management Accounting Business Strategy These notes are not intended to cover the whole of the P6 syllabus © Darren Sparkes, 2009 1
Contents
Page No.
A message from Darren……………………………………..3
A message from the Examiners…………………………….4
Examiners comments November 2008…………………….5
The scope for numbers in the examination………………..6
Examination Technique……………………………….…..…7
Background to Paper………………………………………...9
Syllabus Overview………………………………………......10
Strategic Planning…………………………………..…….…11
Mission and Objectives………………………………….....12
Internal Analysis……………………………………………..13
External Analysis…………………………………………….14
Filling the Gap……………………………………………….15
Strategic Options……………………………………………16
Method of Growth…………………………………………...17
Strategic Choice and Implementation……………………..18
Implementation Issues………………………………………19
Developing an IT Strategy………………………………….21
Organisational Structure…………………………………….22
Marketing……………………………………………………..23
Profitable customers or products?....................................24
Business and Professional Ethics………………………….25
The International Market Place……………………………..26
Review and Control………………………………………….27

CIMA P6 – Management Accounting Business Strategy These notes are not intended to cover the whole of the P6 syllabus © Darren Sparkes, 2009 2
Thank you for requesting a copy of my ‘SMART Revision Notes’.

The notes act as a learning and memory aid for the core models, theories and academic tools included in the syllabus.
However, in order to pass your examination the academic knowledge must be combined with extensive question practice
leading up to the examination.

Your examiner is not interested in the regurgitation of your knowledge but how you APPLY that knowledge to the
scenarios provided in order to answer the requirement set.

I suggest that you should practice as many exam standard questions as possible before the examination. Your practice
answers can be a mixture of answer plans and full written answers to get through as many questions as possible.

However, I would also suggest that it is essential for you to practice at least one full examination to time before entering
the exam room. It is only by replicating the time pressure in the exam that you can appreciate the importance of time
planning on the day.

Keep a look out for relevant articles appearing in your professional magazine or on the Institute’s website prior to the
examination, particularly if they are written by the examiner.

I would welcome feedback on the notes.

And remember….

‘Whether you believe you can or you can’t, you’re right.’ (Henry Ford)

Regards,

Darren Sparkes

CIMA P6 – Management Accounting Business Strategy These notes are not intended to cover the whole of the P6 syllabus © Darren Sparkes, 2009 3
Approach Required
‘Overall this paper is a balanced test of the key syllabus areas and covers a
number of well used strategic tools and models. Candidates should not find
any surprises in this paper and a well prepared candidate should have no
difficulty in both demonstration of syllabus knowledge and in the application
of this to the various examination scenarios.’

‘It’s easy to get carried away with all the models covered in the P6 syllabus
and forget why it’s there in the first place. The syllabus is at the top of the
business management pillar, but its title is very clear. It isn’t a business
strategy exam; it’s an exam in business strategy in the context of
management accounting.’

‘…candidates should recognise that depth of argument is desirable in


answers to this paper, and a series of brief points will never be rewarded
highly.’ (Co-examiners for CIMA P6)

CIMA P6 – Management Accounting Business Strategy These notes are not intended to cover the whole of the P6 syllabus © Darren Sparkes, 2009 4
Extracts from the Examiners comments November 2008
Section A - Question 1
 Candidates demonstrated a good understanding of BCG matrix and applied it to AAA
 Most candidates did well in producing a quantitative analysis
 Very disappointing that so many candidates unable to competently discuss these numbers
 Question 1b) (quantitative analysis) showed some poor presentation and layout
 Candidates advised to read the question requirements carefully – many confused requirement bii) and c)
 Requirements c) and d) well answered by most candidates

Section B
 Questions answered generally well
 Question 2b) answered badly - candidates should be careful in choosing questions and only attempt those
that they have knowledge of
 Question 2c) recommendations not adequately discussed or justified
 Question 3 was a popular choice but many answered it badly due to lack of application to the scenario
 Question 3c) some candidates had not read the examiners article
 Question 4a) very popular but showed that many candidates do not have basic syllabus knowledge
 Question 5b) – the candidates who did well used the scenario

CIMA P6 – Management Accounting Business Strategy These notes are not intended to cover the whole of the P6 syllabus © Darren Sparkes, 2009 5
Cost of Capital
(debt / equity / WACC)

Company Discounted Cash flow


Valuations (NPV / IRR / ARR)

Business Strategy in
the context of
Expected Values Management Costing
(DPP / CVP / CAP /
Accounting Absorption / marginal)
The scope for
numbers/calculations in
the examination
Variances including Pricing / transfer
planning variances pricing

Ratio Analysis

CIMA P6 – Management Accounting Business Strategy These notes are not intended to cover the whole of the P6 syllabus © Darren Sparkes, 2009 6
Examination Technique to give the Examiners what they want

1. USE 20 MINUTES READING TIME WISELY


 Examine section B questions and choose the two on which you can MAXIMISE MARKS (not necessarily
those on your ‘favourite’ topics)
 If you have some time left then analyse Question 1 requirements and skim read the Q1 scenario to get a feel
for the relevant issues and identify where the information is for each part of the requirements.

2. WORK OUT TIMINGS


 Q1 = 90 minutes. Planning = 20-25 minutes, Writing answer = 65-70 minutes
 Section B Questions = 45 minutes each. Planning up to 10 minutes, Writing answer 35 minutes.
 Break down the time required for each part of the requirements using the marks as a guide. 1.8 minutes per
mark in total, 1.4 minutes per mark after planning.
 I suggest you start with Question 1 as you know you have 90 minutes to complete it.

START PLANNING IN YOUR ANSWER BOOK

3. ANALYSE THE REQUIREMENTS


 Identify the verb, or verbs, and make it stand out. The verb tells you what the examiner wants you to do, e.g.
evaluate, recommend, analyse, calculate. Be sure to identify all the verbs in the requirement just in case
there is more than one thing to do, e.g. analyse and discuss, evaluate and recommend.
 Identify key words. These tell you what to do it on or about, e.g. evaluate what?, recommend what?

4. ALLOCATE MARKS TO EACH VERB IN THE REQUIREMENT


 This can now determine how much to write for each verb in the requirement

5. IDENTIFY RELEVANT MODELS, TOOLS, THEORIES FROM YOUR KNOWLEDGE BANK

CIMA P6 – Management Accounting Business Strategy These notes are not intended to cover the whole of the P6 syllabus © Darren Sparkes, 2009 7
6. DEVELOP HEADINGS AND NUMBERS LAYOUT
 Put key elements of model in plan as headings, e.g. Porters 5 Forces analysis = 5 headings. Headings will
give your answer a framework and structure.
 Use requirements to develop headings to show marker that you are answering the question asked

7. DISTRIBUTE MARKS ACROSS HEADINGS


 This can now determine how much you write under each heading

8. ANALYSE THE SCENARIO


 Make brief notes in your plan under relevant headings from models/tools/theories and requirement
 Find relevant numbers for calculations

9. WRITE UP YOUR ANSWER TO MAXIMISE MARKS


 Layout calculations in a logical and easy to mark format
 Add value to calculations by asking ‘SO WHAT?’
 Use as many headings as possible to give the answer structure
 Short sentences in short paragraphs
 Paragraphs of 3/4 sentences maximum
 Looking for 2 marks for each paragraph
 1 mark for making your point/answering the question + 1 mark for application
 Leave a blank line between paragraphs to make your answer ‘easy on the eye’
 Be strict with timings. When time is up on a question, or part of a question, move on.
 Stick to answering the requirement – use your plan to keep you on track

REMEMBER THE THREE GOLDEN RULES – 1)APPLICATION 2) APPLICATION and 3)APPLICATION

CIMA P6 – Management Accounting Business Strategy These notes are not intended to cover the whole of the P6 syllabus © Darren Sparkes, 2009 8
 Identify and evaluate approaches to strategic management

 Explain the place of the enterprise in the broader economic and social
environment

 Apply contemporary thinking on strategic management

Exercise professional  Identify and utilise appropriate tools for strategic analysis
judgement
Select relevant  Evaluate appropriate strategic options and make recommendations
data
 Evaluate the linkages between strategic planning and the implementation of
those plans

Determine appropriate  Design and recommend appropriate performance measure systems


techniques
Candidate Requirements

Apply knowledge
and skills
Aims of the paper
Background

Format of paper Study Weighting

Section A 50%
 Compulsory
 Major case study  Assessing the Competitive Environment 20%
 Usually four parts
 Case will include numbers
 Interacting with the Competitive Environment 20%

 Evaluation of Options, Planning and Appraisal 30%


Section B 50%
 Choice of two from four
 Each question likely to include
 Implementation of Strategic Plans 30%
two parts
 May include short scenario

CIMA P6 – Management Accounting Business Strategy These notes are not intended to cover the whole of the P6 syllabus © Darren Sparkes, 2009 9
3 E’s – Efficiency, Economy, Effectiveness
Syllabus Overview
Hierarchy SMART

Mission and objectives


Purpose,Strategy,Standards,Values
Mendelow power-interest matrix

PEST Stakeholder Analysis


Resource audit

External Analysis Internal Analysis


Core competences
Porters 5 Forces
Corporate
Competitor Appraisal
Analysis Value Chain
Benchmarking
PROSAC
SWOT PLC / BCG
Resource Based
vs Positioning
Withdraw
Strategic Ansoff’s product-
market matrix
Porter’s Generic Options
Strategies Risk
Acquisition vs organic vs joint development

Suitability, Acceptability, Feasibility Strategic Choice Cost/Benefit

Change Management
HRM / IT Culture
Structure Implementation

International Trading Quality


Marketing
Ethics
Review and Control
CSF’s

Financial Measures SVA / EVA® Non-financial Measures


Balanced Scorecard
KPI’s
ROI / RI

CIMA P6 – Management Accounting Business Strategy These notes are not intended to cover the whole of the P6 syllabus © Darren Sparkes, 2009 10
Integrates activities Competitive advantage

Relationship with environment Corporate =


Whole Strategic level
organisation

All stakeholders
Business = Tactical level
Long-term

Strategy
‘… a course of action, including Functional = Operational level
the specification of resources, to
achieve a specific objective (Johnson & Scholes)
Freewheeling Opportunism
 Market Driven – reactive
 Hands on management
 Exploit complacent players
 Relies on leaders vision Alternative Purpose
 No formula for success
 Take advantage of market Strategic
Planning
opportunities
× Stock market problems
 Respond and fit to environment
 Utilise scarce resources
Incrementalism (Lindblom)  Provide direction
 Building block approach  Ensure consistent objectives
 Build strategy through incremental steps not radical  Monitor progress
Rational ‘Top Down’ Approach
shifts
 Accepts uncertainty of future
Mission & Objectives
 Builds commitment
× May be too slow Advantages Disadvantages
× Ideas often compromised Corporate appraisal  Identification of × Expensive (time
strategic issues and money)
 Consistency of goals × Bureaucracy
Strategic options  Improve × Stifles creativity
Emergent Strategy - ‘Bottom up’ (Mintzberg) × Less relevant in
performance/survival
 Pro-active a crisis
Intended Deliberate Realised Strategic choice  Recognises
Strategy Strategy Strategy environment
 Optimum use of
Implementation resources
Unrealised
Strategy Emergent
strategy Review
E.G. Honda’s entry into the USA, 3M

CIMA P6 – Management Accounting Business Strategy These notes are not intended to cover the whole of the P6 syllabus © Darren Sparkes, 2009 11
Advantages
Purpose  Resolve stakeholder conflict
 Set direction Criticisms
 Help formulate strategy  Meaningless terms used
Strategy
 Written retrospectively?
S Specific
 Communicates values to
employees  Not communicated to M Measurable
 Marketing to customers employees A Attainable
Policies and  Ignored by managers R Relevant
standards
T Timebound

Mission Statement
‘… the most generalised type
Values of objective which can be
thought of as its raison d’etre.’ Objectives

Mission and Determinants:


Flexibility
F
I
Innovation
Stakeholders Objectives Resource utilisation
Excellence (Quality of service)
R
E

Results:
Financial performance F
Mendelow’s Power – Interest Matrix Hierarchy Competitiveness C
(Brignall et al)
Low Interest High Mission

Not for Profit Organisations


A B Goals
Low Minimal Effort Keep Informed
Features of objective setting
Give Direction Education / Objectives  Multiple and contradictory objectives
Communication  Participation in objective setting
Power  Providers of funding different to beneficiaries of service
Strategy  Priorities may change frequently
 Value for money a requirement not an objective
C D  Increased role of personal objectives
Keep Satisfied Key Players Action/tasks
High
Intervention Participation Economy Effectiveness
Control (Inputs) (Outputs)

Efficiency
Rewards (Process)

CIMA P6 – Management Accounting Business Strategy These notes are not intended to cover the whole of the P6 syllabus © Darren Sparkes, 2009 12
 Strategy  Valuable Strategic
 Manpower S
 Structure  Rare Assets
 Management Porter’s Value Chain
 Systems  Can’t be copied A
 Money  Staff  Not substitutable Architecture …identify activities within the firm which
 Make-up  Style  Give access to wide R contribute to competitive advantage and
 Machinery  Shared values range of markets those which do not.
 Methods  Skills
I Reputation
 Materials
 Markets Core Competences Primary Activities
‘…the activities or processes that  Inbound Logistics
 Management Innovation
information McKinsey 7 S critically underpin competitive  Operations
Model advantage.’  Outbound logistics
 Marketing and sales
 Service
9 M’s
Competences
Resources Support/secondary activities
Threshold OR Core?
Basic OR Unique?  Procurement
 HRM
Resource Audit/  Technology development
 Firm infrastructure
Position Audit
Product Life-cycle Uses
Stages:  Streamline linkages
 Introduction: high risk, little
competition, low volume, high
Internal Analysis 

Eliminate non-value added activities
Business Process Re-engineering


advertising = losses + negative cash
Growth: increased competition, (Strengths & Weaknesses)  Benchmark key processes

growing volumes, EOS, high


advertising = losses to profits +
negative to positive cash Problems: Benchmarking
 Maturity: steady repeat sales, high  Definition of axes
Portfolio Analysis  Definition of market
volumes, EOS, low level advertising
= profits + positive cash  No account of complimentary goods
 Decline: falling volumes, falling  Assumes high market share = 1. Determine processes to be
prices = profits to losses + positive advantage benchmark
to negative cash, divest 2. Choose type of benchmarking
3. Choose partner
Balance the portfolio 4. Determine measures
Balance the portfolio BCG Matrix 5. Collect data
6. Learn and improve
Problems: High
Relative market
Low 7. Implement changes
 No common shape share
 Unpredictable STAR PROBLEM CHILD
 Self-fulfilling prophecy High Build then Hold Build or Divest Competitive Internal
 Product orientated – ignores market Losses to profits, negative Losses, negative cash
Market to positive cash
growth Process/Activity
CASH COW DOG
Hold then Harvest Harvest then Divest
Low Profits and positive cash Profits to losses, positive BEST IN PRACTICE
to negative cash

CIMA P6 – Management Accounting Business Strategy These notes are not intended to cover the whole of the P6 syllabus © Darren Sparkes, 2009 13
Economic Social & Demographic Technological
 Globalisation  Income distribution  Internet P Prediction of Reaction
 Economic cycle  Education levels  Government spending on RnD R Resources
 Interest rates  Population size  Communications O Objectives
 Inflation  Age profile  Speed/rate of change
 Employment levels  Lifestyle changes  Processes and methods of S Strategy
 Exchange rates  Fashions and tastes production A Assumptions
 Consumerism  Transportation C Competences
Political and Legal
 Taxation PEST analysis
 Government policy (External, Environmental analysis)
 Foreign trade Competitor
regulations
 Monopoly legislation Analysis
 Environmental
legislation
External Analysis



Employment legislation
Consumer protection
Protectionism
(Opportunities and Threats)
Porter’s 5 Forces
Threat from New Market Entrants Threat from Substitute
Barriers to Entry: (Competitive,
Technologies
 Economies of Scale Industry analysis)  Can same features be produced
 Other cost advantages cheaper?
 Capital requirements  Can new features be provided for same
 Access to distribution channels cost?
 Patents, Government policy Competitive Rivalry  Level of danger may be influenced by
 Reaction of existing firms Greatest where: barriers to entry and/or power of buyers
 Competitors of similar size
 Slow market growth rate
 High fixed cost industry
Power of Buyers  Lack of differentiation Power of Suppliers
Power greatest where: Power greatest where:
 Few buyers  Few suppliers
 High number of suppliers available  Few substitutes
 Cost is high proportion of buyers total cost Internal + External Analysis  High switching costs
 Low switching costs = Corporate Appraisal = Position  Threat from forward integration
 Buyers have low profits Appraisal= SWOT Analysis  Customer not significant to supplier
 Buyers have full information  Supplier has differentiated product
 Little product differentiation Strengths Weaknesses
INTERNAL

EXTERNAL
Opportunities Threats

CIMA P6 – Management Accounting Business Strategy These notes are not intended to cover the whole of the P6 syllabus © Darren Sparkes, 2009 14
Filling The Gap

Gap Analysis

Target
Objective
e.g. ROI Diversification
GAP New products
or new markets
Future Penetration
Plans
Efficiency

Current
operations

Time

Scenario Planning

1. Develop scenarios & identify trends


2. Build analysis and strategic options
 Focuses management on future  Costly
3. Link strengths of business to scenarios
possibilities  Often inaccurate
 Encourages creative thinking 4. Consider probability of scenarios
 Uses resources on scenarios that will not
 Encourages communication and 5. Identify resources and competences materialise
required
participation  Tendency for managers to get carried
 Identifies sources of uncertainty 6. Modify strategic options away
 Identifies most important variables 7. Monitor reality and match to scenarios  Risk of self-fulfilling prophecy
8. Redeploy scenarios and modify strategies

CIMA P6 – Management Accounting Business Strategy These notes are not intended to cover the whole of the P6 syllabus © Darren Sparkes, 2009 15
 Strategic Assets
Porters Five To beat the five
 Architecture PEST Forces forces
 Reputation
 Innovative ability
Porter’s Generic Strategies
Strategically develop
Harness core competences to organisation in line  Overall Cost Leadership
give sustainable competitive with environment (better margin, potential price cuts, entry
barrier, reduce supplier power)
advantage
 Differentiation
(Premium price, better margin, barrier,
Positioning view reduce buyer power)
Resource Based Strategy
(outside-in)  Focus (Niche)
(Inside-out)
(Cost or Differentiation, focus on market
needs, develop core competencies)
Method of Growth? (See next page)
What Basis?

Limitations Beware of ‘Stuck in the Middle’


 Definition of market


Ignores factors such as competitors
Suggests strategies in isolation
Strategic Options Uses
 Analyse rivals
 Suggest own strategy
What Direction?  SBU level strategy

Horizontal diversification – competitive products, Limitations


complementary products, by-products
Do nothing
/ Withdraw  Unclear definition of industry
 Defines advantage in terms of position not
resources
Vertical Integration Ansoff’s Matrix
Advantages Products, existing and new (PEN)  Lack of empirical evidence
Disadvantages
 Economies of combined
Markets, existing and new (MEN)  Ignores middle ground
ops  Increased operational
 Restricts firm to position in present
 Economies of control and gearing
industry
 Reduced flexibility to
coordination
change partners  Market Penetration (cost reductions,  Requires perfect information
 Avoiding the market price reductions, advertising, minor product
 Tap into technology  Capital investment needs
modifications)
Conglomerates  Product Development (exploit Risks
Advantages Disadvantages existing customers, RnD, buy-in and badge,  Product
 Flexibility  No additional benefit to JV’s, Licensing)
 Quick growth  Market
shareholders through  Market Development (new markets
 Access to capital synergies such as foreign markets, new segments such  Operations and
 Portfolio effect  No operating advantages as adult to child or industrial to consumer) management
 Avoidance of anti-
monopoly legislation
 Diversification (related = vertical  Financial
integration or unrelated = conglomerate)
CIMA P6 – Management Accounting Business Strategy These notes are not intended to cover the whole of the P6 syllabus © Darren Sparkes, 2009 16
Advantages Disadvantages Advantages Disadvantages
 Quick  Purchase premium  No premium for assets  Slow
 Lower risk  Integration issues  People development  Increases number of
 Overcomes barriers to entry o Systems  Staged investment competitors
 Same number of competitors o People  Established culture  Overcoming barriers to
 Possible synergies o Culture  Introduction of new entry
 Possible under-valuation of  Synergies do not technology and systems  No opportunity for
target materialise easier synergies
 Reputation of target  Possibility of grants  Higher risk

Porter’s 3 Tests for Acquisition Organic


Acquisitions Growth
 The attractiveness test Acquisition versus
 The cost of entry test
Organic growth
 The better off test Divestment
Possible synergies  Quick
 Market  Higher price due to
 Economies of scale strategic value
 Shared activities
 Surplus assets



Vertical integration
Skills transfer
Dilution of risk
Method of Withdrawal 
Demerger
Gives shareholders
 Reduced power of
buyers/suppliers
Growth? 
an exit route
Management can
focus on core areas
 Tax advantages
 Two companies can
develop separate
identities
Joint Venture
Separate business entity
with equity form two or
more businesses
Joint Development
Methods Management Buyout
(MBO)
Strategic Alliance  Quick growth Consider
 Access to competences  On-going involvement of
Long-term agreement to Licensing
share knowledge,  Less financial risk/outlay holding company
Giving the right to
competences, technology  Overcome product, market,  Why is holding company
exploit brand, recipe,
for mutual benefit operational risk selling?
process etc for a
share of the profits × May lose competences  Loss of Holding company
× Train future competitors help, e.g. technical support,
Franchising × Brand infection finance services
Giving the right to exploit a business × Operational and contractual  Quality of management team
method/model in return for a capital sum disputes  Price
plus a share of the profits. Franchisor × Ownership of assets  Personal risk, e.g. home at
usually provides support e.g. marketing, × Sharing of profits risk?
training, technical

CIMA P6 – Management Accounting Business Strategy These notes are not intended to cover the whole of the P6 syllabus © Darren Sparkes, 2009 17
Acceptability
Suitability Will the proposed strategy meet Feasibility
Is the proposed strategy suitable for the the objectives of the organisation Has the organisation got, or can it get,
present situation and circumstances of the and, therefore, be acceptable to the necessary resources to carry out the
organisation? the major stakeholders? strategy?
i.e. Is it suitable given the SWOT
analysis?

Strategic
Risk Choice Cost/Benefit
`

Implementation Management By Objectives


Budgets
C
R
Coordination
Responsibility
of Plans Strategic

U Utilisation of resources Tactical


M Motivation
P Planning and control Operational
E Evaluation of performance
T Telling Functional

Individual

 Achievement of strategies
 Greater focus on key areas
 Better congruence
 Better Motivation

 Time
 Cost
 Commitment
 Too idealistic
 Maintaining motivation

CIMA P6 – Management Accounting Business Strategy These notes are not intended to cover the whole of the P6 syllabus © Darren Sparkes, 2009 18
Unfreeze Change Refreeze Employee commitment
Role Task

Cultural Strength
 Ceremonies
Strengthen Weaken Individual
 Symbols
Power Person
 Rituals
Group  Stories
Driving Forces Restraining Forces
 Heroes
Organisational  Slogans Handy’s cultural types
Lewin’s Force
Field Analysis

Culture
Change ‘The way we do things around here’
Management

Excellence Culture – Peters and


Waterman
Learning Organisations
Implementation P Productivity through people

Characteristics:
Issues A
S
S
A bias for action
Stick to the knitting
Simple structure
 Participative policy making C Close to the customer
 Informating A Autonomy and entrepreneurship
 Internal exchange Learning Climate: S Simultaneous loose-tight properties
 Reward Flexibility  Solicit expertise H Hands on, value driven
 Enabling structures  Empower workers Quality
 Boundary workers as  Encourage experimentation ‘Fitness for use’
environmental scanners  Encourage the search for Customers
knowledge TQM
 Learn from experiences ‘Get it right
 Learn from others Quality first time’ Competence
 Transfer knowledge control =
 Support operations
Kanter’s prescription for creativity:  reactive Commitment
Provide counselling and advice 6 C’s Continuous
 Use the organisations
A Acceptance of change resources on problems improvement
N New Ideas identified by workers Four costs of Quality: Costs
I Interaction  Appraisal
T Tolerance of failure  Preventative Communication
A Acknowledge creative behaviour
 Internal failure
 External failure

Continued on next page


CIMA P6 – Management Accounting Business Strategy These notes are not intended to cover the whole of the P6 syllabus © Darren Sparkes, 2009 19
 Recruitment
 Appraisals  Commitment
 Training Motivation:
 Reward  Quality  Maslow – Hierarchy of needs
 Job design  Herzberg – Hygiene factors and motivators
 Involvement  Flexibility
 Status and security

HRM HRM HRM Behavioural Performance Financial


Strategy Practices Outcomes Outcomes Outcomes Outcomes

Staff understand org’n Increased ability to Guest model


goals & values compete & add value of HRM
Networks
Groupware
HRM
Benefits
Motivated
workforce Intranet
People encouraged to
generate & use knowledge Turn tacit into explicit Implementation Systems

Knowledge = closest we
can get to ultimate
Organisational Issues (cont’d) Extranet

‘competitive advantage’ Knowledge


Management Sequences
Associations
Org’n Structure Information
Technological Systems Classification
barriers Technology
Politics
Issues / Data Mining -
Problems Turning data into Forecasting
Errors in data Reports
transfer
information
De-motivation Data Clustering
Warehousing Large relational
On-line data database
Format of retrieval
Social barriers information
Dimensional
Artificial analysis
Incompatible systems Intelligence Graphical User Predictive Descriptive
& processes
Interface Tools models models

Implementation Issues (cont’d)


CIMA P6 – Management Accounting Business Strategy These notes are not intended to cover the whole of the P6 syllabus © Darren Sparkes, 2009 20
Strategic importance in predicted competitive
environment
Beat the Low High
five forces Value
Generic chain Support – High Potential –
Key business strategies Improve Innovative with high
areas L management future potential
Strategic o effectiveness but not
importance w critical to the
Cost
Strategic in current business
Considerations Weapon competitive
environment
(PICK) Key Operational– Strategic –
Implications H Critical to sustain Critical to future
i existing business business success
1. Identify business needs g
2. Identify IT gap h
Performance 3. Identify potential
opportunities

Peppard – Applications
Portfolio
1. Work backwards from Business Process
2.
outcomes not tasks
Empower the end user Re-engineering Developing an
3. Increase access to

4.
databases
Link parallel activities Radical & fundamental IT Strategy McFarlan & McKenney’s
5. Capture information only change for quantum Strategic Grid
once leaps in performance
Strategic impact of future systems

Earls 3 Levels of Low High


IS Strategy -
Organisation of
IT Strategy
systems Support – Turnaround –
No strategic value Expect info system
L to become
IM Strategy – o strategically
IT Strategy – Supporting w important in the
Technology management Strategic future
infrastructure processes (COPT) impact of
current
systems
Factory – Strategic –
H See strategic value Depend on info
Technology i
Control of info system now system for
g but expect value to competitive
h decrease in the advantage
Organisation Planning
future

CIMA P6 – Management Accounting Business Strategy These notes are not intended to cover the whole of the P6 syllabus © Darren Sparkes, 2009 21
Functional Implementation Issues cont’d
 Economies of scale
Divisional
Entrepreneurial  Specialists with some autonomy  Multiple products &
 Fast decisions markets
 Career structures
 Responsive to market  Autonomy for SBU
 Frees up entrepreneur
 Congruence managers
× Slow decisions (bureaucratic)
× No career structure × Functional silo’s  Training of SBU managers
× No autonomy × Few products & markets Career  Frees up senior managers
× Single product & market path  Focus on specific
products/markets
Employee × Loss of congruence?
Quality Flexibility motivation Autonomy × Duplication of effort
Centralised vs Decentralised Speed × Isolation of SBU
managers
Decisions Motivation of
T Technology managers
O Ownership Features of
P People Organisation Checklist Congruence Matrix
 Breakdown of silo’s
T Tasks  Shared knowledge
 Skill development
I Ideology
E Environment Organisational 
×
Innovation and creativity
Dual command
S Size × Dilution of functional
Structure ×
authority
Time consuming meetings
Decentralisation Span of control
Mintzberg’s Structural
Configurations
Advantages: Tall/Narrow
 Frees senior  Promotional opportunities  Simple structure =
management Strategic Apex entrepreneurial
 Smooth progression
 Better local decisions between levels
Techno- Support
 Machine bureaucracy
 Better motivation  More personal contact = functional
 Flexibility structure Middle Line Staff
 Professional
 Training/career path bureaucracy =
Operating core decentralised
Flat/Wide Greiner’s  Divisional form

Encourages delegation Growth Model
Disadvantages:  Adhocracy = matrix

Quicker, more informed
 Loss of control decisions
 Loss of congruence  Encourages participation Growth through Revolutionary Crisis
 Duplication of effort of lower levels Creativity Leadership
 Extra costs of control  Lower management costs Direction Autonomy
 Promotions real and Delegation Control
meaningful Coordination Red Tape
 Closer contact between Collaboration Psychological saturation
senior management and
lower levels
CIMA P6 – Management Accounting Business Strategy These notes are not intended to cover the whole of the P6 syllabus © Darren Sparkes, 2009 22
Market Leader Coordinated marketing
- largest market share
Customer needs Analyse environment
Profitability and competitors – PEST
Market Challenger Marketing
- runner-up, fighting to / Porter’s five forces /
Target Markets Strategy PROSAC / 4P’s
increase share
Kotler’s Four Pillars
of Marketing
Market Follower
- runner-up, aiming to Market Segmentation and
hold share Marketing Target Market
…identify, anticipate and satisfy …division of the market into
Competitive homogenous groups of potential
Market nicher customer requirements
Strategies customers who may be treated
- serve small segment, not similarly for marketing purposes
pursued by larger firms
Product Sales
Production  Geographic
 Demographic
o Age
Firm’s orientation o Gender
o Income
A Awareness o Family life-cycle
I  Social class
D
Interest
Desire Communications Mix:
Advertising
Marketing 

Psychological
Education
A Action Sales promotion  Hobbies
Public relations
Personal selling Use of intermediaries:
 Economic criteria Marketing Research Undifferentiated
 Control criteria …systematic gathering,
Promotion Place recording and analysing of data Differentiated
about problems relating to the
marketing of goods and services
Marketing Mix – 4P’s Concentrated
…set of controllable
marketing variables used to Field Research (Primary Desk research
Price produce desired response in Product qualities data) (secondary data)
the target market Features, options,
range, warranty, Interviews, focus groups, External
packaging, branding questionnaires, Internal CSO reports,
 Cost based experiments, Test Accounts, Sales Business
 Target pricing monitors, Trade
Product marketing reports, Customer
journals,
 Discriminatory pricing complaints
Product Life Cycle newspapers
 Psychological pricing
 Promotional pricing
 Product line pricing Product Brand Strategies Existing Product New Product
to meet Product
 Captive product pricing
needs mix Existing Brand Line Extension Brand Extension
 Market skimming
 Market penetration
New Brand Multi-branding New Brand
CIMA P6 – Management Accounting Business Strategy These notes are not intended to cover the whole of the P6 syllabus © Darren Sparkes, 2009 23
Sales (price x number of Improving DPP:
Evaluation of DPP:
units – returns) Calculating DPP  Increase sales price
 Too product focussed
 Increase sales volume
LESS:  Easier and cheaper to cut price
 Reduce costs of
than conduct DPP exercise
stocking
Costs (unit cost + ordering  Ignores relationships between
Profits from sales of  Offer incentives
+ inventory + storage + products
individual products
transport + shelf stacking +
wastage + breakage)
DPP – Direct Drawbacks:
Product  Hard to predict future behaviour
Profitability  Hard to factor in competitors
Typical cost drivers:  Difficult to pinpoint life-cycle
 Product size stage
 Demand uncertainty Product View  Uncertainty of environmental
 Delivery cycle factors
 Ordering method

Profitable Consider:
 Present value of existing & future

Products or purchases
 Probability of customer retention
 Probability of customer
Single period view of
value of customer
CAP – Customer
Account
Customers? purchasing new products
 Costs of initial attraction
Profitability
Life-Cycle
1. Analyse customer base and divide into
Customer View
customer value
segments
2. Calculate annual revenues earned Developing Customer Relationships:
from customer segments Evaluation of CAP: Customer  Develop customer retention schemes
3. Calculate annual costs of serving the  Includes non-production costs Relationship for staff
segment including the ‘hassle’ factor  Identifies customer groups of
4. Identify and retain ‘quality’ customers value to the firm
Marketing /  Reduce staff turnover
Management  Elevate customer retention in corporate
5. Eliminate or re-engineer unprofitable  Enables assessment of value of
marketing expenditure thinking
customers
× Leads to ill-judged product  Analyse detailed information on
changes customers and their buying habits
Focus marketing
 Minimum order size × Calculation difficulties resources on  Monitor customer relationships
 Install telesales / EDI × Single period view maintaining &  Engage with customer
 Charge service fees enhancing existing  Develop ideas to increase loyalty
 Impose flat order customer base DREAMED
charge
 Discriminatory pricing
CIMA P6 – Management Accounting Business Strategy These notes are not intended to cover the whole of the P6 syllabus © Darren Sparkes, 2009 24
C Confidentiality Equal opportunities
O Objectivity
P Professional due care Consumer health and safety
Professional Ethics Fair Trade
P Professional Competence ‘Self control, not self interest’
I Integrity Safety in the workplace
T Technical Standards
Honesty in Advertising

Corporate Governance Sustainability


 Divorce of ownership and control
Issues
 Separate roles of CEO and Chairperson
 Audit Committee / Remuneration Committee Environment
 Directors re-election at least every 3 years
 Non-exec Directors Corporate Social
o Independent Responsibility
o Role on audit / remuneration
committees
o Corporate conscience
o Mentors to inexperienced execs Views on Business Ethics
o Strategic value through expertise Business and
Reputation
Professional ‘The business of
Small company business is business’
Innovation &
ideas from
and branding
advantage in the
supply chain
Ethics (Friedman)
close links to
community Management to concentrate on
Competitive Avoid future Government policy maximising profits and
advantage shareholder wealth.

Recruitment Enlightened Self-Interest Businesses have no duty to


society.
Benefits to Business Firms should acknowledge their social
responsibilities. Societal benefits will arise as a
Relieve stress on
result of commercial success.
management
Attract ethical
investor funds

Competitive disadvantage No universal acceptance of Conflict of CSR with shareholder wealth


Potential problems morals & ethics  Reduced revenues
 Increased costs
Deciding what is ethical  Diverts funds from shareholders
Disclosure of business information
 Distracts management

Bad publicity from monitoring and enforcement


CIMA P6 – Management Accounting Business Strategy These notes are not intended to cover the whole of the P6 syllabus © Darren Sparkes, 2009 25
Country Political
specific costs Influences Acquire
resources PEST
Market Knowledge
Diversify
Economies Cost advantages sources of
of scale Expand sales sales & Financial
supply

Convergence of Markets Reasons for growth in PROSAC


international business Objectives of General
international risks 5 Forces
Trend to Global growth
products
Firm structure, strategy, rivalry

Exporting


Low capital outlay
Low risk
The International Porter’s
Diamond
Factor Demand

×
Can learn about market
May not meet customer needs
Market Place conditions ‘National
Competitive
conditions

× Perceived lack of commitment Advantage’


× High distribution costs
Methods of International Expansion Related and supporting industries
Joint Venture &
Franchising
 Access to local resources Ethnocentric Multinational - Polycentric Global - Geocentric
 Reduced national sentiment
 Shared capital input
 Perceives foreign markets as  See overseas market as  Standardise wherever possible,
 Access to competences and similar to domestic market distinctive e.g. RnD, Branding
knowledge
 Products & marketing mix  Customised products and  Market convergence may allow
× Shared profits
constant marketing mix standardised product
× Lose competences
 Standardisation to save time and  Increased overseas sales  BUT
× Train competitor
money volumes  Demand-driven
× Operational disputes
 Supply-driven policy BUT  Customised marketing mix where
 Fewer EOS giving higher costs, necessary = GLOCAL
Foreign Direct Investment so volumes not turned into profits
 CloserPto market
Exporting Joint venture, Franchising, Foreign Direct Investment
 Retain profits
 More control
STAFFING
 Reduced operational conflicts
× High financial risk  Overcomes lack of host skills,  Alleviates cultural myopia,  Efficient use of HR, builds strong
× Staffing decision unified culture, Transfers inexpensive culture and management
× Integration difficulties competencies × Limits career mobility, isolates HQ network
× Resentment by host, cultural from subsidiaries × Subject to National immigration
myopia policies, expensive

CIMA P6 – Management Accounting Business Strategy These notes are not intended to cover the whole of the P6 syllabus © Darren Sparkes, 2009 26
Transfer Prices:
 Marginal Cost – no incentive for
seller & inflated profit for buyer Problem:
 Full Cost (Cost Plus) – may be no no account taken of invested Return On Residual
incentive for the buyer & no capital used to generate Investment
incentive for seller to control costs
Income (RI)
profits
 Market price – no buyer incentive (ROI)
 Opportunity Cost – usually best
 Centrally set – uncontrollable Examples
 PBIT
 Negotiated – powerful divisions Gross margin
PBIT X 100 = % (CE x imputed interest rate)
 Net margin
CE RI
 Cost % sales
Aims of performance measures:  Profit
 Motivation
 Congruence Relative Measure % Absolute Measure £’s
 Accurate reflection of performance
Profit Related Measures
 Accountability/Controllability
 Reconcile long and short-term Problems: Problems:
 Sub-optimal  Absolute measure
investment poor for

Benefits Review and Control 


decisions
Deplete capital
performance
comparisons
 Longer-term assets too early
measures
 More difficult to
manipulate Joint issues when used in isolation
 Measures The Balanced Scorecard  Backwards looking measures
determinants and
 Short-termist decisions
results
 Open to easy manipulation of discretionary costs and
 Promotes goal Financial Perspective
capital employed
congruence
 Includes
stakeholders
Customer Internal Business Conclusion
Perspective Perspective Financial measures should not be used in isolation to
Potential measure performance but should be combined with
non-financial measures.
Drawbacks Innovation and
× Measures conflict Learning Perspective
with each other
Shareholder
× Requires cultural Economic Value
change Value Analysis
× Overload –
Added (EVA®)
1. Identify CSF’s
‘paralysis by
analysis’ 2. Identify competences required for CSF’s The business should be
3. Develop KPI’s for competences managed to increase
× Time and cost Adjusted NOPAT
4. Measure competence shareholder wealth – i.e. all
× No obvious (Adjusted CE x imputed interest rate)
5. Take action – continuous improvement activities and processes
relationship with EVA
shareholder wealth

CIMA P6 – Management Accounting Business Strategy These notes are not intended to cover the whole of the P6 syllabus © Darren Sparkes, 2009 27

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