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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.
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.’
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)
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
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
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
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
Apply knowledge
and skills
Aims of the paper
Background
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%
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
Change Management
HRM / IT Culture
Structure Implementation
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
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
Results:
Financial performance F
Mendelow’s Power – Interest Matrix Hierarchy Competitiveness C
(Brignall et al)
Low Interest High Mission
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
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
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?
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
`
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
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
Knowledge = closest we
can get to ultimate
Organisational Issues (cont’d) Extranet
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
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
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
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
CIMA P6 – Management Accounting Business Strategy These notes are not intended to cover the whole of the P6 syllabus © Darren Sparkes, 2009 27