KB5 Study Text

STUDY TEXT
CA SRI LANKA CURRICULUM 2015

First edition 2015
ISBN 9781 4727 1049 9
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ii
Contents
Page
Introduction iv
Chapter features vi
Learning outcomes vii
Action verbs checklist xvii
KB5 Business Value Creation

Part A Business value creation
1 Introduction to business value creation 3
Part B Role of supply chain in value creation

2 Supply chain management 37
Part C Creating value through operations

3 Value and operations management 69
Part D Marketing and value creation

4 Marketing and value creation 109
5 Further aspects of marketing and value 153
Part E People and value creation

6 People and value creation 181
7 Further aspects of people and value creation 227
Part F Value creation through technology and innovation

8 Technology, innovation and value creation 273
Part G Strategy for value creation

9 Strategy and value creation 305
10 Formulating, implementing and evaluating strategy 333
Index 375
Introduction iii
Introduction
KB5 Business Value Creation

At the Business Level the content is styled around the value chain, so that students understand each
activity and how they combine to create margins for the organisation. The focus at this level is on
understanding the interplay of different functions of the organisation and where accounting
professionals can contribute to value addition. This module climaxes with a detailed discussion of
business strategy development, drawing heavily from prior discussions of value chain analysis.
Syllabus structure
Main syllabus areas Weightings

1. Introduction to Business Value Creation 8%
2. Role of Supply Chain in Value Creation (Supply Chain Management) 12%
3. Value Creation through Operations 12%
4. Value Creation through Marketing 20%
5. Human Resource Aspects of Value Creation 20%
6. Value Creation through Technology & Innovation 12%
7. Strategy for Value Creation 16%
One of the key elements in examination success is practice. It is important that not only you fully
understand the topics by reading carefully the information contained in this Study Text, but it is also
vital that you practise the techniques and apply the principles that you have learned.
In order to do this, you should:
 Work through all the examples provided within the chapters and review the solutions, ensuring
that you understand them;
 Complete the progress test for each chapter.
In addition, you should use the Practice and Revision Kit. These questions will provide you with
excellent examination practice when you are in the revision phase of your studies.
iv KB5 Business Value Creation

Pillar structure
The Curriculum 2015 is structured around three pillars, namely, Knowledge, Skills and Personal.
The Pillars are subdivided into specific subject areas or sub pillars and content is delivered to meet the
requirements of three progressively ascending levels of competency, namely, Executive, Business and
Corporate.
The Business Level builds technical abilities whilst enhancing interpersonal and communication skills
and problem resolution skills as required of a Senior Business Accountant.
The Knowledge Pillar focuses on imparting sound technical knowledge required of a competent CA,
and comprises five sub pillars that focus on the following subject areas:
Sub pillar 1: Financial Accounting and Reporting (FA&R)
Sub pillar 2: Management Accounting and Finance (MA&F)
Sub pillar 3: Taxation and Law (T&L)
Sub pillar 4: Assurance and Ethics (A&E)
Sub pillar 5: Management and Contemporary Issues (M&C)
FA&R MA&F T&L A&E M&C

Sub Pillar Sub Pillar Sub Pillar Sub Pillar Sub Pillar
KC1 KC2 KC3 KC4 KC5

Corporate
Corporate Corporate Corporate Corporate

Level
Corporate
Financial Finance Taxation Governance, Strategy &
Reporting and Risk Assurance & Contemporary
Management Ethics Issues
KB1 KB2 KB3 KB4 KB5

Business
Business Business Business Business Business

Level
Financial Management Taxation Assurance, Value

Reporting Accounting & Law Ethics Creation
& Audit
KE1 KE2 KE3 KE4 KE5

Executive
Financial Management Fundamentals Processes, Commercial

Level
Accounting Accounting of Assurance & Insight for

& Reporting Information Taxation & Law Ethics Management
Fundamentals
Introduction v
Chapter features
Each chapter contains a number of helpful features to guide you through each topic.
Topic list This tells you what you will be studying in the chapter. The topic items form
the numbered headings within the chapter.
Chapter The introduction puts the chapter topic into perspective and explains why it is
introduction important, both within your studies and within your practical working life.
Learning The learning outcomes issued for the module by CA Sri Lanka are listed at the
Outcomes beginning of the chapter, with reference to the chapter section within which
coverage will be found.
Key terms These are definitions of important concepts that you really need to know and
understand before the exam.
Examples These are illustrations of particular techniques or concepts with a worked

solution or explanation provided immediately afterwards.
Case study Often based on real world scenarios and contemporary issues, these examples
or illustrations are designed to enrich your understanding of a topic and add
practical emphasis.
Questions These are questions that enable you to practise a technique or test your
understanding. You will find the answer underneath the question.
Formula to These are the formula that you are required to learn for the exam.
learn
Section This summarises the key points to remember from each section.
introduction
Chapter This provides a recap of the key areas covered in the chapter.
roundup
Progress Progress tests at the end of each chapter are designed to test your memory.
Test
Bold text Throughout the Study Text you will see that some of the text is in bold type.
This is to add emphasis and to help you to grasp the key elements within a
sentence or paragraph.
vi KB5 Business Value Creation

Learning outcomes
CA Sri Lanka’s Learning outcomes for the Module are set out on the following pages. They are cross-referenced to the chapter in the Study Text where they are
covered.
1. Introduction to Business Value Creation

(Syllabus Weighting: 8%)
Knowledge Component Knowledge Knowledge Learning Outcome Chapter
Dimension Process
1.1 Nature of business value Conceptual Comprehension 1.1.1 Explain the concept of value creation and its importance to business 1
(including shareholder value, customer value, employee value, supplier
value and societal values).
1.2 Value creation process Procedural Comprehension 1.2.1 Explain the primary and supporting activities involved with creating 1
value to business (introduction to value chain).
1
1.2.2 Explain the concept of the value network and its uses in business.
1.3 Stakeholders Procedural Application 1.3.1 Prioritise organisational stakeholders in terms of their impact on 1
business (stakeholder mapping, based on the power/interest matrix).
1.4 Strategic capability and Procedural Analysis 1.4.1 Analyse the role of resources and competencies in developing 1
competitive advantage competitive advantages (threshold resources vs. unique resources and
threshold competencies vs. core competencies).
1.5 Role of the accountant in Conceptual Comprehension 1.5.1 Discuss the role of the accountant in the process of value creation. 1
value creation
Learning outcomes vii

2. Role of Supply Chain in Value Creation (Supply Chain Management)

Dimension Process
2.1 Supply chain Procedural Application 2.1.1 Demonstrate the different elements of supply chain management and 2
management and their respective contributions to creating competitive advantage.
competitive advantages
2.2 Inventory management Procedural Analysis 2.2.1 Analyse the balance between customer satisfaction level and 2
and warehousing inventory management policies.
2.2.2 Outline the functionalities of a warehouse management system for 2
planning, monitoring and control.
2.3 Physical distribution and Conceptual Comprehension 2.3.1 Discuss distribution and logistics systems in businesses. 2
logistics systems
2.4 Supply chain information Procedural Analysis/ 2.4.1 Analyse different information technology applications used in the 2
systems Evaluate supply chain process (including internet, intranet, electronic data
interchange and radio frequency identification devices).
2.4.2 Evaluate the potential of using information technology to improve 2
performance of the supply chain process.
2.5 Supply chain Meta Evaluate 2.5.1 Evaluate different supply chain performance management systems 2
performance cognitive including the “SCORE Model” and “Balanced Scorecard”).
management 2.5.2 Recommend a supply chain performance management system for a 2
business.
viii KB5 Business Value Creation

3. Value Creation through Operations

Dimension Process
3.1 Competitive advantage Procedural Comprehension 3.1.1 Discuss the role of operations management in developing 3
through operations competitive advantage for businesses.
management
3.2 Product design and Conceptual Comprehension 3.2.1 Discuss the conceptual understanding of the process of product 3
process selection (new design in a typical manufacturing organisation, along with the
product development) different production methods available for manufacturing (job,
batch, chain production, lean manufacturing).
3.3 Quality management Procedural Comprehension/ 3.3.1 Compare and contrast the alternative quality control systems 3
Analysis available to an organisation.
3.3.2 Discuss the application of Total Quality Management in businesses 3
(including Six Sigma, Kaizen and 5S).
3.4 Project management Conceptual Comprehension 3.4.1 Discuss the conceptual understanding of the process of project 3
management and the concepts associated with it, such as the critical
path method, PERT, histograms and Gantt charts.
3.5 Location planning and Procedural Analysis 3.5.1 Analyse the systematic decision process in planning for locations. 3
analysis
Learning outcomes ix
4. Value Creation through Marketing

Dimension Process
4.1 Role of marketing Procedural Comprehension 4.1.1 Discuss the role of marketing strategies for value creation in 4
strategies businesses.
4.2 Segmentation, targeting Procedural Application 4.2.1 Demonstrate the importance for an organisation of having an STP 4
and positioning process.
4.22 Apply STP in marketing programs.
4.3 Managing products and Conceptual Comprehension 4.3.1 Discuss product management and brand management applications 4
brands (product levels, product mix decisions, product line decisions and
branding decisions).
4.4 Pricing strategies Procedural Analysis 4.4.1 Compare and contrast alternative pricing methods and strategies for 4
developing competitiveness in the market (cost-based, demand-
based and competitor-based pricing methods and price adaptation
strategies).
4.5 Distribution and channel Procedural Analysis 4.5.1 Compare and contrast alternative channel management decisions 4
management and channel dynamics for developing competitiveness in the market
(intensive, selective and exclusive distribution strategies and
horizontal and vertical channel systems).
4.6 Managing marketing Procedural Analysis 4.6.1 Compare and contrast the main elements of promotional mix and 4
communication promotional strategies for developing competitiveness in the market
(promotional mix: advertising, sales promotion, public relations,
personal selling, events and experience; promotional strategies:
push, pull and profile).
x KB5 Business Value Creation

4. Value Creation through Marketing

Dimension Process
4.7 Managing the product life Procedural Analysis 4.7.1 Analyse the marketing strategies at different phases of the “Product 5
cycle Life Cycle (PLC)”.
4.8 Service marketing Conceptual Comprehension 4.8.1 Discuss the service marketing mix (7Ps). 5
4.9 Customer relationship Conceptual Comprehension 4.9.1 Explain the importance of Customer Relationship Management 5
management (CRM) in the value creation process.
4.9.2 Discuss basic CRM techniques used by businesses. 5
Learning outcomes xi
5. Human Resource Aspects of Value Creation

Dimension Process
5.1 Role of human resource Conceptual Comprehension 5.1.1 Discuss the contribution of Human Resource Management (HRM) to 6
management in value value creation in businesses.
creation
5.2 HR planning Conceptual Comprehension 5.2.1 Explain the process of HR planning. 6
5.3 Talent attraction and Procedural Analysis 5.3.1 Compare and contrast the main methods of recruitment (recruitment 6
retention process and talent attraction strategies), selection and socialisation.
5.3.2 Compare and contrast methods of employee motivation and talent 6
management.
5.4 Performance Procedural Analysis 5.4.1 Compare and contrast the main methods of performance appraisals 6
management (including feedback and setting goals).
5.5 Human resource Procedural Analysis 5.5.1 Analyse the staff training methods and strategies of employee 7
development development, Return on Investment (ROI) and human resource
development.
5.6 Knowledge management Procedural Analysis 5.6.1 Analyse how to incorporate knowledge management to enhance 7
business performance (including knowledge worker/knowledge
codification, knowledge abstraction and knowledge
diffusion/managing tacit and explicit knowledge).
xii KB5 Business Value Creation

5. Human Resource Aspects of Value Creation

Dimension Process
5.7 Managing culture and Procedural Comprehension/ 5.7.1 Explain different aspects of organisational culture. 7
change Evaluate
5.7.2 Evaluate ways to overcome resistance to change when implementing 7
new strategies (including cultural web by Johnson and Scholes, three-
stage change process by Kurt Lewin, hierarchy in managing change
and Elizabeth Kubler Ross’s grief cycle).
5.8 Leadership Conceptual/ Remember/ 5.8.1 Identify main leadership approaches (including trait approach, 7
Procedural Evaluate behavioural approach and situational approach to the leadership).
5.8.2 Recommend appropriate leadership styles for different business
situations.
Learning outcomes xiii

6. Value Creation through Technology and Innovation

Dimension Process
6.1 Technology and business Procedural Comprehension 6.1.1 Discuss the role of technology in creating competitive advantages for 8
value organisations.
6.2 Information technology Procedural Analysis 6.2.1 Compare and contrast different types of information technology 8
infrastructure in infrastructure employed in different functional areas of a business.
organisations
6.3 E-business Procedural Comprehension/ 6.3.1 Discuss the e-business process and its value to businesses. 8
Analysis 6.3.2 Analyse the application of e-business in different businesses (B2B
and B2C).
6.4 Managing research and Procedural Comprehension 6.4.1 Discuss the role of research and development in creating value for 8
development businesses.
6.5 Managing innovation Procedural Application 6.5.1 Assess the importance of innovation in today’s context and the role 8
of innovation in driving competitive advantage.
xiv KB5 Business Value Creation

7. Strategy for Value Creation

Dimension Process
7.1 Levels and types of Conceptual Comprehension 7.1.1 Discuss different levels and types of strategy. 9
strategy
7.2 Strategic planning Procedural Comprehension 7.2.1 Discuss the key steps involved in the strategic planning process within 9
process within strategic a Strategic Business Unit (SBU).
business units
7.3 Strategic purpose of an Procedural Application/ 7.3.1 Prepare a suitable enterprise vision, mission, goals and objectives for a 9
organisation Analysis SBU.
7.3.2 Analyse “Critical Success Factors (CSFs)” and their implications on 9
“Key Performance Indicators (KPIs)”.
7.4 Formulation of business- Procedural Analysis 7.4.1 Compare and contrast alternative business level strategies for each 10
level strategy SBU (including generic strategies, strategy clock, blue ocean and red
ocean, and competitive strategies based on market position).
7.5 Strategic behaviour in Procedural Application 7.5.1 Assess the strategic behaviour in interacting with others (modelled as 10
competitive markets games) and strategic interactions among businesses, in order to
(game theory)
maximise their own profit (Nash equilibrium, dominant and
dominated strategies).
7.6 Evaluation and Procedural Evaluate 7.6.1 Evaluate different strategies for SBUs. 10
implementation of
business-level strategy 7.6.2 Recommend appropriate strategies using frameworks such as 10
“Suitability, Acceptability, Feasibility” (SAF) and/or McKinsey’s 7S.
Learning outcomes xv
7. Strategy for Value Creation

Dimension Process
7.7 Monitoring and control Procedural Evaluate 7.7.1 Evaluate the success of an implemented strategy, via a mix of financial 10
and non-financial measures.
7.7.2 Advise on the changes to strategy with reference to respective KPIs 10
and NFPIs.
xvi KB5 Business Value Creation

Action verbs checklist
Knowledge Process Verb List Verb Definitions

Tier - 1 Remember Define Describe exactly the nature, scope or meaning
Recall important information Draw Produce (a picture or diagram)
Identify Recognise, establish or select after

consideration
List Write the connected items one below the other
Relate To establish logical or causal connections
State Express something definitely or clearly
Tier - 2 Comprehension Calculate/ Make a mathematical computation

Explain important Compute
information Discuss Examine in detail by argument showing
different aspects, for the purpose of arriving at
a conclusion
Explain Make a clear description in detail revealing
relevant facts
Interpret Present in understandable terms or to translate
Recognise To show validity or otherwise, using knowledge

or contextual experience
Record Enter relevant entries in detail
Summarise Give a brief statement of the main points (in

facts or figures)
Action verbs checklist xvii

Tier - 3 Application Apply Put to practical use
Use knowledge in a setting Assess Determine the value, nature, ability or quality
other than the one in which it
Demonstrate Prove, especially with examples
was learned/solve close-
ended problems Graph Represent by means of a graph
Prepare Make ready for a particular purpose
Prioritise Arrange or do in order of importance
Reconcile Make consistent with another
Solve To find a solution through calculations and/or

explanations
Tier - 4 Analysis Analyse Examine in detail in order to determine the
Draw relations among ideas solution or outcome
and to compare and Compare Examine for the purpose of discovering
contrast/solve open-ended similarities
problems Contrast Examine in order to show unlikeness or
differences
Differentiate Constitute a difference that distinguishes
something
Outline Make a summary of significant features
xviii KB5 Business Value Creation

Tier - 5 Evaluate Advise Offer suggestions about the best course of
Formation of judgments and action in a manner suited to the recipient
decisions about the value of Convince To persuade others to believe something using
methods, ideas, people or evidence and/or argument
products Criticise Form and express a judgment
Evaluate To determine the significance by careful

appraisal
Recommend A suggestion or proposal as to the best course
of action
Resolve Settle or find a solution to a problem or
contentious matter
Validate Check or prove the accuracy
Tier - 6 Synthesis Compile Produce by assembling information collected

Solve unfamiliar problems by from various sources
combining different aspects Design Devise the form or structure according to a plan
to form a unique or novel
Develop To disclose, discover, perfect or unfold a plan or
solution
idea
Propose To form or declare a plan or intention for
consideration or adoption
Action verbs checklist xix

xx KB5 Business Value Creation
KB5 | Part A: Business Value Creation
2 CA Sri Lanka
CHAPTER
INTRODUCTION
A business brings together and uses resources – money, people, materials, equipment and other assets – in order to
create value. The value of what a business produces should be more than the value of the resources that it uses. The
objective of a business organisation is to create value.
Strategy is a plan of action, or a combination of plans, for achieving a desirable objective. With business strategy, the
objective is to create value.
This introductory chapter looks at the concept of value. It explains how value is created by a business organisation, for
the benefit of the people who have an interest in it.
Knowledge Component
1 Introduction to business value creation
1.1 Nature of business value 1.1.1 Explain the concept of value creation and its importance to business
(including shareholder value, customer value, employee value,
supplier value and societal values)
1.2 Value creation process 1.2.1 Explain the primary and supporting activities involved with creating
value to business (introduction to value chain)
1.2.2 Explain the concept of value network and its uses in business
1.3 Stakeholders 1.3.1 Prioritise organisational stakeholders in terms of their impact on

business (stakeholder mapping, based on the power/interest
matrix)
1.4 Strategic capability and 1.4.1 Analyse the role of resources and competences in developing
competitive advantage competitive advantages (threshold resources vs unique resources
and threshold competences vs core competences)
1.5 Role of the accountant in 1.5.1 Discuss the role of an accountant in the process of value creation
value creation
3
KB5 | Chapter 1: Introduction to Business Value Creation
LEARNING
CHAPTER CONTENTS OUTCOME
1 The nature of business value 1.1.1
2 Value creation and the value chain 1.2.1
3 The value network 1.2.2
4 Stakeholders 1.3.1
5 Competitive advantage: resources and competences 1.4.1
6 The accountant and value creation 1.5.1
1 The nature of business value

In business, value is a measure of the worth of something.
A business organisation obtains the use of resources, such as money, employees,
materials, equipment and other assets. These have a value. The organisation then
makes products or provides services that have more value than the resources it
has used. Business activities should 'add value'. If business activity fails to add
value, it is not worthwhile and should not be undertaken.
What is value, and how do we measure it? The answer to this question is that
'value' has different meanings for different groups of people, and there are
different ways of measuring it.
Meaning of value
Shareholder value For shareholders, the owners of a company, value means the
value of their shares. Creating value means adding to the
value of their shares. As a general rule, companies add to the
value of shares, and so add to shareholder value, by making
profits and paying dividends.
Customer value For customers of a company, value means the value of the
goods or services they buy. This can be measured by the price
that they are willing to pay for them. Customers will buy
products or services if they believe they are getting value for
the price they pay. They will compare the products or
services of rival companies, and will often buy from the
company that seems to offer the value that the customer
wants for the best price.
4 CA Sri Lanka
Meaning of value
Employee value Employee value is the value of the work experience that
employees get from their employer. Pay (wages or salary) is
an important factor in measuring employee value. Other
factors that may give value to the employees are job security,
working conditions, recognition from bosses for work that is
well done, and good prospects for career development.
The amount of effort that employees put into their work is
affected by the value they believe they are receiving.
Supplier value The relationship between a business organisation and its
suppliers is a two-way relationship. Each creates value for the
other, through their business relationship. Supplier value can
be improved through careful selection of suppliers, and by
working towards greater efficiency and effectiveness in the
supply relationship. Creating value in the 'supply chain' is
discussed in a later chapter.
Societal values Societal values are the values of the societies and
communities in which a business organisation operates.
People may value companies for the benefits they provide to
society. If people think that a company is damaging for
society, they may put pressure on government to restrict the
company's activities. For example, there may be public
pressure for extra regulation to control or restrict company
activities.
Many companies, especially large companies, need to
consider their reputation in society. They need to work to
win the support – or acceptance – of the societies in which
they operate.
Creating business value means adding value. A business sells goods and services
by creating customer value, and creates shareholder value by making profits.
These ideas should be well understood. It is important to remember, however,
that business organisations should also seek to improve customer value, supplier
value and societal value.
CA Sri Lanka 5
QUESTION Societal value

Explain how a company might add to its perceived value among the society in
which it operates.
ANSWER
You may think of a different answer, but a company may seek to improve both its
reputation with society and also add to employee value by creating a workplace
environment that is free from pollution and safe to work in.
One global company producing soaps and detergents is working in countries in
Asia and Africa to develop the use of soaps that improve health and also use less
water, where water is a scarce and valuable commodity.
2 Value creation and the value chain

Value is created from the way in which a business makes use of its resources, and
the activities that it carries out. The value-creating activities within an
organisation are known as its value chain. The value chain is a term for the
activities within an organisation that add value to purchased inputs of materials.
The value created by a business organisation can be measured in terms of

customer value. This is the difference between:
• The market value of the goods or services that the business sells to its
customers
• The cost of materials and services that it buys in from its suppliers
This 'added value' is created by the organisation's own resources.
For example, a company producing bread may pay Rs. 10 for the materials to
make a loaf of bread and sell its loaves at Rs. 80 per loaf. In doing this, it will add
value of Rs. 70 for each loaf that it makes and sells. The company's ambition may
be to increase profits – and value – by selling more loaves, making them more
cheaply or selling them at a higher price.
A business creates value from the way that it operates and uses its resources.
Activities and the use of resources within a business are known as the value chain.
6 CA Sri Lanka
2.1 Value chain

Business operations are value-creating activities. The value chain is a term for the
activities in a business that add value: these are called 'value activities'.
The value chain differs between organisations in different industries and markets.
Michael Porter (in Competitive Advantage) grouped the activities of a typical
business organisation into the following value chain model:
The margin on the right-hand side of this diagram represents the difference
between the price the customer pays for the organisation's goods or services and
the cost to the firm of obtaining resource inputs (materials) and the cost of its own
activities. In other words, margin represents profit.
By making a profit from adding value for customers, a company also adds value for
its shareholders.
A value chain consists of:
• Primary activities
• Support activities: these give support to the primary activities
2.2 Primary activities

Primary activities are activities directly involved in the manufacture of goods or
provision of services to customers, sales and marketing, delivery of goods to
customers and after-sales service and support.
The primary activities for a typical manufacturing company are as follows.
Activity Comment
Inbound Receiving materials from suppliers, handling and storing
logistics them, and distributing them to production departments
(inventory control).
CA Sri Lanka 7
Activity Comment
Operations Manufacturing operations. Converting raw materials into a
final product. Inspection and testing of finished goods. For
consumer goods, packaging the products.
Outbound Storing the finished products and distributing them to
logistics customers.
Marketing and Informing customers about the products and persuading
sales them to buy (through advertising, sales promotions, direct
selling, attractive pricing, and so on).
Service Service to customers after delivery of the goods. After-sales
service, customer support, help lines, training employees of
customers in the use of a product
2.3 Support activities

Support activities provide support for the primary activities in the value chain.
What each support activity is, and how each support activity links to primary
activities, is explained in the table below.
Activity Comment
Procurement Procurement is the purchasing of materials and other
items from suppliers. In large companies, most
procurement is done by a specialist buying
department.
Procurement provides support for primary activities
in the value chain by arranging for materials and
services to be obtained for operations:
 At the time required
 To the desired quality specification
 At an economical price
Efficient, effective and economical procurement
systems add value for the organisation.
Technology Many businesses must continually adapt the
development technology that they use, and support for primary
operations comes from activities such as Information
Technology (IT) systems and new product
development and an engineering department.
8 CA Sri Lanka
Activity Comment
Technology provides support for other activities in the
value chain through IT systems, and also through
product innovation and enhancements.
Human resource Human resource (HR) management is concerned with
management ensuring that the organisation has the people, suitably
trained and skilled, to carry out its operations. HR
management covers activities such as recruitment of
employees, training, and pay and rewards.
Business organisations depend for their success on
the quality and skills of the people they employ. HR is
concerned with obtaining employees to fill vacancies
in the workforce and, where necessary, training them
to do their work.
HR adds value by providing the organisation with a
skilled work force to carry out operations efficiently
and effectively.
Firm infrastructure Business planning, finance and quality control: Porter
argued that these elements in the organisation's
infrastructure are important for its strategic capability
in all its primary activities.
A business organisation needs a management
infrastructure to provide direction, through planning,
co-ordination of activities and control. The success of
a business depends largely on how it is organised and
led, and how activities are planned and controlled.
QUESTION Buying department
Explain how a buying department provides support to the primary activities in

the value chain and how else the department might add value.
ANSWER
The buying department should ensure that the raw materials needed for
operations are available, to the correct specification and quality standard, when
they are needed.
The department may also add value by negotiating lower prices for materials from
suppliers.
CA Sri Lanka 9
It may also add value by saving costs in the stores department, by avoiding over-
buying and excessive inventory levels.
2.4 Using the value chain concept to add value

The purpose of the value chain model is to help management:
• Understand the activities within their organisation that should add value
• Look for ways of improving the way that activities are performed in order to
add more value
Value is added, remember, by selling more goods or services, increasing selling
prices or cutting costs.
Value can often be added by improving the linkages between different activities
in the value chain. The way to do this will vary between businesses, but here are
just two simple examples.
(a) The sales and marketing department could improve its communication with
the manufacturing department, so that the manufacturing department
increases production of a particular product to coincide with a new
advertising campaign.
(b) The IT department could work closely with the stores and warehousing
department, to train stores staff in how to make the best use of the IT system
for inventory control.
QUESTION Restaurant value chain
Explain how the value chain for a restaurant might differ from the value chain for
a manufacturing company. How might the owner and manager of a restaurant
seek to add value for the business?
ANSWER
Unlike a manufacturing company, a restaurant will hold only small amounts of
food. Its 'inward logistics' activities will therefore be limited. Unless it delivers
'take-away' food to customers' premises, it will have no outward logistics
activities at all.
A restaurant is a small business, and its firm infrastructure and technology
infrastructure will also be limited in scope.
A restaurant manager may try to add value in any of the following ways:
• Buy food products from its suppliers at lower prices
10 CA Sri Lanka
• Improve the decoration and atmosphere in the restaurant, and improve the
quality of service, so that customers enjoy their meals and are more likely to
return in the future
• Increase the range of dishes served, in order to attract more customers
• Offer reduced prices on certain days of the week when business is quiet, in
order to attract more customers
• Open a new restaurant, in a different part of the town or in another town, in
order to sell more meals
• Improve the quality of the food produced, and so have an opportunity to
raise prices
• Eliminate items from the menu that are creating negative value – where
sales of the menu item are less than the costs of having the item on the menu
The value chain is a useful model because it helps management to see the business
as a whole, and to:
• Compare value activities with those of its competitors
• Identify potential sources of creating competitive advantage by improving
aspects of the value chain
– Find new or better ways to do activities
– Combine value activities in better ways
– Improve the linkages between activities in the value chain
QUESTION Value chain
Explain the meaning of the value chain and how an understanding of the value
chain can be helpful for management.
ANSWER
A value chain refers to interconnected activities within an organisation that create
value. Porter suggested that activities within an organisation can be analysed into
different categories.
• Value can be created by any of these activities.
• Management should analyse these value-creating activities, and identify
where the organisation is most effective at creating value, and where it is
least effective.
• Management can identify which activities give them a competitive advantage
over rivals.
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By analysing value-creating activities, decisions can be made about:

• How the creation of value can be improved and more value created
• How to improve competitive advantage over rivals
• Whether some activities should be stopped because they cost more than the
value they create, and so destroy value
3 The value network

The value network joins an organisation's value chain to those of its suppliers and
customers. A value network extends from the producers of basic raw materials to
the distributors and sellers of an end consumer product. Value should be created
at every stage in the value network, although more value may be created in some
parts of the network than in others.
A value network consists of the interconnected value chains of all organisations

in the supply chain from raw material production to the end consumer.
Value activities and linkages between value activities are not restricted to an
organisation's own business activities.
3.1 Example: a value network

A manufacturer of motor cars is in the middle of a value network.
• At the beginning of the network, there are mining companies that extract the
ore to make metal, farmers who rear animals whose hides will become
leather for car seats and other producers of raw material items.
• Next in the chain there are producers of metal such as steel, glass for
windscreens and leather hide or cloth to cover seats.
• Next there are producers of windscreens, door handles, engines, tyres and so
on.
• The car manufacturer buys components from many different suppliers to
produce its cars.
• It then sells the cars to distributors, who sell them to consumers or business
customers.
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3.2 Value network and supply chain

The term 'value network' was used by Johnson, Scholes and Whittington
(Exploring Corporate Strategy) to describe the links between the value chains of
different business organisations:
'The value network is the set of inter-organisational links and relationships that
are necessary to create a product or service'.
A value network can also be described as a supply chain, linking suppliers of the
original raw materials to the end consumer of a finished product.
A supply chain shows the business organisations, people, technology and
activities involved in transforming a product or service from its raw materials to
the finished product for end consumers.
Supply chain management, which is the subject of the next chapter, is concerned
with how to manage the supply chain effectively and efficiently.
Value network management is more concerned with identifying the potential
within the network or supply chain for creating more value. In this respect,
looking for added value in networks is an aspect of supply chain management.
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3.3 Using the value network to create value

Value network = the sum of
the value chains in all the
firms in a supply chain
The value that customers pay

for when they buy goods or
services comes from the value
created by the entire value
network
A business should also

A business should try
consider the entire value
to improve the
network, and think about how
efficiency and
value can be added across the
effectiveness of its
network, not just within its
own value chain
own value chain
Collaboration between
business organisations and
their key suppliers (for
example, in developing new
materials or improving
delivery systems) can add
value across the network, to
the benefit of all the
organisations involved
4 Stakeholders
The stakeholders of a business organisation are the people and groups who have
an interest in what the organisation does. In some cases, stakeholders are able to
influence the organisation and what its management decide to do. Different
stakeholders have different expectations about what the organisation should do to
provide value. The interests of different stakeholders may conflict with each other.
14 CA Sri Lanka
Here are some of the stakeholders of a large company.
Stakeholders
Internal stakeholders These are individuals or groups who work within the
organisation.
Management Different management groups may have differing
expectations from the company, and may have differing
amounts of influence on decision making. For example,
senior management are more powerful and influential
than junior managers.
Employees In global companies, there may be many different
employee stakeholder groups in subsidiary companies
around the world.
Connected These are individuals or other persons/organisations
stakeholders with direct links to the company.
Shareholders Equity shareholders are the company's legal owners.
There may be a dominant majority shareholder and
several minority shareholders. Alternatively, shares
may be widely held by a large number of investors.
Customers Customers buy the products or services of the company,
and have expectations of the benefits and value that the
company should provide.
Suppliers Suppliers may expect a constructive business
relationship with the company. Some suppliers may be
more important for the company than others.
Lenders Lenders such as banks expect the company to pay
interest and repay their loans in full and on time. In an
event of default by the company, a lender may take legal
action.
External stakeholders These are people or organisations that do not have a
direct relationship with the business of the company
Government Although government is not directly involved in a
company's business, it has expectations about how
companies should behave. Government is able to
influence what a company does by means of laws or
regulations that the company must obey.
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Stakeholders
The general public The general public may have an interest in what a
company does, especially when the company is in a
position to affect people's lives substantially. The public
can be an important stakeholder for businesses such as
industrial companies that pollute the atmosphere and
banks that look after people's money.
4.1 Stakeholder objectives

Stakeholders have differing expectations about what an organisation should do for
them. Here are some examples of stakeholder objectives.
Employees and managers Customers

Good rates of pay Products of a certain quality at a
More pay for better performance reasonable price
Job security Products that give 'status' to the owner,
Good conditions of work such as an expensive car
Job satisfaction Products that should last a certain
number of years
Career development
A product or service that meets other
customer needs
Shareholders Suppliers
Profits Regular orders for goods, in return for
Expectations of more profit growth reliable delivery and good service
Increase in share price
4.2 The power of stakeholders

Stakeholders have an interest in what the organisation does. They are also able to
influence decisions made by the organisation. Some stakeholders have more
power than others over decision making.
The amount of power held by stakeholders differs between organisations and may
change over time.
Here are some of the ways in which stakeholder groups in a company may be able
to exert power or influence over decision making by the organisation.
16 CA Sri Lanka
Stakeholders Influence or power

Management The board of directors and senior management make
most of the important decisions in a company. Top
management are therefore very powerful.
Other managers and Below is a list of negative powers
employees  They may take industrial action
 They may resist efforts by senior management to
introduce change and new work practices
 They may refuse to re-locate to a new location for the
business
 They may resign
 They may work inefficiently and resist management
efforts to improve productivity
In other organisations, management may encourage
participation by employees in decision making. Where
this happens, the employees should have positive
influence.
Shareholders A majority of shareholders has the power to dismiss the
directors from the board.
Shareholders have the right to make certain decisions for
the company, such as approving a major takeover or a new
issue of shares, and approving the re-election of directors.
However, when there are many shareholders, each with a
small shareholding, they may find it difficult to organise
opposition to the board of directors.
Lenders such as banks They may refuse additional lending when the company
needs it.
They may take action when the company is in default on
a loan.
Suppliers May take legal action for late payments.
May refuse to make further supplies.
Customers May switch to buying the products of rival companies.
Government and May introduce new laws and regulations.
public bodies May take action for breach of regulations.
May change rates of taxation.
The general public Create bad publicity for the company.
Put pressure on government to act against the company
(for example, make new regulations).
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CASE STUDY
The power of stakeholders
Nike, producer of sports goods and sportswear, has been accused of using sub-
contractors who employ people in countries such as Pakistan, Indonesia and
Bangladesh for very low rates of pay and in poor working conditions. The
accusations were first publicised in the early 1990s. In 2011 it was reported that
sub-contractors of Nike used child labour for making footballs in Pakistan and
running shoes in Indonesia.
Eventually, the general public in the US and Europe reacted to the adverse
publicity created by these reports, and people were encouraged to avoid buying
Nike products. The influence of the general public had spread to customers. Nike
responded by insisting that its suppliers in Asia should provide minimum
standards of working conditions for their employees.
Public pressure and customer pressure persuaded the management of Nike to act
to improve their supply chain.
4.3 Stakeholder mapping

Most decisions by a company are taken by its directors or senior executives.
One theory is that decisions by a company should seek to maximise value for
shareholders, by maximising profits and so maximising the value of the company
and its shares. In accounting and financial management, this theory is often used
as the basis for making financial recommendations and investment decisions.
In practice, decisions may be influenced by other stakeholders – including senior
management themselves, who may seek to promote their own self-interest at the
expense of shareholders. The extent to which stakeholder views are taken into
consideration depends on:
• The strength of interest of the stakeholders in the decisions by the company
• The power or influence of the stakeholders over decision making
Stakeholder mapping is a method of:
• Analysing the interest and power of different stakeholder groups
• Indicating how management should respond to the concerns of each
stakeholder group
Stakeholder mapping is commonly associated with Aubrey Mendelow. Mendelow

suggested that stakeholders could be placed on a 'map'. This is a 2×2 matrix, with
one side representing the level of interest of the stakeholders in the organisation's
18 CA Sri Lanka
decisions, and the other side of the matrix representing the power of the
stakeholders.
Level of interest
Low High
Low
A B
Power
C D
High
For example, a stakeholder group with a high level of interest but a low amount of
influence or power would be put into segment B in this matrix. Low-paid and low-
skilled employees would probably be an example.
4.4 Using stakeholder maps

Stakeholder mapping is used to assess the significance of stakeholder groups. This
in turn has implications for the management of the organisation.
(a) Key players are found in segment D. They have a high level of interest in
what the company does and a high level of influence or power. One example
might be a major customer of the company. Another would be a shareholder
owning a majority of the company's shares.
Senior management should take the views of these key stakeholders into
very careful consideration when making decisions.
(b) Stakeholders in segment C have a low level of interest in the company but a
large amount of influence and power, should they ever wish to use it.
Stakeholders in this segment must be treated with care. There is a risk that
they might move to segment D. They should therefore be kept satisfied.
Large institutional shareholders in a listed company might fall into
segment C. Government – such as the Ministry of Trade or the Department of
Inland Revenue – may be another example.
(c) Stakeholders in segment B do not have great ability to influence strategy,
although their level of interest is high. Their views may be important in
influencing more powerful stakeholders, perhaps by lobbying. They
should therefore be kept informed. As indicated above, many employees of
a company may fall into segment B.
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(d) Stakeholders in Segment A have a low level of interest in the company and a
low amount of influence. Management do not have to give much – or even
any – consideration to stakeholders in this group.
4.5 Stakeholder conflicts

Different stakeholder groups have different interests, and these may come into
conflict. Management need to understand what the result of the conflict might be.
For example, management might make a decision to change work practices, in
order to improve efficiency, reduce costs and increase profits. This decision would
be in the interests of the shareholders. However, the decision may be resisted by
employees who are opposed to job losses, and who therefore go on strike. When
direct conflicts occur, management may be required to find a solution, possibly a
compromise between the different groups.
If you are asked to evaluate a strategy, you may need to think about what impact it
will have on stakeholders, and the key stakeholders in particular.
However, you should also consider the different types of responsibility an
organisation has to its stakeholders. For example:
• Economic responsibility – to make profits and provide an acceptable rate
of return to shareholders.
• Legal responsibility – to comply with relevant rules and regulations.
• Social responsibility – to be a good corporate citizen, and to make a
positive contribution to society and the local community.
4.6 Management of stakeholders

A company can benefit from managing stakeholder relationships and keeping
stakeholder groups satisfied. The level of satisfaction of some stakeholder groups
is fairly easy to monitor.
Stakeholders Measure of satisfaction

Shareholders Share price
Customers Volume of sales
Level of complaints about products or service
Employees Labour unrest and disputes
Rate of labour turnover
Lenders Indication of willingness to lend more
20 CA Sri Lanka
5 Competitive advantage: resources and competences

Competitive advantage is an advantage that a business organisation has over its
rivals, improving its prospects of selling its products or services to customers and
creating value. One important source of competitive advantage is the resources
that the organisation has at its disposal.
The resource-based view (RBV) of business strategy is that the resources that an
organisation has in its possession or under its control give it the ability to compete
in its industry and markets.
Resources must be sufficient to enable an organisation to compete successfully
(threshold resources) but unique resources create competitive advantage.
Resources are used in a way that creates competence in what the organisation
does. Business organisations must have a threshold level of competence, so that it
can compete. Core competences, however, create competitive advantage.
Resources are used by an organisation to create value. They are used by activities
in the value chain. Businesses have different types of resource.
Resource Example
Machinery Some business organisations may have more automated systems
than others.
Machinery can be assessed according to its age, condition, output
capacity and technology.
Make-up The culture and organisation structure are resources, because
they affect how people in the organisation think, and how
decisions are taken.
The make-up of an organisation also includes its intangible
resources, such as its brand names, patents and customer
goodwill.
Management Management are an important resource. The quality of
management depends on factors such as skills, experience and
leadership qualities, and also loyalty to the organisation.
Management The ability of an organisation to create value depends on the
information quality of its management information systems, and its ability to
systems provide reliable and relevant information to management on a
timely basis. Good management information improves the quality
of decision making.
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Resource Example
Men and Human resources are another important resource. The quality of
women: this resource depends on factors such as numbers, skills and
employees experience, productivity and morale.
Methods The quality of resources also depends on how they are used. How
are activities carried out?
Money Business organisations need money to operate. The ability of an
organisation to compete depends on it having enough money.
What is the organisation's cash position? What is the strength of
its cash flows?
Another way of identifying the resources of an organisation is in terms of the

following four categories.
Category of resource
Physical resources Machines and other assets: their age, condition, capacity
and location
Financial resources Capital, cash, sources of cash and funding
Human resources The number and mix of people in the organisation:
their skills, experience and potential
Intellectual capital Patents, brands, customer databases
5.1 Threshold resources and unique resources

Resources can be either:
• Threshold resources, or
• Unique resources
Threshold resources are the resources that an organisation must have to meet
the minimum requirements and expectations of customers.
Without threshold resources, an organisation cannot compete at all.

Unique resources are resources that competitors find difficult or impossible to
imitate.
They are capable of giving the organisation a competitive advantage over rival
firms. Unique resources are important, but competitive advantage is obtained
through the way that unique resources are used.
22 CA Sri Lanka
5.2 Threshold competences and core competences

The term competences refers to the ways in which an organisation uses its
resources to create value and meet the expectations of its customers.
Competences can be divided into two categories:
• Threshold competences
• Core competences
Threshold competences are the activities and processes needed to meet
customers' minimum requirements. An organisation must have threshold
competences, as well as threshold resources, to compete successfully and remain
in business.
Without threshold resources for its operations, an organisation cannot survive.
Core competences are activities that create competitive advantage. They are
difficult for competitors to imitate or obtain. Core competences can be created and
sustained in the way that unique resources are used.
Unique resources, and also the way in which resources are used, may enable an
organisation to provide better value to its customers than its competitors, and in
doing so it can achieve a competitive advantage over its rivals.
Identifying threshold resources and competences is important. If an
organisation does not pay attention to them, and ensure that it has them, it cannot
be competitive and will not survive.
Threshold levels of competence will change over time. As time goes by, an
organisation may build up and retain resources and capabilities that are no longer
needed to stay in business. If this happens, it will need to consider the best way of
disposing of the resources it no longer needs.
Competitive advantage comes from unique resources and core competences.
These are difficult, or impossible, for competitors to imitate or obtain.
The significance of threshold and distinctive resources and competences is
summarised in the following table.
Resources – what we Competences – what we

have do well
Needed in order to Threshold Threshold
compete and survive
Required to achieve Unique/distinctive Core/distinctive
competitive advantage
over rivals
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Unique resources and core competences may be referred to jointly as strategic

capabilities.
5.3 Improving the value chain and competitive advantage

Competitive advantage can also be considered in terms of the value chain.
The activities in the value chain produce goods or services that provide value for
customers. In most markets, rival businesses are all doing this same thing. They
compete with each other to sell their goods and services.
It is easier to sell to customers when the business can offer customers something
that their rivals cannot provide.
Competitive advantage means offering products or services to customers in a
way that the customers value more. If a business has a competitive advantage over
its rivals, created by activities in any part of the value chain, it is more likely to
succeed in selling its products.
In a competitive market, the most successful companies are those that are best at
creating value. Michael Porter (Competitive Strategy) has argued that companies
must seek competitive advantage over their rivals. They do this by:
• Creating more value,
• Creating value more effectively, more efficiently or at lower cost
Porter suggested that a business organisation can adopt either of two competitive
strategies:
• A cost leadership strategy, where the aim of the organisation is to create the
same value as its competitors in the products it makes or the services it
provides, but at a lower cost.
• A differentiation strategy, where the aim is to create more value than
competitors, for a competing product or service, so that customers are
willing to pay more to buy it.
5.4 The qualities of strategic capabilities

Unique resources and core competences are important for creating and sustaining
competitive advantage. If competitive advantage is to be based on unique
resources and core competences, they must have four qualities:
 They must produce effects that are valuable to buyers.
 They must be rare.
 They must be robust and impossible to imitate or copy easily.
 They must be non-substitutable.
24 CA Sri Lanka
These four qualities are sometimes identified by the letters VRIN:

 V – Value
 R – Rarity
 I – Inimitability
 N – Non-substitutability
Quality
Value to customers Competitive advantage exists only to the extent that it
contributes to the organisation's ability to satisfy its
customers' needs. No matter how rare a resource or how
well developed a competence, it cannot create competitive
advantage if it does not add to customer value.
Rarity Unique resources are rare. If a resource is not rare,
competitors can obtain it too. If competitors can obtain the
same resource, the resource cannot provide competitive
advantage.
Inimitability and Robustness means that a resource is difficult for
robustness competitors to imitate. It often comes from a core
competence, and the ability to use resources in a way that
competitors are unable to imitate.
Non-substitutability To provide competitive advantage, a resource should not
only be rare. It should also be something that competitors
do not need because they can achieve the same objective
using different resources.
QUESTION Resources
State some examples of a rare resource that can provide competitive advantage.
ANSWER
• Ownership of extraction rights to a deposit of a scarce and valuable mineral
• A worldwide patent giving rights to a valuable product or process
5.5 Dynamic and redundant capabilities

The business environment changes continually. Changes in customer attitudes and
tastes, combined with changes in technology and economic conditions, mean that
the resources and competences that an organisation has built up may cease to be
CA Sri Lanka 25
sufficient to enjoy competitive advantage, or even survive in business, in the

future.
Organisations must therefore continue to acquire new resources and new
competences in order to remain competitive by developing new strategic
capabilities.
5.5.1 Dynamic capabilities

Dynamic capabilities is a term that refers to the ability of a firm to 'integrate,
build and re-figure internal and external competences to address rapidly-changing
environments' (Treece and others).
Dynamic capabilities may also be defined as the 'capacity of an organisation to
purposefully create, extend and modify its resource base'.
Whereas operational capabilities refer to the ability of a firm to compete
successfully in current business conditions, dynamic capabilities refer to the
ability of a firm to survive in the future as business conditions and markets
change.
Requirements for dynamic What dynamic capabilities enable a

capabilities firm to do
Build up knowledge within the Recognise strategic opportunities and
organisation – develop organisational threats.
learning and knowledge.
Organisational knowledge is collective
intelligence gained through formal
systems, and also the shared
experiences of the people in the
organisation.
Build new strategic assets. Seize strategic opportunities.
Transform existing assets to the needs Re-configure the strategic capabilities
of the changing business environment. of the organisation to meet the
changing business environment.
The concept of dynamic capabilities is similar to the resource-based view (RBV) of

the firm, except that:
• Dynamic capabilities focus on building new capabilities in order to survive in
the future.
• The RBV view focuses on the strategic capabilities that are required to
achieve sustainable competitive advantage.
26 CA Sri Lanka
5.5.2 Redundant capabilities

Redundant capabilities are resources and competences that an organisation has
built up, but which are no longer needed and no longer help to create value. As
well as building up new strategic capabilities, firms should also dispose of
redundant resources and cease to maintain competences that are no longer
worthwhile.
There is a possibility that, unless redundant capabilities are disposed of, there is a
risk that the firm will fail to respond successfully to changes in the market. A
notable example in recent years has been the experience of the mobile phone
manufacturer Nokia. At one time it was the world's leading producer of mobile
phones. It tried to maintain its competitive advantages in the production and sale
of mobile phones, but failed to identify and adapt to the changes in mobile phone
technology and was too slow in developing smartphones. As a result, it failed to
acquire the new threshold resources it needed to survive and lost much of its
market share to competitors such as Apple and Samsung. In 2013, Microsoft
purchased Nokia's struggling mobile phone business.
5.6 Testing strategic capabilities

How does a firm test the strength of its resources and competences? How does it
decide whether its competences are threshold competences or core competences?
How does it assess how strong or weak its competences are? How does it assess
the competitive value of its resources?
Management should continually diagnose the strategic capabilities of their
organisation, in order to decide which resources and competences need to be
developed or sustained. Methods of testing the strength of strategic capabilities
include the following.
Method of testing
strategic capabilities
Benchmarking Making comparisons to the capabilities of competitors,
or the capabilities of successful firms in other markets
and industries ('the best in class'). Benchmarking can
help management decide what needs to be done to
improve competitiveness.
Strengths and Assessing the strengths and weaknesses in the
weaknesses analysis organisation's resources – human resources, physical
resources, financial resources and so on.
CA Sri Lanka 27
Method of testing
strategic capabilities
Value chain analysis Analysing strengths and weaknesses in the value chain,
and value network by looking at cost and price structures and identifying
analysis 'profit pools' within the value chain where most profits
are made. Making decisions about making items 'in
house' or buying from other suppliers in the value
network. Deciding who to have as strategic business
partners in the value network.
6 The accountant and value creation

In the value chain, the finance and accounting function is a part of the firm
infrastructure. The role of the accountant is to provide information for
management, to assist with decision making. The quality of decision making by
management depends on the quality of the information they use. Traditionally,
accountants have provided management with information from sources within the
organisation. Now, particularly at a strategic level, accountants also provide
information from sources external to the organisation.
Many qualified accountants rise to senior management positions within their

organisation, but in their role as accountants, they are part of the firm
infrastructure in the value chain.
Accountants fulfil several functions. The most important are:
• Providing information to management. As indicated above, accountants
have traditionally provided financial information, obtained from sources
within the organisation. In many organisations, they now provide non-
financial information as well as financial information. They also provide
management with both financial and non-financial information from sources
outside the organisation.
• Management of information systems. The ability of management to
provide extensive information to management has been improved by the
development of IT systems and access to data from a wide variety of sources
through the internet as well as in-company databases.
• Supporting management decisions. The information provided by
accountants to management enables management to make better-quality
decisions, for both planning and control purposes. Accountants provide
information for the strategic planning process.
28 CA Sri Lanka
• Providing information for the directors to report to shareholders and

other stakeholders. The accounting function maintains the accounting
records and prepares the organisation's financial statements.
• Managing the organisation's finances and cash flows. The accounting
function is responsible for managing the organisation's finances efficiently.
This includes management of cash flow and working capital. It also involves
helping the organisation to raise new finance when needed, and helping
management to invest its capital effectively.
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CHAPTER ROUNDUP
 In business, value is a measure of the worth of something.

 A business organisation obtains the use of resources, such as money, employees,
materials, equipment and other assets. These have a value. The organisation then
makes products or provides services that have more value than the resources it
has used. Business activities should 'add value'. If business activity fails to add
value, it is not worthwhile and should not be undertaken.
 Value is created from the way in which a business makes use of its resources, and
the activities that it carries out. The value-creating activities within an
organisation are known as its value chain. The value chain is a term for the
activities within an organisation that add value to purchased inputs of materials.
 The value network joins an organisation's value chain to those of its suppliers and
customers. A value network extends from the producers of basic raw materials to
the distributors and sellers of an end consumer product. Value should be created
at every stage in the value network, although more value may be created in some
parts of the network than in others.
 The stakeholders of a business organisation are the people and groups who have
an interest in what the organisation does. In some cases, stakeholders are able to
influence the organisation and what its management decide to do. Different
stakeholders have different expectations about what the organisation should do to
provide value. The interests of different stakeholders may conflict with each other.
 Competitive advantage is an advantage that a business organisation has over its
rivals, improving it prospects of selling its products or services to customers and
creating value. One important source of competitive advantage is the resources
that the organisation has at its disposal.
 The resource-based view (RBV) of business strategy is that the resources that an
organisation has in its possession or under its control give it the ability to compete
in its industry and markets.
 Resources must be sufficient to enable an organisation to compete successfully
(threshold resources) but unique resources create competitive advantage.
Resources are used in a way that creates competence in what the organisation
does. A business organisation must have a threshold level of competence, so that it
can compete. Core competences, however, create competitive advantage.
30 CA Sri Lanka
 In the value chain, the finance and accounting function is a part of the firm
infrastructure. The role of the accountant is to provide information for
management, to assist with decision making. The quality of decision making by
management depends on the quality of the information they use. Traditionally,
accountants have provided management with information from sources within the
organisation. Now, particularly at a strategic level, accountants also provide
information from sources external to the organisation.
CA Sri Lanka 31
PROGRESS TEST
1 The main objective of a commercial company is often seen as the objective of

maximising _________________ value.
2 Value = __________________ minus _________________________ .
3 Return = added value minus _______________________________ .
4 The provision of training to employees is one way in which the _____________________

function can add value for a business organisation.
5 A retailing company has a database of the buying preferences and buying habits of
a very large number of customers. Rival retailing companies do not have
databases that are as large or as sophisticated. This database is an example of:
A A threshold resource
B A unique resource
C A threshold competence
D A core competence
6 In Mendelow's stakeholder map, in which part of the matrix would you put a small
supplier that sells a large part of its output to a company but the goods that it sells
are easily obtainable from other suppliers if necessary?
A Low interest, low power
B High interest, high power
C Low interest, high power
D High interest, low power
7 According to Porter, when a company uses a valuable resource to create a

competitive advantage, it has a ____________________________ that rival companies do
not have.
32 CA Sri Lanka
ANSWERS TO PROGRESS TEST

1 Shareholder
2 Revenue from sale of products and services minus cost of bought-in materials
3 Cost of activities (costs excluding bought-in materials)
4 Human resource management
5 The answer is B. The database is a unique resource (which competitors may be

able to copy in time). To create a core competence, the company needs to put the
database to effective use.
6 The answer is D. The supplier has a strong interest in what its major customer
does, but has little influence over the customer's decisions, because it does not
supply a critically important product. The company's management should try to
keep the supplier informed about its decisions that have relevance to the supplier.
7 Core competence
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34 CA Sri Lanka
KB5 | Part B: Role of Supply Chain in Value Creation
36 CA Sri Lanka
INTRODUCTION
CHAPTER
The previous chapter explained the nature of value, and how value is created by an organisation's own value
chain and also across the entire value network. A value network can also be described as a supply chain.
For a company, supply chain management means managing those parts of the supply chain over which it has
some control. A company cannot manage its entire supply chain, but it can manage some parts of it – and in
particular its dealings with its suppliers and its arrangements for supplying its finished products to its
customers.
This chapter considers the supply chain and how supply chain management is able to provide an organisation
with core competences that it can use to create a competitive advantage over its rivals.
Knowledge Component
2 Role of supply chain in value creation (supply chain management)
2.1 Supply chain management 2.1.1 Demonstrate the different elements of supply chain management and their
and competitive advantages respective contribution to creating competitive advantage
2.2 Inventory management 2.2.1 Analyse the balance between customer satisfaction level and inventory
and warehousing management policies
2.2.2 Outline the functionalities of a warehouse management system for planning,
monitoring and control
2.3 Physical distribution 2.3.1 Discuss distribution and logistics systems in business
and logistics systems
2.4 Supply chain information 2.4.1 Analyse different information technology applications used in the supply
systems chain process (including internet, intranet, electronic data interchange and
radio frequency identification devices)
2.4.2 Evaluate the possibilities of using information technology for improving
performance of the supply chain process
2.5 Supply chain 2.5.1 Evaluate different supply chain performance management systems (including
performance the 'SCOR model' and 'balanced scorecard')
management
2.5.2 Recommend a supply chain performance management system for a business
37
KB5 | Chapter 2: Supply Chain Management
LEARNING
1 Elements of supply chain management 2.1.1
2 Warehousing 2.2.1, 2.2.2
3 Warehouse management systems (WMS) 2.2.2, 2.4.2
4 Inventory management 2.2.1
5 Physical distribution and logistics systems 2.3.1
6 Supply chain information systems 2.4.1
7 Supply chain performance management 2.5.1, 2.5.2
1 Elements of supply chain management

The supply chain is the network of organisations involved in the different
processes and activities that transform raw materials into finished goods and
services, in order to produce value for the end consumer.
Supply chain management is concerned with managing those parts of the supply
chain over which an organisation has influence or control.
The two parts of the supply chain over which a business organisation has most
control are:
• Its relationships with its suppliers
• The interface with suppliers: inward logistics and stores management
• Its relations with customers
• The interface with customers: warehouse management and outward
logistics
A supply chain flows from raw materials producers to the customers for the end
products, and most business organisations (with the exception of retailing
organisations) are somewhere in the middle of the chain.
• The term 'upstream activities' in a supply chain means the activities of
organisations earlier in the supply chain. A company's suppliers are
'upstream' in the supply chain.
38 CA Sri Lanka
• 'Downstream activities' are the activities that occur later in the supply
chain, ending with the sale of goods to the end consumer. A company's
customers are 'downstream' in the supply chain.
1.1 Creating value in the supply chain

Value is created in any of the following ways:
• Cutting costs
• Persuading customers to pay a higher price for products
• Selling more products
• Selling a more profitable mix of products
Creating value through the supply chain can be achieved in the following ways:
• Responsiveness
• Reliability
• Relationships
• Management of efficiency in logistics operations
Responsiveness Companies must be able to supply their customers quickly.

Customers may expect to receive products as soon as they
want to buy them, or at least within a certain time after
placing an order.
Responding quickly to customer orders creates value because
customers are more likely to buy from companies that can
supply them immediately, or faster.
Responsiveness means having goods in the warehouse
available to supply to customers on demand, or being able to
fulfil a customer's order promptly.
In order to meet customers' demand for goods, a company
needs the materials and components from its own suppliers.
Responsiveness therefore also means having a sufficient
amount of material items in store to meet production
demand, or being able to obtain materials promptly from
customers.
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Reliability Deliveries through the supply chain must be reliable, in terms

of timeliness, quality and quantity. Reliability depends to some
extent on responsiveness, but value is created when
customers are able to rely on a company to deliver the right
amount of goods, of the right quality, and at the time when
they are expected.
For example, value is created in a service for delivering parcels
by promising a delivery time and meeting the promise.
Reliability is also improved by transparency in the supply
chain, so that upstream firms can see orders coming from their
customers and can monitor deliveries coming from
downstream suppliers.
Relationships The need for responsiveness and reliability means that a

company can establish strong relationships of trust and
mutual understanding with its suppliers and its customers.
A supply chain can be seen as a network based on
collaboration and common interest. Companies can work with
the suppliers to find ways of improving responsiveness to
customers and improving the reliability of supply.
Operational Management can also create value by improving the efficiency

efficiencies of stores and warehouse operations.
Minimising inventory levels, without running out of inventory
when needed, reduces the investment in inventory, and so
reduces financing costs.
Investment in better warehousing equipment and shelving
may enable a company to use its warehouse space more
efficiently, for example by stacking items higher. Better use of
space could result in lower accommodation costs.
Companies may try to increase value by obtaining lower
prices from suppliers. However, a risk with this buying
strategy is that a relationship of trust is difficult to establish
when the customer is continually demanding lower prices;
and efficient buying might not create a sustainable
competitive advantage.
40 CA Sri Lanka
1.2 Creating competitive advantage in the supply chain

The previous section explained how value can be created through supply chain
management.
But does supply chain management simply create a threshold competence, using
threshold resources; or can supply chain management be used to create a core
competence and competitive advantage?
The answer to this question is that this will depend on the circumstances.
CASE STUDY
Amazon
Amazon's business was based on an ability to respond quickly to online purchases
by customers. The company was a reliable source of supply for goods that
customers wanted to buy, and it was able to deliver goods to the customers
address within a short time, often the next day.
For a while, this created a competitive advantage, because other sellers of goods
either did not sell online or could not respond to orders as quickly. Over time,
however, this competitive advantage has been eroded. More companies sell their
products online and deliver goods quickly.
Some companies allow customers to check online the progress of their order and
delivery.
However, Amazon has retained competitive advantage for the online sales of many
items because of the relationship that has developed with customers over time.
Customers trust Amazon to deliver. The original core competence may have
eroded as competitors improved their supply chain, but the core competence has
transformed into a unique resource – trust.
1.3 Methods of improving the supply chain

There are different ways of improving the supply chain. A company's ability to use
these methods of supply chain management will depend on its circumstances.
Method Comment
Reduce the number of Suppliers who are not responsive or reliable may be
suppliers 'dropped', and reliable suppliers used more
extensively.
Using fewer suppliers should reduce administration
costs in the buying department. It may also allow a
company to make more use of shared IT systems
with suppliers.
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Method Comment
Having fewer key suppliers should also improve the
opportunities for developing strong relationships
with them.
Reduce the number of In some cases, this may improve supply chain
customers management by allowing a company to focus on
customers who are more profitable and provide
more value.
Co-ordinate production, If a company is planning a marketing campaign for a
warehousing and sales, product, management should make sure that a
and marketing sufficient amount of the product is held in the
warehouse or can be produced quickly in order to
meet the expected increase in sales demand.
Supplier involvement in For companies that develop new products, value can
product development and be created by involving key suppliers in the product
component design design. Suppliers may be able to suggest ways of
producing materials or components more cheaply
without loss of quality, or may be able to work with
the company on ways of developing improved
components.
2 Warehousing
Value is created by efficient warehousing management.
Efficient warehousing management involves establishing and operating a system
for holding inventories of goods and keeping them secure and in good condition
until required; and also an efficient and economical system for receiving goods
into store and retrieving them when required.
A warehouse is a commercial building for the storage of goods. Warehouses are

operated by different types of business organisation:
(a) Manufacturers have warehouses for storing raw materials and components
that have been purchased from suppliers; and for holding inventories of
finished goods until they are sold and despatched to customers.
(b) Importers use warehouses for holding goods that they have imported into
the country, and exporters use warehouses for goods awaiting export to
buyers in other countries.
42 CA Sri Lanka
(c) The customs department of the government uses warehouses for holding
imported goods that have not yet been given customs clearance for import
into the country.
(d) Wholesalers use warehouses to hold goods they have purchased from
manufacturers before they are sold on to retailers.
• Transport and distribution companies use warehouses for holding goods
that they are in the process of transporting (distributing) on behalf of client
businesses.
Some warehouses specialise in the storage of particular types of goods. For
example, refrigerated warehouses are used to hold goods such as meat products in
cold storage, to prevent them from deterioration or decay whilst in store.
Items held in warehouses range from raw materials and components, to spare
parts, finished goods, packaging materials and agricultural produce.
2.1 Purpose of warehousing

The purpose of warehousing is to hold goods until they are required for use or
sale. The main functions of warehousing are:
• To keep goods secure until they are needed for use or sale
• To hold goods in a place where they can be located and retrieved easily and
quickly when required
• To minimise the costs of handling goods whilst in store
It is difficult to organise operations in a supply chain so that goods are obtained at
exactly the time they are needed for use, or at exactly the time they are needed for
selling to a customer. If goods could be obtained at exactly the moment they are
needed, there would be no requirement at all for storage and warehousing.
There is an approach to inventory management known as just-in-time (JIT)
purchasing and production, which seeks to arrange for the purchase or production
of goods at exactly the time they are needed, in order to reduce inventory levels as
close to zero as possible. JIT is explained later, but JIT arrangements are difficult to
achieve in practice:
• Suppliers are often unable to deliver goods at exactly the time that they are
needed.
• Production management systems are often unable to produce goods quickly
to meet new customer orders.
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Inventories, and the warehousing of inventories, are needed to prevent hold-ups

or breakdowns in the supply chain (or value network), due to delays in supply
deliveries or production processes.
2.2 Functionalities of a warehouse management system

Value is created in warehousing through efficient planning, operations and
control. These are required in all the following aspects of operations (functions):
• Handling goods received from suppliers: checking that the supplier has
delivered them as specified in the purchase order, and in good condition;
transferring the purchased items into a storage location
• Similarly handling, recording and storing finished goods as they come out of
production
• Protection of items during the time they are held in store
• Efficient location of items within store, so that physical movements of items
are minimised – this speeds up the despatch process
• Despatching orders
• Monitoring and controlling inventory levels, to minimise stock-outs but also
to avoid excessive levels of inventory: limiting costs of losses due to
damaged and stolen inventory
2.3 Warehousing processes

Warehouse operations involve the recording of goods received into the warehouse
and goods despatched. This is part of the inventory management process.
The physical aspects of warehousing involve efficient systems for receiving,
holding and then despatching items held in store.
Aspect of warehousing
operations
Receiving goods into store Receiving goods into store can be a time-
consuming operation. The goods have to be
unloaded and physically moved to their storage
location. This process does not add any value to the
business, and any method of minimising the cost of
this process adds value by saving money.
Some warehouses are located and constructed so
that unloading and loading of goods is simplified.
For example, some warehouses are located at rail
terminals or airports or seaports, and goods
44 CA Sri Lanka
Aspect of warehousing
operations
received into store are taken up to or into the
warehouse before unloading.
The physical movement of goods within store
typically involves the use of forklift trucks or cranes.
Holding goods in store Efficient warehouse management involves making
until required the best use of space within the warehouse. This
involves not just making use of all the floor area to
hold goods, but also to stack goods as high as
possible.
Pallets are stored in pallet racks, which may go up
to the ceiling. Pallets stored high in a pallet rack
can be placed in store and then retrieved using
cranes. Pallets low down near the floor can be
retrieved using forklift trucks.
Since storing and retrieving goods is easier when
the goods are held close to the ground, the most
commonly-used goods should usually be located
low down in a pallet rack.
Retrieving goods when When goods are required for use or despatch, the
required objective of warehouse management should be to
locate and retrieve them as quickly as possible.
Cranes and forklift trucks can be used to do this. In
some warehousing operations, automated storage
and retrieval systems speed up the process and
reduce costs by removing much of the need for
human intervention.
Automated systems may include automated cranes
or conveyor belt systems. Conveyor belts can be
used to move goods from their location in the
warehouse to the place where they will be
packaged and loaded for despatch.
Warehousing can be an expensive operation, but costs can be reduced by means of

efficient systems for accepting goods into store, location and storage and retrieval
for use or despatch.
Although JIT systems of operation seek to reduce the need for inventories and
warehouses, warehousing and holding inventories is often a necessary
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requirement for the efficient functioning of the supply chain. The development of
online selling – the direct selling of goods to consumers through the internet – is
creating additional demands for warehousing to support the operations of the
supply chain. Goods must be available in store in order to meet the demand for
online buying.
2.4 Warehousing cost management and performance controls

Management should monitor the efficiency and effectiveness of warehousing
operations, and should seek to keep warehousing costs under control. Inventory
costs are discussed later. Other important aspects of warehousing are:
• Time to complete operations
• Security and safety of goods held in store
• Use of the facilities available (capacity usage)
Standard times may be set for the time that it takes to:
• Receive goods into store and place them in their storage location
• Retrieve goods from store, from the time that a request for goods is received
to the time they are despatched from the warehouse
Security and safety of goods may be monitored by measurements of:
• Losses due to damaged goods that have to be disposed of
• Unexplained losses, possibly due to theft
Some losses due to damage or theft are probably unavoidable, but these should be
kept to a tolerable (low) level.
Capacity usage may be measured by the average amount of storage space actually
used as a percentage of warehouse capacity. A low capacity usage ratio may
indicate that the organisation's warehousing facilities are too large.
3 Warehouse management systems (WMS)

A warehouse management system (WMS) is an IT system for controlling the
movement and storage of goods (normally finished goods) within a warehouse
and processing associated transactions such as receiving goods, putting them
away, picking goods for shipment and shipping them. A WMS monitors the
progress of products through the warehouse.
46 CA Sri Lanka
There are also IT systems that are specifically designed for warehouse
management. They should:
• Improve efficiency of warehouse operations
• Provide management with information about warehouse operations and
inventory levels, to help them to manage operations more effectively
A WMS may cover a network of warehouses: a central warehouse, a regional
warehouses (serviced by the central warehouse) and potentially retail
warehouses (serviced by the regional warehouses).
Warehouse management systems often use automatic identification technology,
such as barcodes or radio frequency identification device (RFID), to monitor the
flow of products. Once data on products and product movements has been
captured, it is transmitted to a central database, which can then provide useful
reports about the status of the goods in the warehouse.
The objective of a warehouse management system is to provide a set of
computerised procedures for management of warehouse inventory with the goal
of minimising cost and time to fulfil orders.
3.1 Features of a WMS

A WMS typically includes the following features.
It provides a standardised process for handling goods when they are received into
the warehouse. There may be an individual handling process for each warehouse
or product type.
An efficient WMS helps companies to reduce costs by minimising the amount of
unnecessary inventory held in store. It also helps companies keep lost sales to a
minimum by having enough inventory on hand to meet demand.
• A WMS can be used for modelling the physical storage facilities in the
warehouse (such as racking and location of racks, etc). For example, if
certain products are often sold together or are sold more often than others,
they can be grouped together or placed near the delivery area, to speed up
the process of picking, packing and shipping to customers.
• A WMS provides an automated link between order processing and logistics
management, in order to pick, pack, and ship products from the warehouse.
• An RDIF or barcoding can be used to track where products are held, which
suppliers they come from, and the length of time they are stored. A WMS
then provides management with an analysis of this data, to control inventory
levels and maximise the use of warehouse space.
Warehouse management systems can be stand-alone IT systems, or modules of an
enterprise resource planning (ERP) system.
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4 Inventory management
Although value is created by efficient warehousing management, a balance needs
to be found between holding large inventories in order to meet customer demand
promptly every time (creating customer satisfaction) and the high costs of holding
inventory.
Efficient inventory management involves monitoring inventory levels, to try to
ensure that there is a fast response to demands for inventory, but that inventory
levels are not excessive.
4.1 The purpose of inventory management

The purpose of holding inventory is to make sure that materials are required
when needed, for production or other purposes, without the delay of having to
place an order with a supplier and wait for delivery.
Finished goods inventory is similarly held, to meet customer demand
immediately, without the need to wait for the item to be produced.
Customers value prompt delivery. However there is a cost of holding large
quantities of inventory. As stated previously, holding inventory is an operation
that does not add value to a business operation. Inventory is needed to prevent
hold-ups and breakdowns in the supply chain, but it does not create value for the
customer or add to a firm's profitability. There are the operational costs of having
to store the inventories, protect them, insure them and, when needed, move them.
There are also the finance costs of the investment in inventory.
The purpose of inventory management is therefore to:
 Record and monitor inventory levels
 Keep inventory costs to a minimum, preventing excessive levels of
inventories, but without unacceptable delays due to not having items in
store when required
4.2 Costs of inventory and inventory management

Costs of inventory include the costs of buying or producing the goods. In addition,
there are costs of:
• Storing goods
• Re-ordering goods from suppliers, or organising a new production run to
manufacture more goods
48 CA Sri Lanka
Holding costs for inventory include:

• Costs of insurance
• Where an independent warehousing company is used, storage fees
• Where a business has its own warehouses, accommodation costs
• Labour costs
• Depreciation of warehouse equipment
• Measures for the protection of goods, including security services
• Costs of losses due to obsolescence, shrinkage, damage and theft
• Finance costs of holding inventory: inventories have to be financed somehow
and finance has a cost
In your earlier studies, you should have come across systems for managing
inventory levels. One of these is the economic order quantity (EOQ) for purchases:
this identifies the quantity of an item that should be purchased in each order of an
item from a supplier. The EOQ is an order quantity that should be expected to
minimise the combined costs of holding inventory and placing orders with
suppliers.
There have also been some ways in which companies have tried to create a
competitive advantage through inventory management. These have included just-
in-time (JIT) ordering systems, and 'pull' systems for handling customer orders.
4.3 Just-in-time (JIT) ordering systems

Just-in-time purchasing is purchasing items from suppliers so that they are
delivered at exactly the time they are required for use in production.
Just-in-time production is manufacturing items so that they are delivered to the
finished goods warehouse at exactly the time they are required for sale to a
customer.
JIT ordering systems are systems for ordering:

• Materials from suppliers
• Production output from the production department
In its ideal form, JIT ordering will arrange for a new supply of the raw materials at
exactly the moment that they are needed, or a new supply of finished goods at
exactly the moment that a customer wants to buy them. In this ideal situation, a
business will not have any need to hold inventory at all, and customer demand can
be met promptly, without any delay.
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In practice, this ideal situation is not achievable. Even so, the aim of JIT purchasing
and JIT production systems should be to keep inventory levels, of materials and
finished goods, to a minimum consistent with being able to meet demand without
delay.
Companies that can achieve something close to the ideal for JIT purchasing and JIT
production will have a core competence that most other rivals will not be able to
achieve. This creates a core competence because the company will operate with
lower warehousing costs, and so will be more profitable.
4.4 'Pull' ordering and production systems

The traditional model of a supply chain is as a 'push' system.
A push system is a system in which a company manufactures products and,
having manufactured them, tries to sell them to customers.
The customers are effectively passive receivers of the products at the end of the
supply chain: they can buy what is on offer or can choose not to buy.
A pull system is a system in which the decision to produce comes from the
customer, not the company. The customer specifies exactly what they want, and
the company then makes the item to specification.
This type of ordering system is common in jobbing industries, but it has been used
by some companies in consumer goods production.
One example has been the computer company Dell. Customers are able to specify
the exact requirements for the computer they want to buy, including size of hard
drive, processing speed, screen size and so on. The item is then assembled to order
and despatched to the customer's address.
This type of ordering system means that Dell has to hold inventories of
components, but does not hold inventories of assembled computers. Enabling
customers to specify their own computer design also created, at least for a time, a
core competence that Dell could exploit to sell its products.
Many other companies now give customers options to specify a product design
when placing an order online.
50 CA Sri Lanka
5 Physical distribution and logistics systems

Digital products, such as music and film, can be delivered to customers over the
internet, via a mobile phone network or another satellite system. Physical
products, however, must be delivered physically to customers. Logistics systems
are concerned with delivery of physical products to the customer.
Customers may value low cost, speed or convenience of delivery, or a combination
of these things.
Logistics systems are concerned with the inward delivery of physical products
from suppliers or the outward delivery of goods to customers.
Outward logistics are concerned with warehousing and physical distribution to
the customer.
Physical distribution is concerned with the efficient handling, movement and
storage of goods, from the point of origin to the point of consumption or use.
Physical distribution may involve the movement of goods through wholesalers
and retailers, or the delivery of goods direct to customers from the manufacturer.
Logistics managers (distribution managers) should look for ways of delivering

products to customers efficiently and reliably.
QUESTION Quality improvement

Explain how the handling of customer orders can help to improve the quality of
the despatch service to customers, so as to provide value to customers.
ANSWER
Customer orders should be handled with speed and accuracy.
Value can be provided for customers by making a promise about despatch: for
example, all orders received by midday will be despatched the same day for
delivery the following day.
(Another possible answer is the use of containers for shipping goods. Containers
can be packed at a warehouse, and then easily loaded on to vehicles for despatch
and unloaded at the customer's premises.)
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5.1 Channels of distribution

A channel of distribution is a term for the arrangements used by a manufacturer to
deliver goods from the production facility or factory to the customer. This
involves:
(a) The physical transportation of the goods to a point where they are either
delivered to the customer or taken away by customers who have bought
them.
(b) The stages in this physical movement, which may involve transporting goods
from a large central warehouse to smaller regional warehouses, or
delivering goods to a wholesaler's warehouse; the wholesaler is then
responsible for the next stage in physical distribution, to retailers.
Aspects of logistics and physical distribution

Location of A company may decide to have several warehouses,
warehouses instead of a single central warehouse. The aim would be
to reduce delivery times and costs, because deliveries to
customers would be more 'local'.
Method of transport Many goods are delivered to customers by road or by
post. For some industries and goods, other methods of
despatch are used, especially for international trade. Air
transport achieves fast delivery, but is too expensive for
bulky items. Transport by sea may be used, but this is
often very slow.
The choice between road and rail for overland transport
may depend on the existence of rail transport facilities,
and the quality of the road network.
The use of containers speeds up the delivery process for
goods that are shipped partly by land and partly by sea.
Size of transport As a general rule, large transport vehicles reduce the
vehicle costs of transport for large volume products. An example
is the use of supertankers for shipping oil and liquefied
natural gas. However, these ships need special deep-sea
harbour facilities.
52 CA Sri Lanka
QUESTION Drones
Some major companies are experimenting with the use of drones (robot vehicles)
for inland delivery of goods to customers.
Explain the potential competitive advantages to be obtained from the use of
drones.
ANSWER
• Using drones for delivery may eventually be cheaper than traditional
delivery methods, because humans are not involved, so there is no labour
cost.
• Customers may get value from quicker delivery, as drones can operate at any
time of the day and any time of the week.
• For some customers, at least initially, there may be status value in having
items delivered by robot.
5.2 Integrated logistics management

Integrated logistics has been described as a 'one-stop solution to shipping and
logistics requirements' for a company. An integrated logistics management service
may be provided by an external specialist organisation for client companies,
covering:
• Order management (including the preparation of packing lists, which are
lists of the items to be included in an order for despatch to a buyer)
• Freight management (which is the management of and arrangements for
transportation of the goods)
• Warehouse management
The provision of an integrated service by a specialist company may help to
increase customer satisfaction, by providing an efficient and error-free
distribution system.
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6 Supply chain information systems
Various applications of information technology can be used to improve the supply

chain process. They are used mainly to reduce costs and improve efficiency.
Application
Internet The internet can be used as a method of locating suppliers for
products, and placing orders online.
Online purchasing is available to businesses as well as
computers.
Online purchasing can add value by enabling the buyer to
locate items that are needed and, where there are several
suppliers for identical items, obtaining the best price.
Intranet It is useful to think of an intranet as an internal IT network
for an organisation, with a link to the internet for the system
users.
An intranet has the same advantages as the internet for
purchasing from external suppliers, but it also has some
additional potential advantages:
• An intranet can be used by an organisation to place orders
for items internally, for example purchase requisitions
may be submitted electronically to the company's buying
department.
• External suppliers may be given access to the
organisation's intranet, via the internet. The suppliers may
then be allowed to monitor the company's production
schedules, in order to anticipate future orders. The
intranet can also be used to place orders with a supplier.
Electronic data Electronic data interchange (EDI) is another way in which
interchange companies can communicate electronically with suppliers or
customers, for the purpose of placing orders for goods and
possibly also paying for them.
More information about EDI is given below.
Radio frequency RDIF is a technology for the automatic identification of items.
identification In logistics, RDIF can be used to identify items of goods
devices (RDIF) automatically, when they are being despatched or, more
commonly, when they are received into the warehouse from
the supplier.
More information about RDIF is given below.
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6.1 Electronic Data Interchange (EDI)

EDI was defined as long ago as 1996 by the US National Institute of Standards and
Technology as 'the computer-to-computer interchange of strictly formatted
messages that represent documents other than monetary instruments. EDI
implies a sequence of messages between two parties, either of whom may serve as
originator or recipient. The formatted data representing the documents may be
transmitted from originator to recipient via telecommunications or physically
transported on electronic storage media'.
EDI is a transfer of structured data, by agreed message standards, from one
computer system to another without human intervention.
Unlike allowing a supplier or customer access to the internet, EDI involves two
separate computer systems, and enables those systems to communicate with each
other and transfer documents to each other, such as purchase orders. EDI
messaging can also be used to track the progress of orders.
By computerising the exchange of information, EDI adds value by speeding up the
ordering process and reducing scope for human error in the process.
6.2 RFID technology

RFID is an automated method for identification of objects such as goods in transit.
An RFID system consists of three elements:

(a) An RFID tag. This is an electronic tag placed on the object.
(b) An RFID reader device. This hand-held device can read the information on an
RFID tag. It communicates with the RFID tag by means of radio-frequency
waves.
(c) A backend IT system, for interpreting the data captured by the RFID reader.
It cross-references the ID number of the RFID with a database record, which
identifies the object to which the tag is attached.
RFID has some similarities with barcoding: Both technologies use codes and
scanners to read the codes, and they both use an IT system to cross-reference the
ID in the code to an object or a class of objects, using a database system.
RFID has some advantages over bar codes.
• No line of sight required between the code and the reader. An RFID reader
can pick up the data on an RFID tag without having to 'see' the tag.
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• Individual items can be identified, instead of a class of items. In other words,

RFID tags can be given to specific individual products.
6.2.1 Levels of RFID tagging

In logistics, RFID tagging can take place at three levels.
(a) RFID tags can be given to a pallet of goods delivered to a customer. When the
pallet is ready for shipment, a ID code is programmed into the tag. This tag
ID is cross-referenced to a purchase order and a list of the inventory on the
pallet. At the shipment destination, the tag ID can be cross-referenced again
to the database record that contains the pallet information.
(b) Similarly, RFID tags and ID codes can be given to a case of goods. As with
tagging of pallets, the case tag cross-references purchase order and
inventory information. Tagging cases allows for more detailed tracking of
goods than pallet tracking. It can also save labour time by automatically
reporting case counts and making unnecessary the manual counting of cases
despatched or received.
(c) RFID tags may be given to individual items of goods. They are attached to the
item itself. Tagging of individual items is probably only cost-effective for
manufacturing companies for high-value items. Retailing organisations may
find them cost effective, as a way of combating theft of goods from stores.
6.3 E-procurement
E-procurement is a general term for the purchase of supplies and services
through the internet and other information and networking systems, such as
electronic data interchange (EDI). It is typically operated through a secure website
where orders are placed electronically.
Traditionally, e-procurement has been seen as a simple process, from:

(1) Identifying a requirement to purchase something
(2) Placing an electronic purchase order with a supplier
(3) Possibly paying for the order through an electronic bank payment system
These transactions are only part of the e-procurement function as a whole, which
includes purchasing, transportation, receipt of goods receipt and warehousing. A
properly-implemented e-procurement system can connect companies and their
business processes directly with suppliers, and manage all the interactions
between them. This includes the management of correspondence, bids, questions
and answers, and previous pricing.
56 CA Sri Lanka
It focuses on the complete purchasing mix, or the 'five rights of purchasing', which
are that goods and services must be delivered:
 At the right time  At the right price
 In the right quantity  From the right vendor
 At the right quality
6.3.1 E-procurement websites

An e-procurement website allows authorised and registered users to log in using a
password. The supplier sets up the website so that it recognises the purchaser
once they are logged in. It then presents a list of items that the purchaser regularly
buys. This avoids searching for the required items, and also avoids the need to key
in the purchaser's name, address and delivery details. Depending on the approach,
buyers or sellers may specify prices or invite bids. Transactions can then be
initiated and completed.
6.3.2 Benefits of e-procurement
Cost Might include process efficiencies, reduction in the actual cost of

reduction goods and services, and reduced purchasing agent overheads.
Reduced Because orders are cheaper to place and process, organisations
inventory can afford to place orders more frequently, and can therefore
levels hold lower levels of inventory.
Control The ability to control parts inventories more effectively.
E-procurement also provides greater financial transparency and
accountability over the procurement process.
Wider choice In theory, resources can be sourced from suppliers anywhere in
of supplier the world, perhaps at much lower prices than could be obtained
if an organisation only considered local suppliers.
In this respect, one of the key stages in e-procurement is
e-sourcing: using electronic methods to find new suppliers and
establish contacts with them.
Quicker A second key stage of e-procurement is e-purchasing, which
ordering covers product selection and ordering. E-purchasing allows
organisations to select standard items from electronic catalogues
and then automatically send electronic purchase orders to the
supplier via an extranet.
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Intangible Staff are able to concentrate on their prime function and there is
benefits financial transparency and accountability.
Benefits to Reduction in ordering and processing costs, reduced paperwork,
suppliers improved cash flow and reduced cost of credit control.
7 Supply chain performance management

Management should monitor and control the supply chain. To do this, they need
information about the performance of different aspects of the supply chain. This
information can be provided by a supply chain performance management system.
There are two major challenges for supply chain performance management
systems.
(a) How to make possible the comparison of supply chain information between
different organisations, for example the supply performance of different
suppliers?
(b) How to decide what are the most important aspects of performance?
7.1 The SCOR model

The Supply Chain Operations Reference (SCOR®) model was developed by the
Supply Chain Council, a global non-profit-making body. The model provides a
widely-accepted framework for evaluating and comparing the performance of
supply chains.
The SCOR model makes it possible for organisations to:

• Compare the performance of different internal supply chain operations
within the organisation
• Compare performance to other organisations
The SCOR framework not only provides standardised metrics for measuring
performance of the supply chain, which all organisations can use; it also provides
information about supply chain processes and best practices, and improvements
in supply chain technology.
58 CA Sri Lanka
What benefits does the SCOR model provide?

Problem SCOR model
Effective supply chain The SCOR model provides a framework for
management is all about delivering understanding current supply chain
the right product in the right conditions and performance. It can help
quantity and in the right condition, supply chain managers compare costs with
with the right documentation, to performance, develop strategies for meeting
the right place at the right time at new customer expectations, and respond to
the right price. This is not always growth in their business.
easy in practice.
Supply chain managers need to The SCOR model provides a range of

control the costs of their different metrics for measuring cost
operations. performance and identifying those aspects
of cost that are in most urgent need of
control. The SCOR model also provides
measures for supply chain performance
attributes, so that benefits and costs can be
compared.
Different organisations can have The SCOR model provides a common
different methods for measuring language for supply chain classification and
and communicating performance analysis. Using a common language and
expectations and results. They may framework makes it easier for teams to
also use different terminology. communicate, make comparisons and
evaluate best practices.
Effective supply chain The SCOR model includes a skills
management calls for skilled management framework, which sets out the
managers. key competencies required for supply chain
management and specific job qualifications,
and also specifies methods for developing
future talent and sourcing specific skills.
7.2 Balanced scorecard and supply chain performance

measurement
The basic model of the balanced scorecard (BSC) was first introduced by Kaplan
and Norton in 1992. The BSC provides an approach to setting performance targets
and measuring performance, which many organisations have since used in some
form or another.
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The basic idea behind the BSC is that traditional measures of company
performance focused too much on short-term financial performance, such as
annual profit or return on capital. Kaplan and Norton argued that this approach
was too narrow in its focus: it measured historical performance without any
regard to the future, and did not measure how current performance will
eventually have an impact on future performance.
Future financial performance will be determined by non-financial achievements.
Kaplan and Norton suggested that organisations should have a scorecard,
measuring different aspects of performance. Most of these should be non-financial
in nature, because non-financial performance now will affect financial
performance in the future.
They identified four broad areas or perspectives of performance. A small number
of performance measurements and performance targets should be established for
each of these perspectives.
The four perspectives are as follows:
Perspective
Financial perspective There should be targets for financial
performance
Customer perspective There should be targets and
measurements for customer attitudes to
the organisation
Operational perspective (or business There should be targets for
operations perspective) improvements in business operations,
such as greater efficiency in certain key
aspects of operations
Learning and innovation (or learning There should be targets for
and growth) perspective improvements in the skills or
knowledge of the workforce, and for the
introduction of innovation or achieving
business growth
Kaplan and Norton developed the BCS for organisations as a whole.

The same concept, however, can be applied to supply chain management. A
company can measure its performance using different metrics, covering each of
the four performance perspectives. It can then set targets for performance for
each of the measures, and monitor performance by comparing actual results with
the targets.
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QUESTION Performance measurement

Using the balanced scorecard model, state one performance measurement or
target for each of the four perspectives, for application to supply chain
management performance.
ANSWER
Here are some suggestions:
(1) Financial perspective. Set a target for a reduction in warehouse management
operating costs.
(2) Customer perspective. Set a target for the number of new customers placing
orders through an e-procurement method.
(3) Business operations perspective. Set a target for reducing the maximum time
between receiving an order and delivering goods to the customer.
(4) Learning and innovation perspective. Set a time target for the
implementation of a new warehouse management system.
Suitable performance measurements will vary according to the nature of the
business and its operations.
7.3 Service level agreements

Given the importance of companies collaborating and working together within the
supply chain, it is also important for companies to be able to measure and manage
the performance of key partners within the supply chain (for example, to control
the number of late or incomplete deliveries).
A key issue will be whether 'upstream' suppliers are delivering the agreed
quantity and quality of goods or services on time. In order to measure whether the
suppliers are meeting such requirements, the requirements first have to be
established.
One way of doing this for regular suppliers to the company is to agree a formal
service level agreement.
A service level agreement should include:
• An explanation of the service the supplier has agreed to provide (and details
of any information the company has agreed to provide the supplier).
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• The benchmarks or metrics that will be used to measure the supplier's

performance. These may include specifications for delivery times, quality,
quantities and so on.
• The consequences of failure by the supplier to perform to the agreed level or
standard.
• Procedures for dealing with any complaints arising from the actual level of
performance provided, and expected response times for responding to any
queries or complaints raised.
• Procedures for cancelling the contract between the parties in the event of
continuing failure to achieve the required performance levels.
Once a service level agreement is in place, both parties have a structure against
which to measure their performance in the relationship, and to assess whether a
satisfactory level of performance is being achieved.
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CHAPTER ROUNDUP
 The supply chain is the network of organisations involved in the different

processes and activities that transform raw materials into finished goods and
services, in order to produce value for the end consumer.
 Supply chain management is concerned with managing those parts of the supply
chain over which an organisation has influence or control.
 Value is created by efficient warehousing management.
 Efficient warehousing management involves establishing and operating a system
for holding inventories of goods and keeping them secure and in good condition
until required; and also an efficient and economical system for receiving goods
into store and retrieving them when required.
 A warehouse management system (WMS) is an IT system for controlling the
 Although value is created by efficient warehousing management, a balance needs
to be found between holding large inventories in order to meet customer demand
promptly every time (creating customer satisfaction) and the high costs of holding
inventory.
 Efficient inventory management involves monitoring inventory levels, to try to
ensure that there is a fast response to demands for inventory, but that inventory
levels are not excessive.
 Digital products, such as music and film, can be delivered to customers over the
internet, via a mobile phone network or another satellite system. Physical
products, however, must be delivered physically to customers. Logistics systems
are concerned with delivery of physical products to the customer.
 Customers may value low cost, speed or convenience of delivery, or a combination
of these things.
 Various applications of information technology can be used to improve the supply
chain process. They are used mainly to reduce costs and improve efficiency.
 A warehouse management system (WMS) is an IT system for controlling the
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 Management should monitor and control the supply chain. To do this, they need
information about the performance of different aspects of the supply chain. This
information can be provided by a supply chain performance management system.
64 CA Sri Lanka
PROGRESS TEST
1 Minimising inventory levels may be inconsistent with which of the following:

A Reliability of supply
B High financial returns
C Physical security of inventory
D Inventory control
2 Using RFID to tag individual manufactured items for tracking purposes is not
common practice. This is because RFID tagging of individual items is not usually
_________________________ .
3 A shorter supply lead time for deliveries of material from suppliers can add value
because it:
A Improves the reliability of supply
B Reduces the amount of inventory required
C Speeds up processing of customer orders
D Reduces the cost of materials purchased
4 A manufacturing company weaves cotton into cloth that is used to make clothing.
Identify two organisations that are 'upstream' in the supply chain to this company
and two organisations that are 'downstream'.
5 A company is able to create a monopoly for production of an electronic device by

obtaining a five-year patent. In terms of competitive business strategy, the patent
is a ____________________ (unique resource; core competence), providing competitive
advantage. However this competitive advantage is not ___________________________ .
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1 The answer is A. When inventory levels are kept low, there will be some risk of
'stock-outs' – not having items of inventory available when required.
2 Cost-effective/worth the cost (or similar wording)
3 The answer is B. With shorter supply lead times, there is less requirement to hold
inventory.
4 Upstream. A cotton grower; a business that spins cotton, ready for weaving.
Downstream. A company that dyes (colours) cotton cloth; a clothing
manufacturer; a distributor of clothing products; a retailer of clothing products.
5 In terms of competitive business strategy, the patent is a unique resource,
providing competitive advantage. However this competitive advantage is not
sustainable (or long-lasting, or permanent). It has a life of just five years.
66 CA Sri Lanka
KB5 | Part C: Creating Value Through Operations
68 CA Sri Lanka
CHAPTER
INTRODUCTION
Operations management is concerned with producing goods (or services) and so is at the heart of what business
organisations do, and is a core primary activity in the value chain.
This chapter looks at the aspects of operations management where value is created, and more value can be
added.
A business organisation must have a sufficient quantity of threshold resources, and it must have threshold
competences, to survive in a competitive market. It may also be possible to acquire unique resources and core
competences to achieve a competitive advantage in areas such as new product development, quality and cost
reduction, project management and location of operations.
Knowledge Component
3 Creating value through operations
3.1 Competitive advantage 3.1.1 Discuss the role of operations management in developing competitive
through operations advantage for businesses
management
3.2 Product design and process 3.2.1 Discuss the conceptual understanding of the process of product designing in a
selection (new product typical manufacturing organisation, along with different production methods
development) available for manufacturing (job, batch, chain production, lean
manufacturing)
3.3 Quality management 3.3.1 Compare and contrast alternative quality control systems available to an
organisation
3.3.2 Discuss the application of 'total quality management in businesses (including
Six Sigma, kaizen and 5S)
3.4 Project management 3.4.1 Discuss the conceptual understanding of the process of project management
and the concepts associated with it, such as critical path method, PERT,
histograms and Gantt charts
3.5 Location planning and 3.5.1 Analyse the systematic decision process in planning locations for business
analysis operations (including manufacturing plants and retail)
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KB5 | Chapter 3: Value and Operations Management
LEARNING
1 Operations management and competitive advantage 3.1.1
2 New product design and innovation 3.2.1
3 Production methods 3.2.1
4 Quality control 3.3.1
5 Total quality management (TQM) 3.3.2
6 Six Sigma 3.3.2
7 Project management 3.4.1
8 Project management techniques 3.4.1
9 Location planning and analysis 3.5.1
1 Operations management and competitive advantage

Operations management is the activity in the value chain that is concerned with
making the product (or providing the service, in the case of service businesses).
This chapter focuses mainly in manufacturing businesses, although retailing will
also be considered in the context of location of business operations.
Operations are a key area where a manufacturing business creates value,

converting raw materials into products for selling to customers. It is also a value
activity where an organisation may be able to create competitive advantage,
through a unique resource or a core competence.
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Creating value Creating competitive advantage

Methods Methods
Sell more products to earn more Design and develop new products that
revenue and margin are different from those made by
 Produce a larger quantity of existing competitors: create value through
products and sell them differentiation
 Produce new (innovative) products Speed up the process of new product
Develop new products in as short a development, to bring new products to
time as possible, and without excessive the market faster than competitors
costs: project management
Sell products at a higher price
 Difficult, unless the products have
features (such as scarcity) that make
customers willing to pay more
Cut operating costs Use production methods or processes
Locate operations in a place that that reduce costs to a level that
reduces operating costs, or which competitors cannot achieve: 'cost
provides value to customers in another leadership'
way Reduce operating costs, in order to sell
products at a lower price than
competitors (while still making a profit)
Use production methods that create a
product with higher value for customers
The table above shows ways in which value and competitive advantage may be
created by the operations of a manufacturing company. The rest of this chapter
will consider these in more detail.
2 New product design and innovation

2.1 Innovation and competitive advantage
Value is created by new products, because when they have been developed and
when they are marketed, they add to sales revenue and profit margin.
Innovation can be a major source of competitive advantage. Companies that
develop new products can, for a time, offer something to customers that
competitors cannot offer.
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However, new product development can also be risky, because new product ideas
may not be successful in the market. So to avoid unnecessary spending, there
should be a programme of assessment for new product ideas.
Developments in technology have sped up the process of product innovation in

many industries. You will be familiar with some of the new products that have
achieved success in global markets, such as the IBM personal computer,
Microsoft's office software, mobile phones and smartphones, digital television and
so on. Major new product developments lead on to further product innovations,
and in the markets for media and telecommunications, we have seen products
emerging such as tablets, 3D televisions, smart wristbands and so on.
Companies that develop innovative products can gain a competitive advantage by
being the first in the market, and perceived by customers to be 'the best', although
competitors usually catch up eventually. The history of Apple over recent years is
an example of creating and fighting to retain competitive advantage in the face of
strong competition from companies such as Samsung.
Product innovation can be a major source of competitive advantage.
• For a time there may be no direct competitors for a new product, and a
company has time to establish a market and attract customers. If a new
product is successful, the company may also benefit from enhanced
reputation with customers.
• When a company introduces a successful new product before its
competitors, it may also benefit from a 'learning curve' effect, and may be
able to use its experience with the product to find ways of reducing
production costs before competitors can do the same.
• Legal protection, such as patents, for intellectual property may bring
important revenue advantages. This is particularly important in industries
such as pharmaceuticals (medicines), and media and telecommunications.
However, being the first company to introduce innovative products also has
particular problems:
• Gaining regulatory approval where required
• Uncertainty about sales demand
• High levels of research and development (R&D) costs
Sometimes the most successful companies are not the ones that bring a new
product to the market first, but those that follow on later. Companies that are first
in bringing new products to the market may be called 'leaders' and those that copy
them soon afterwards are called 'followers'.
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2.2 New product strategies

The development of new products might be an important aspect of a firm's
competitive strategies. Companies should decide whether they intend to be
'leaders' or 'followers' in the market.
Features of a 'leader' strategy Features of a 'follower' strategy

Innovation is seen as a way of gaining Lower product design and development
competitive advantage, with unique costs than with a 'leader' strategy.
products.
Need to invest heavily in R&D. High Less emphasis on R&D.
R&D costs reduce profitability.
Problem of short life cycles for new Reduces uncertainty about sales
products, especially those with high demand and size of the market.
technological content and also 'fashion'
products.
The table below suggests what innovation strategies may be, depending on the
nature of technological change and change in the market.
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Product
No technological Improved
New technology
change technology
Reformulation Replacement
Market Find a new balance The new
–
unchanged between price and technology
product quality. replaces the old.
Product line
Remerchandising Improved product
extension
Growth in The product may Use the improved A product is
existing market be sold in a new technology to make added to the
(new demand way – for an improved product. existing product
from same example, in new Sales growth to line, to increase
customers) packaging. existing customers by total sales.
offering product
improvements.
New use Market extension Diversification
By finding a new New customers New customers
use for the sought on the sought by
existing product, strength of product entering new
New market new customers improvements. markets with new
are found. products.
Can be a high-risk
strategy, due to
lack of experience.
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QUESTION Competitive advantage

Explain how a company with a 'follower' strategy for innovation can succeed in
acquiring a competitive advantage from this strategy.
ANSWER
It must be able to develop a core competence at:
• Recognising new products that other companies are bringing to the market
• Recognising the commercial/profit potential of these products
• Identifying ways of bringing a similar product to the market, but offering
more value to customers
• Designing and developing selected new products, and bringing them to
market quickly
2.3 Stages in the process of new product development

The process of developing a new product can be described as a series of stages,
one following on from the next.
Stages in new product development

(1) Idea The initial idea is suggested for a product (or service) that
generation might be successful. Ideas may be generated by different
parts of the organisation, including sales and marketing.
(2) Idea screening New product ideas are given an initial 'screening', to decide
whether the idea may be a good one. This screening
process involves specifying:
• What is the target market or who are the target
customers?
• What is the actual or potential size and growth potential
of this market?
• Is it technically feasible to manufacture the product?
• Will it be profitable?
• If there is an existing market for similar products, what
is the current size of the market and what seem to be
current trends in the market?
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(3) Concept The product concept is developed in more detail, and this
development concept is tested on a small group of prospective
and testing customers, to see how they react to it.
• Investigate intellectual property (IP) rights. Does
another company have IP rights for a similar product?
• What features of the product matter most to customers?
• What benefits (value) will the product provide for
customers?
• What will the product cost to make?
• Produce an initial prototype (early model) of the
product.
• Test the product concept by showing the product idea to
a group of prospective customers.
(4) Business Carry out a financial analysis of the potential returns from
analysis the product.
Decide what the sales price will be (given the existence of
competitors' products in the market).
Estimate sales volume, revenue, profitability, break-even
point.
(5) Beta testing Produce a physical prototype (early model) of the product.
and market Arrange private testing with a test group of customers
testing ('beta testing'). Beta testing is the process of subjecting a
prototype for a new product to testing by real customers in
a real user environment, prior to a full commercial market
launch.
Conduct interviews with the group of customers to find out
their views on the product.
Make adjustments to the product design.
Produce a small quantity of the amended product to test by
selling in a small market area ('test marketing').
(6) Technical Plan and establish the arrangements for production and
implementatio logistical arrangements for distribution of the product.
n
(7) Launch the The market launch is likely to be supported by an intense
product on the selling and marketing campaign.
market
76 CA Sri Lanka

(8) Post-launch Carry out a review of the product after the market launch.
review Review the selling price and adjust this if an increase or
reduction in price seems appropriate.
2.4 Research and development (R&D)

Research may be pure, applied or development. It may be intended to improve
products or processes. New product development should be controlled by
requiring senior management approval at key points during the development.
• Product research is based on creating new products and developing
existing ones.
• Process research is based on improving the way, or efficiency, with which
those products or services are made or delivered.
Product research Process research

New products are a major source of New processes may speed up the
competitive advantage but are expensive time required to make products.
to bring to market.
A screening process is necessary to Greater productivity in a production
ensure that resources are concentrated process may also create value by
on projects with a high probability of reducing the amount of waste, and
success and not wasted on those that increasing the ratio of output to
have poor prospects. Market research input materials.
may be used to assess the probable sales
demand for a new product.
Product design is extremely important, New process design may
to ensure that products create value for incorporate new technology, and
customers, but at a reasonable cost. reduce production costs.
Innovation is also concerned with Process innovation may also
improving the design of existing improve product quality.
products, to extend their commercial life.
It may be necessary to make sure that
new products are compatible with the
existing industry standards for existing
products.
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3 Production methods
The production methods used by a company to manufacture its products may also
be important for creating value. The most appropriate production method
depends on what customers want and so what creates value most effectively.
Most production methods may be classified into three broad types:
• Job manufacturing. A single product or a single job is performed to the
specifications of the customer. For example, a person may ask a building
company to manufacture a new house to their design specifications.
• Batch production. The manufacturing process produces a quantity or batch
of an item, and every item in the batch is the same. The demand for the
product is less than the production capacity of the manufacturing operation,
which may produce batches of similar but slightly different products. For
example, a cloth manufacturer may produce cloth in batches or rolls, with
each batch differing in colour or design.
• Chain manufacturing. This term may be used for either mass production of
a standard item, or a continuous production process for a high-volume item.
The production process is highly automated, and may go through several
stages. Key features of this type of manufacturing are high volumes of
standard output and low unit production costs.
Each of these production methods can create value in different ways.
Job Batch Chain/high volume

How value Item manufactured to Between job and Low cost production
is created the customer's specific chain manufacturing. means that the
requirements. For Product supply product can be sold
some products, limited and costs at a lower price,
customers will pay lower than with job giving customers
more for this. production. Balance value for money.
of uniqueness and
value for money.
How to gain Develop core Innovative product Being the lowest-
competitive competence in making design. cost producer, and
advantage these products: skills selling at a low price
experience, know-how. in the market.
78 CA Sri Lanka
3.1 Lean manufacturing

Lean manufacturing or lean production is not a production method. It is an
approach to manufacturing, or a 'philosophy' of manufacturing.
The aim of lean manufacturing is to:
• Increase value
• Minimise the amount of resources (including time) used in manufacturing
operations
Lean manufacturing is an approach to manufacturing that seeks to eliminate all
activities that do not add value, such as waste and holding inventory.
It involves identifying and eliminating all 'non-value-adding activities' (activities

that do not add value for the customer, or which cost more than the value they
provide).
The concepts behind lean manufacturing may also be applied to services and
systems in the organisation. Lean manufacturing may also be associated with
aspects of total quality management, which is explained later.
The aim of lean production is to eliminate waste, and to improve product flow and
quality. Instead of devoting resources to planning future manufacturing
requirements and building up inventories in anticipation of demand (as in a 'push'
system), lean manufacturing is a 'pull' system. It focuses on reducing the response
time so that the production system is capable of:
• Producing items quickly when an order is received
• Changing rapidly to meet market demand
• Meeting the needs of customers and, in doing so, providing value to
customers
To do this, production methods must be of the highest quality, with minimum time
wasting and minimal defects in production. In lean manufacturing, production
must flow uninterrupted to meet demand.
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Womack and Jones (Lean Thinking) define five principles of lean thinking:
Principles of lean manufacturing

Specify value The critical starting point for lean manufacturing is value that
the customers want. Value can only be defined by the customers.
Therefore the first principle is to specify what creates value
from the customer's perspective.
Value stream For each product, identify the 'value stream'. These are the
activities in the production process that create the value that
customers want.
Flow Make the production process flow in response to demand,
without interruptions such as breakdowns or defective output.
Pull Let the customer 'pull' value from the producer. The producer
should only make what is valued (pulled) by the customer, and
make it just in time to satisfy customer demand. Lean
manufacturing is associated with just-in-time purchasing and
production methods.
Perfection Strive for perfection (zero defects) by constantly removing layers
of waste, and by removing delays and discontinuities in the
supply chain and manufacturing process.
QUESTION Lean manufacturing

Explain why lean manufacturing is associated with just-in-time production
methods.
ANSWER
Lean production is based on a 'pull' system, whereby items are only produced
when there is demand from a customer. A 'pull' system differs from a 'push'
system in that the organisation tries to avoid holding inventories, which
customers may never want to buy.
Holding zero inventories and producing to meet demand as it arises is a feature of
both lean manufacturing and just-in-time production.
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4 Quality control
Quality is a feature in products or services that provides value for customers.
Quality in manufacturing is concerned with standards of production, and trying to
ensure that the costs of poor quality are minimised.
Quality costs are the total of the costs of preventing errors in production, the
costs of inspecting output for faults, the costs of correcting faults that are
discovered and the costs of dealing with complaints from customers about
defective items that are produced and sold.
4.1 Traditional approaches to quality

Traditionally, 'quality' in manufacturing was seen as a requirement to identify
defective items in the production process, and either:
• Correct the defective items, by re-working them, or
• Getting rid of the defective items as scrap, or possibly by selling them as sub-
standard items.
Procedures might also be introduced into the production process to reduce the
risk of defective items. 'Quality costs' therefore consisted of four elements:
Quality costs
Prevention costs These are arrangements to prevent defective items, or
reduce the number of defectives.
Inspection and These are the costs of inspecting and testing output, to
testing costs identify defective items or batches.
Internal failure costs These are the costs of correcting defective items that
are found by inspection and testing.
External failure costs These are the costs of dealing with complaints from
customers about defective items that have escaped
detection in the inspection process and that have been
sold to customers.
Traditionally, the aim was to minimise the total of these four elements of quality
cost. The nature of measures to prevent defectives, and measures for inspecting
and testing, vary with the nature of the manufacturing process.
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4.2 Alternative quality control systems

Business organisations have choice in the type of quality control system they use.
(a) They may spend large amounts on prevention costs, to reduce the amount of
defective production. Spending more on prevention should reduce the need
for inspection, and should also reduce failure costs.
(b) They may spend large amounts on inspection and testing, to minimise the
risk that defective items will be sold to customers. For example, instead of
checking samples of output for defective items, the organisation may inspect
or test 100% of output items.
(c) The organisation may limit prevention and inspection costs and accept that
there will be defective items and customer complaints.
However, it is important to recognise that:
• Inspection costs and dealing with defective items are activities that do not
add any value: since they cost money, they result in loss of value.
• Waste and rejected output also involve loss of value.
A different approach to quality control management is to take the view that:
• Since inspection costs and costs of correcting errors do not add value, they
should be avoided entirely
• The aim should be to achieve zero defects in production
This approach is applied in lean manufacturing and total quality management.
5 Total quality management (TQM)

In the context of total quality management (TQM), quality means getting it right
first time and improving continuously. TQM is the process of applying a zero
defects philosophy to the management of all resources and relationships within an
organisation as a means of developing and sustaining a culture of continuous
improvement that focuses on meeting customers' expectations.
Total quality management (TQM) is an integrated and comprehensive system of

planning and controlling all business functions so that products or services are
produced that meet or exceed customer expectations.
TQM is a business philosophy that emphasises the importance of satisfying

customer needs. TQM utilises management techniques such as continuous
improvement, employee empowerment and quality processes.
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Although TQM is a general philosophy of business, similar in many ways to lean

manufacturing, it consists of a variety of general principles. These have developed
over time, and have their origins in Japan from the 1940s and 1950s. A number of
US advisers to Japanese manufacturers developed ideas on quality. Several major
Japanese companies adopted a TQM philosophy: the most well-known of these
was at Toyota, the car manufacturer.
5.1 Deming
W Edwards Deming is one of the originators of the quality movement. His views
were adopted in Japan, and were based on the following ideas.
(1) A business should continually seek to improve is products and services.
(2) Eliminate all waste. Eliminate defective production.
(3) Do not rely on inspection procedures to achieve quality. Inspection uses up
resources without creating value.
(4) When selecting suppliers, price should not be the only consideration. Quality
and reliability of supply are also important.
(5) Improve production systems. This reduces waste and improves quality.
(6) Train employees so that they become better at doing their job.
In order to stop relying on inspection procedures, it is necessary to prevent
defective output from happening. This means achieving high standards in the
production process.
5.2 Crosby
Philip B Crosby is known mainly for two concepts in TQM:
(1) Zero defects. There should never be any defects in a product. Although this
may seem an impossible ideal in practice, the aim nevertheless should be to
eliminate all defects and achieve 100% quality.
(2) Get it right the first time. A product should not have to be corrected once it
has been made. 'Right first time' is consistent with the idea of 'zero defects'.
Each worker should take full responsibility for their work: quality is everyone's
responsibility.
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5.3 Juran
Joseph Juran's book Quality Control Handbook was published in 1951. Juran was
concerned with identifying specific improvements for enhancing quality. Here
are some of his ideas.
• The best approach to enhancing quality is to 'identify specific opportunities;
evaluate their viability by using conventional methods such as return on
investment; plan the selected project carefully; monitor the results'.
• Juran defined quality as 'fitness for use', which includes two elements:
– Quality of design, which can include the customer satisfactions built
into the product.
– Quality of conformance, in other words, a lack of defects in the
finished goods.
5.4 Kaizen
Another important feature of TQM, developed originally in Japan, is the concept of
'kaizen'.
Kaizen means 'continuous improvement'. It is a philosophy that seeks additional
small improvements continually; finding new improvements can never come to an
end.
There are two basic approaches to improving quality.

• One approach is to make major changes to the production process, and
replace the existing process with a different and better system.
• A second approach is to look continuously for small ways in which processes
and methods can be improved, and implement them. Over time, a
continuous stream of small improvements will add up to major
improvements in quality.
Kaizen is based on the view that quality will be improved by continuous small
improvements, and employees should be encouraged – and trained – to look for
these. All employees should be involved in the continuous improvement process.
Instead of viewing workers as the cause of problems, kaizen views workers as the
source of solutions, and it empowers workers to find solutions to enable the
continuous improvements.
An essential feature of kaizen is that the process of continual improvement never
ends.
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QUESTION Kaizen
Explain the implications of continuous improvement or kaizen for change
management.
ANSWER
Major changes are more difficult to implement than small changes, because major
changes affect many people within the organisation, often significantly.
Small changes do not disrupt operation and can be introduced easily and with
little or no resistance from employees, who have probably been involved in
recommending the change anyway.
Kaizen therefore creates far fewer problems for change, while still achieving
improvements in processes.
5.5 5S
The concept of '5S' is another aspect of TQM that originated in Japan.
5S is an approach to achieving and maintaining a high-quality work environment,
and it is underpinned by the idea that there is 'a place for everything, and
everything goes in its place'.
The 5S concept is used with the aim of creating a workplace with real organisation
and order, which creates employees' pride in their work, improves safety and
results in better quality output.
The name '5S' comes from the fact that there are five elements that combine to
create a high-quality working environment, and each of these (converting
Japanese into English), begins with the letter S.
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5S
Sort (seiri) Eliminate all unnecessary items (tools and parts) from the
workplace. Keep only essential items, and keep them in a
place that is easily accessible.
Set in order (seiton) Arrange work so that it flows in a logical order. Get an
orderly flow of work. Without this, it is impossible to
eliminate problems and defects.
Shine (seiso) Keep the workplace and all equipment clean and tidy, and
organised.
Standardise Use uniform procedures, so that it is easier for people to
(seiketsu) change from one task to another
Sustain (shitsuke) Sustain the new standards. Make them a way of life.
QUESTION Tidiness
Explain why it is considered important to keep the workplace clean and tidy.
ANSWER
When employees work in a dirty and untidy environment, it is much more likely
that items of work or tools will be lost or damaged, or that work will also be done
in an untidy fashion.
6 Six Sigma
Six Sigma is an approach to eliminating defects from products and operations, and
achieving near perfection. It was originally applied to manufacturing operations
and defects in products, but it can also be applied to any product, process or
transaction. There is a focus on the customer, and achieving levels of performance
that are acceptable to the customer.
Six Sigma was initially envisaged as a quality management technique, but it has
now developed into a system for process improvement.
It was originated by the US corporation Motorola in the 1980s. (Although the term
'Six Sigma' is widely used, it is a registered trademark of Motorola.)
Six Sigma originated in statistical analysis and, in general, it means that there
should be no more than 3.4 defects in every 1 million items, for any product or
process to which the Six Sigma methodology is applied.
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The limit of 3.4 defects per 1 million items can be seen as a target. Improvements
in existing products and processes, and designs of new products and processes
should aim towards this target.
6.1 The Six Sigma approach

The basic objective with Six Sigma is to focus on improvements in processes and a
reduction in variations from the target standard. Perfection is achieved by
reducing the amount of variations in a process. For example, if a product is
designed to have a length of exactly one metre, Six Sigma improvements might be
aimed at reducing the variation in the length of products actually manufactured to
acceptable tolerance limits of, say, plus or minus one millimetre, with no more
than 3.4 items in one million actually produced having a length outside this
tolerance range.
The Six Sigma approach relies heavily on statistical measurements. Actual
performance is measured and compared with the target, and the number of
'defects' – products or processes that fail to meet acceptable standards – can be
established, to see whether the required quality standards have been achieved.
Another feature of Six Sigma is that project teams are established to achieve the
required improvements in processes. These project teams consist of
representatives from every department or aspect of operations that might
contribute towards making the required improvements. The projects teams are
led by individuals who are specially trained in Six Sigma methods, who are
commonly called Master Black Belts, Black Belts and Green Belts, according to
their level of skill and knowledge of Six Sigma.
6.2 Process improvement and process design with Six Sigma

The Six Sigma approach differs slightly between:
• Making improvements in existing processes, where the required changes in
the process are fairly small ('incremental improvements')
• The design of a new process, or major re-design of an existing process
The Six Sigma approach to making incremental improvements in existing
processes is in five steps, known as DMAIC.
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DMAIC steps
D Define an A serious problem with quality is identified. A statement is
opportunity then prepared that describes the nature of the problem in
specific, measurable terms.
A statement is prepared of what will be done to deal with
the problem. This should also be expressed as a quantified
measurement. For example, the problem statement may
be that the number of defects in a particular process is
currently 1 in 1,000. The mission statement may then be
that the aim should be to reduce the number of defects to
no more than 1 in 100,000.
A project team is set up to solve the problem.
M Measure Data is obtained about the current process, and the
performance project team should measure how the process is working,
and obtain data that can be analysed to identify what
seems to be causing the problem. This is a preliminary
analysis. The project team will not make a final decision
about the main causes of the problem until it has carried
out a more extensive analysis.
Measures of process performance are critical to the
success of a Six Sigma programme.
A Analyse the The preliminary ideas about what might be causing the
opportunity problem are investigated in more detail. The 'root' cause
(or causes) of the problem is identified.
I Improve The cause (or causes) of the problem are removed by
performance means of re-designing and improving the process that is
causing the problem. The chosen improvement is then
designed in detail.
Before the improvement is implemented, it should be
tested to prove that it will be effective. The improvement
is then implemented.
C Control New controls are designed and implemented to prevent
performance the problem from returning and to make sure that the
improvements are sustained.
Controls will include regular measurements of output
from the process, and a comparison of actual performance
with the target.
The Six Sigma approach to designing a new process or major re-design of an
existing process is also in five steps, known as DMADV.
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DMADV steps
D Define the goals for The goals and target quality standards of the new
the new process process must be defined. Customer requirements
and expectations should be taken into
consideration when defining these goals.
M Match performance The next step is to develop a set of performance
requirements with measurements (quantified performance targets)
these goals that will enable the goals for the process to be
achieved.
A Analyse the These performance standards for the new process
performance must be analysed. Based on this analysis, a
requirements preliminary design for a new process is developed.
D Design and The preliminary design for the new process is
implement the developed into a more detailed design, and the new
process process is then implemented.
V Verify performance After the new process has been implemented,
controls and checks should be introduced to
confirm that the required performance targets are
met, and that the goals of the process are
successfully achieved.
7 Project management
Projects are a common feature of operations management. They have a limited
duration and are established to achieve a specific purpose, such as to develop and
introduce a new IT system, a Six Sigma project to improve an existing process, or a
project to design and develop a new product.
Efficient project management can create value, by ensuring that the project's
objectives are achieved, within the budgeted amount allowed for cost and within
the timescale for completion that has been set. In other words, project
management can add value by ensuring that projects are completed to
specification, within cost and on time.
7.1 The features of a project

A project has certain characteristics.
• It is established to achieve a specific purpose.
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• A project team is established, consisting of individuals from different

departments and with different skills and experience. A project manager is
appointed to lead the team.
• During the project, the project manager reports to a project committee,
consisting of senior management, whose responsibility is to monitor the
progress of the project.
• The project manager is expected to lead the team in completing the project.
When the project is completed, the project team is disbanded.
The objective of project management is to deliver a successful project. A project is
successful if it is completed at the specified level of quality, on time and within
budget.
Criteria Comment
Quality The end result should conform to the project specification. In
other words, the result should achieve what the project was
supposed to do.
Budget The project should be completed without exceeding authorised
expenditure.
Timescale The progress of the project must follow the planned process, so
that the 'result' is ready for use at the agreed date. As time is
money, proper time management can help contain costs.
The differences between a project and normal operations are set out in the
following table.
Projects Operations
Have a defined beginning and end Ongoing
Have resources allocated specifically to them, Resources used 'full-time'
although often on a shared basis
Are intended to be done only once A mixture of many recurring
tasks
Follow a plan towards a clear, intended end Goals and deadlines are more
result general
Often cut across organisational and functional Usually follows the organisation
lines or functional structure
An activity that meets the first four criteria above can be classified as a project,
and therefore falls within the scope of project management. Whether an activity
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is classified as a project is important, as projects should be managed using project

management techniques.
7.2 Project management as a core competence

Project management can be a core strategic competence for companies working
in some industries, such as consulting and construction. Such companies must
ensure that they maintain and improve their project management abilities if they
are to continue to be commercially successful.
In construction, for example, the customer will often insist that a job or contract is
completed by a specified date. For the construction company, there may be a
penalty payment, in the form of a reduction in the price for the project work, if
completion is late.
7.3 A project life cycle

A large project typically goes through the following stages.
Stage
Project definition The need for a project is identified.
A project committee of senior managers is set up. This
will make the decision whether or not to go ahead with
the project.
A small team is appointed to investigate and prepare
recommendations for a project.
Outline project The investigation team reports to the project
definition and committee.
cost/benefit analysis The report includes an outline design for the project
and an estimate of the costs and benefits.
The project committee approves the project, which has
a specified scope or objective, a resource or
expenditure budget, and a target date for completion.
Project team A project team is established, with individuals from
established different departments or functions. A project manager
is appointed.
Detailed project plan The project team prepare a detailed plan for the project,
including objectives, detailed budget and expected
completion date.
This plan is reviewed and approved by the project
committee. The project manager will report regularly to
the committee on progress.
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Stage
The project work is At the end of the project, there is often a testing phase,
undertaken when the new operation is tested before becoming
operational.
Implementation The project is implemented, and the new operation
becomes the responsibility of 'normal' operations
managers. The project team is disbanded.
7.4 Responsibilities of a project manager

The project manager's responsibilities give rise to a number of duties and
managerial activities
Duty Comment
Outline planning See above for project definition and initiation.
Detailed planning Work breakdown, structure, budgeting, resource
requirements and network analysis for scheduling.
Obtain necessary Resources may already exist within the organisation or may
resources have to be bought in. Resource requirements unforeseen at
the planning stage will have to be authorised separately by
the project board or project sponsor.
Teambuilding Build cohesion and team spirit in the project team.
Communication Keep all stakeholders suitably informed and ensure that
members of the project team are properly briefed. Manage
expectations.
Co-ordinating Co-ordination will be required between the project team,
project activities external suppliers, the project owner and end users.
Monitoring and Monitor progress against the plan, and take corrective
control measures where needed.
Problem- Even with the best planning, unforeseen problems may
resolution arise.
Quality control Understand and manage quality procedures; agree and
manage any appropriate trade-off of functionality against
achieving deadlines.
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7.5 Competing demands of project objectives, cost and time

A project will be successful if it is completed on time, within budget, and it
achieves its intended objectives. In practice, there is often a problem. The project
objectives may be more difficult to achieve than expected; tasks may run late so
that the expected completion time is deferred; or actual costs for the project may
exceed the budget.
When problems arise, the project manager may need to make compromises
between objectives (scope of the project), time and cost.
Project
scope
Time Cost
For example, if the project is running late, the project manager can ask the project
committee for permission to:
• Obtain extra resources, even though this will add to the project cost
• Reduce the scope of the project, so that it can be completed more quickly
QUESTION Project management

A project to automate a production process is running into difficulty, because it is
nearing its required completion date and the project team has not yet found a way
of automating the final part of the process.
Discuss what the project manager might do to deal with this problem.
ANSWER
Some possible ways forward are:
• To ask the project committee for more time to complete the project, and an
additional spending allowance to pay for the overrun on time.
• To ask the project committee to agree that the final part of the production
process need not be automated.
• To look for an expert outside the project team who may be able to suggest a
solution to the process design problem.
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8 Project management techniques

A project manager may use several different methods or techniques to help with
the task of completing the project within the budgeted expenditure limit and by
the final target date for completion.
Techniques for controlling cost Techniques for controlling

completion times
Project budget; regular comparison of Critical path method diagram
actual cost to budgeted costs as the (CPM)/critical path analysis (CPA)
project progresses
Resource histogram PERT analysis
Gantt chart Gantt chart
8.1 Resource histogram

A resource histogram is a chart or diagram for planning the amount of resources,
typically people, that will be needed for each week (or day or month) of a project.
It should be consistent with the detailed cost estimates in the budget. It shows
both the amount and the timing of the required resources. (A histogram is a form
of bar chart.)
A simple resource histogram showing the programmer time required on a
software development project is as follows:
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Programmer Time Required

Total programmer 300
hours
275
250
225
200
175
150
125
100
75
50
25
0
9 16 23 30 6 13 20 27 6 13 20 27 3 10 17 24 1 8 15 22
Jan Feb Mar Apr May
Week ending
It is possible to add an additional set of bars (lines) next to the bars for the
resource quantities required, to show the resource quantities that will be available
to the project.
• If in any week or month there will be fewer resources available than
required, the project manager can make plans to deal with the problem,
either by acquiring additional resources, or by bringing forward or deferring
some tasks so that the total resources required in any week does not exceed
availability.
• If in any week or month there will be more resources available than
required, the project manager can think of ways to make productive use of
the spare resources, for example by starting some tasks earlier than
necessary.
Another way of using a histogram to compare the amount of resources available
with the amount required is as follows.
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Numbers of workers
13
12
Numbers of workers available

10
8 Numbers of
workers
required
6 to complete
scheduled
tasks
4
5 7 10 15 20 Time
(days)
Here, the number of workers required on the seventh day is 13. Can the project
manager re-schedule the non-critical activities to reduce the requirement to the
available level of 10? They might be able to re-arrange activities so that they can
make use of the workers available from day 9 onwards.
8.2 Critical path method (CPM)

The critical path method (CPM), also called network analysis, is a technique for
planning the completion of a project within the scheduled time.
A project consists of many different tasks. Some tasks cannot begin until others
have been completed. For example, a new process cannot be tested until its
development has been completed. In a project to introduce a major new IT system,
programming work cannot begin until the system has been designed and the
design has been approved.
All the tasks in the project should be put in order of which can start immediately,
and which cannot start until others have been completed.
This logical sequence of starting and completing tasks can be shown in a critical
path diagram.
For each task within the project, there is an estimated time for completion, from
start to finish of the task.
The estimated completion times for the task are added to the chart, and it is then
possible to calculate:
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• The minimum time in which the project can be completed, and the tasks
that should be started and finished as soon as possible in order to complete
the project in this minimum time. The sequence of tasks that must be started
and finished at the earliest possible time is known as the critical path for
the project.
• For other tasks, which are non-critical, we can calculate the amount of
'slack' time. This the amount of delay that can be allowed before the task
starts, or the extra time that can be taken to complete the task, without that
task becoming 'critical' and part of a new critical path for the project.
CPM is therefore a technique for planning the completion time for a project and
also for monitoring actual progress against the plan. The project manager should
ensure that the critical path tasks start and end at the earliest times, but that they
have some choice in deciding when to begin non-critical activities, or how long
they can allow non-critical activities to exceed their expected time for completion
– without affecting the overall completion time for the project. CPM charts are
usually large, containing a large number of different tasks.
8.3 PERT analysis

Project evaluation and review technique (PERT) is similar to the CPM method,
except that it allows for some uncertainty in expected completion times for each
task in the project.
Typically, there is a most likely completion time, a shortest expected time and a
longest expected time for each task.
This allows the project manager to analyse some of the uncertainty about
estimated completion times, when these cannot be estimated with confidence.
8.4 Gantt chart

A Gantt chart, named after the engineer Henry Gantt who pioneered the
procedure in the early 1900s, is a horizontal bar chart used to plan the time scale
for a project and to estimate the resources required.
The Gantt chart displays the time relationships between tasks in a project. Two
lines are for each task, to show:
• The planned time allocated for each task
• The actual time taken
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8.5 Example: Gantt chart

A simple Gantt chart, illustrating some of the activities involved in a network
server installation project, follows.
As at the end of the week 10
Task Weeks
Key
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
(1) Order computer/arrange finance Estimated
Actual
(2) Agree delivery dates
(3) Select site
(4) Plan and prepare site
(5) Prepare for delivery
(6) Install computer
(7) Engineers' acceptance tests
(8) Operational tests
(9) Plan and prepare permanent staff

work areas and accommodation
The chart shows, for example, that at the end of the tenth week Activity 9 is
running behind schedule. More resources may have to be allocated to this activity
if the staff accommodation is to be ready in time for the changeover to the new
system.
In addition, Activity 4 had not been completed on time, and this has resulted in
some disruption to the computer installation (Activity 6), which may mean further
delays in the commencement of Activities 7 and 8.
A Gantt chart does not show the interrelationship between the various activities in
the project as clearly as a network diagram (covered later in this chapter). A
combination of Gantt charts and network analysis will often be used for project
planning and resource allocation.
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9 Location planning and analysis

The location of operations is another aspect of operations where value can be
created. In particular, there may be a competitive advantage in locating operations
close to a key supplier or close to target customers.
Some global companies have chosen to locate production operations 'offshore' in
countries with low labour costs, in order to benefit from low production costs.
Location can be an important aspect of logistics, particularly outward logistics.

Companies may choose to operate with a central warehouse and a number of
satellite regional warehouses, in order to have inventories close to customers.
This enables them to fulfil customer orders more quickly when deliveries might
otherwise take a long time.
Decisions about where to locate operations may involve:
• Moving existing operations to a new location, which may be close to the
location of existing operations, or in a different part of the country, or in a
different country
• Setting up operations at a new location, in addition to existing
operations at the current location
• The choice of a site for operations within the selected town or area
Location is an aspect of operations that may affect value creation.
Location of operations
Close to key suppliers For example, manufacturers of products made from
agricultural commodities may benefit from locating their
operations close to the farming areas. This should enable
the commodities to be transferred quickly for
processing, speeding up the supply chain operations and
reducing transportation costs.
In a low-cost country Global companies may locate manufacturing operations
in countries where labour costs are low, in order to
benefit from low-cost production. Low costs enable the
global company to gain a competitive advantage over
rivals, or at least to maintain a threshold competence if
other global companies also locate operations in low-
cost countries.
However, there may be restrictions on foreign
investment in these countries, in which case the global
companies may outsource production and purchase
goods from independent manufacturers, at low prices.
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Location of operations
Close to customers There may be advantages in locating manufacturing
operations close to a customer, particularly if there is a
close supplier-customer relationship within the supply
chain.
Locating operations in a place that is convenient for
customers is essential for businesses in retailing.
Online buying may reduce the need for a physical
location for a retail outlet, but shopping is still a
widespread habit. If retailers are unable to locate their
stores in places where customers want to go to buy, they
may have great difficulty in making sales.
Customers may prefer a town centre with a large variety
of different stores, or they may prefer to visit an out-of-
town centre where there are large stores selling a wide
variety of different products.
Community factors When selecting a new location for operations, an
employer may need to consider 'community factors'.
These may affect the willingness of existing employees
to stay with the company and move to the new location.
Employees who do not want to move will resign.
Community factors in a new location include:
• The quality of life
• The quality of local services such as education and
shopping
• The quality of utility services such as transport
services
• Financial support from the employer to assist
employees with the move
• Personal taxation at the new location
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9.1 Methods of choosing a location

There are different methods of deciding on a new location for operations.
Method of choosing location
Location cost-volume-profit Estimate the fixed costs and variable costs of
(CVP) analysis operating at each possible new location, and
select the least-cost location, based on
expected activity levels.
Centre of gravity method Look for a location that is geographically in a
location that seems to minimise total travel
times and transportation times (for inward-
bound raw materials and outward-bound
finished goods), and so is expected to
minimise shipping/transportation costs.
Factor rating method Identify the factors that should affect the
location decision and award a maximum
rating score (a weighted maximum number
of marks) to each factor. Then for each
possible location, decide the score for each
factor. Add up the scores for each location for
all the factors. Select the location with the
highest total score.
Factors that are likely to influence the choice of location for manufacturing
operations include:
• Availability of energy supplies and water
• Closeness to sources of raw materials
• Transportation/distribution costs
Factors that are likely to influence the choice of location for service operations
include:
• Closeness to markets
• Location of competitors
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CHAPTER ROUNDUP
 Operations are a key area where a manufacturing business creates value,

converting raw materials into products for selling to customers. It is also a value
activity where an organisation may be able to create competitive advantage,
through a unique resource or a core competence.
 Value is created by new products, because when they have been developed and
when they are marketed, they add to sales revenue and profit margin.
 Innovation can be a major source of competitive advantage. Companies that
develop new products can, for a time, offer something to customers that
competitors cannot offer.
 However, new product development can also be risky, because new product ideas
may not be successful in the market. So to avoid unnecessary spending, there
should be a programme of assessment for new product ideas.
 The production methods used by a company to manufacture their products may
also be important for creating value. The most appropriate production method
depends on what customers want and so what creates value most effectively.
 Quality is a feature in products or services that provides value for customers.
Quality in manufacturing is concerned with standards of production, and trying to
ensure that the costs of poor quality are minimised.
 Quality costs are the total of the costs of preventing errors in production, the costs
of inspecting output for faults, the costs of correcting faults that are discovered
and the costs of dealing with complaints from customers about defective items
that are produced and sold.
 In the context of total quality management (TQM), quality means getting it right
first time and improving continuously. TQM is the process of applying a zero
defects philosophy to the management of all resources and relationships within an
organisation as a means of developing and sustaining a culture of continuous
improvement that focuses on meeting customers' expectations.
 Six Sigma is an approach to eliminating defects from products and operations, and
achieving near perfection. It was originally applied to manufacturing operations
and defects in products, but it can also be applied to any product, process or
transaction. There is a focus on the customer, and achieving levels of performance
that are acceptable to the customer.
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 Projects are a common feature of operations management. They have a limited

duration and are established to achieve a specific purpose, such as to develop and
introduce a new IT system, a Six Sigma project to improve an existing process, or a
project to design and develop a new product.
 Efficient project management can create value, by ensuring that the project's
objectives are achieved, within the budgeted amount allowed for cost and within
the timescale for completion that has been set. In other words, project
management can add value by ensuring that projects are completed to
specification, within cost and on time.
 A project manager may use several different methods or techniques to help with
the task of completing the project within the budgeted expenditure limit and by
the final target date for completion.
 The location of operations is another aspect of operations where value can be
created. In particular, there may be a competitive advantage in locating operations
close to a key supplier or close to target customers.
 Some global companies have chosen to locate production operations 'offshore' in
countries with low labour costs, in order to benefit from low production costs.
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PROGRESS TEST
1 Statistical measurements are an essential feature of the Six Sigma method of

quality management. True or false?
True False
2 Give three examples of a project that may require project management.
3 Kanban is a method used in total quality management to ensure that items are not
produced in one stage of production until they are needed for the next stage of
production, in order to minimise inventory levels. Kanban is therefore an example
of a _______________ system of manufacturing.
4 The main concern of the kaizen approach in a programme of total quality

management is best described as:
A Getting things right first time
B Achieving continuous small improvements
C Keeping the workplace clean
D Eliminating waste
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1 True. The basic principle is that no more than 3.4 units in one million should fall
outside the accepted tolerance range for production.
2 Here are four examples:

• Producing a new product, service or object
• Changing the structure of an organisation
• Developing or modifying a new information system
• Implementing a new business procedure or process
3 Pull
4 The answer is B.
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KB5 | Part D: Marketing and Value Creation
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INTRODUCTION CHAPTER
Marketing and sales are a primary activity in the value chain. Companies need a marketing strategy in order to
compete in their markets, and the choice of marketing strategy can be an important way of creating competitive
advantage.
This chapter looks at two aspects of marketing strategy: first, the positioning of products or services within a
selected market segment (segmentation, targeting and positioning); and secondly, management of the
marketing mix.
Other aspects of marketing are described in the following chapter.
Knowledge Component
4 Value creation through marketing
4.1 Role of marketing strategies 4.1.1 Discuss the role of marketing strategies for value creation in businesses
4.2 Segmentation, targeting 4.2.1 Demonstrate the importance of having an STP process for an organisation
and positioning
4.2.2 Apply STP in marketing programmes
4.3 Managing products and 4.3.1 Discuss product management and brand management applications (product
brands levels, product mix decisions, product line decisions and branding decisions)
4.4 Pricing strategies 4.4.1 Compare and contrast alternative pricing methods and strategies for
developing competitiveness in the market (cost based, demand based,
competitor based pricing methods and price adaptation strategies)
4.5 Distribution and 4.5.1 Compare and contrast alternative channel management decisions and
channel management channel dynamics, for developing competitiveness in the market (intensive,
selective and exclusive distribution strategies, and horizontal and vertical
channel systems)
4.6 Managing marketing 4.6.1 Compare and contrast the main elements of the promotional mix and
communication promotional strategies for developing competitiveness in the market
(promotional mix: advertising, sales promotion, public relations, personal
selling, event and experience; promotional strategies; push, pull and profile)
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KB5 | Chapter 4: Marketing and Value Creation
LEARNING
1 Marketing, markets and marketing strategies 4.1.1
2 Segmentation 4.2.1
3 Segmentation, targeting and positioning (STP) 4.2.1, 4.2.2
4 The marketing mix 4.1.1
5 Managing products and brands 4.3.1
6 Pricing strategies 4.4.1
7 Place: distribution channel management 4.5.1
8 Promotion strategies 4.6.1
1 Marketing, markets and marketing strategies

Companies sell their products or services in markets they have chosen for
targeting. In order to sell their products and persuade customers to buy them,
companies must undertake marketing activities.
Marketing strategies are plans developed by companies for selecting target
markets and marketing their products or services to potential customers in the
target market.
Marketing creates value by creating interest in a product or service, and
persuading customers in the target market to buy it.
1.1 Marketing
It may be tempting to think of marketing as a combination of advertising, sales
promotions and selling, but it covers a wider range of activities.
There have been many different definitions of marketing.
(a) The American Marketing Association (AMA) Board of Directors, which now
reviews its definition of marketing every five years, has defined marketing
most recently as: 'the activity, set of institutions, and processes for creating,
communicating, delivering, and exchanging offerings that have value for
customers, clients, partners, and society at large' (2012).
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(b) A previous definition of marketing by the AMA was that marketing is: 'the
process of planning and executing the conception, pricing, promotion, and
distribution of ideas, goods and services to create exchanges that satisfy
individual and organizational objectives' (1985).
(c) Philip Kotler, a leading writer on marketing management, has defined
marketing as: 'the science and art of exploring, creating, and delivering value
to satisfy the needs of a target market at a profit. Marketing identifies
unfulfilled needs and desires. It defines, measures and quantifies the size of
the identified market and the profit potential. It pinpoints which segments
the company is capable of serving best and it designs and promotes the
appropriate products and services'.
Marketing: the science and art of exploring, creating, and delivering value to
satisfy the needs of a target market at a profit.
Marketing strategies are strategies/plans for marketing a product or service to a

target market.
1.2 Markets
Companies undertake marketing in selected markets. So what is a market?
One definition of a market is that it is a group of consumers or organisations:
• That is interested in a product (or service)
• That has the resources to buy a product (or service)
• That is permitted by law or regulation to buy a product (or service)
Using this definition, we can make a distinction between the following markets:
Classification of market
Potential market The total of the consumers or organisations that
might be interested in buying the product (or
service).
Available market The total of the consumers or organisations in the
potential market who have the resources to buy the
product.
Qualified available The total of the consumers or organisations in the
market available market who are permitted by law to buy
the product, or who are not prohibited by law from
buying it.
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Target market The part of the market to which the business
organisation has decided to sell its products ('to
serve').
Penetrated market The part of the target market that the organisation
has succeeded in selling its products to.
There are other ways of classifying markets.
Geographical markets Markets may be defined or classified according to
the geographical area they cover: global market,
regional market, national market, local market.
Product markets Markets may be defined by the type of product that
is sold in them, such as a market for oil, the energy
market, a stock market and so on.
Within a product market, there are different
variations of the product. Even in the market for
something basic such as bottled water, there is still
water, sparkling water, flavoured water, water for
water dispenser machines, and water bottles of
differing sizes.
Customer markets Markets may be defined by the intended customers,
such as a consumer market, an industrial market, a
retail market and so on.
In marketing, a market is often defined in terms of its buyers or potential

buyers.
 Consumer markets (for example, markets for food, cookers, television sets,
clothing)
 Industrial markets (also known as business-to-business, for example,
selling machines to a factory)
 Government markets (markets for products that governments purchase,
such as armaments and, where there is state-run medical services and
schools, medical equipment, medicines and school equipment)
 Reseller markets (markets where the sellers are manufacturers of goods
and the buyers are retailers or other organisations that resell the goods they
buy, such as wholesalers)
 Export markets (selling goods to customers in other countries)
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1.3 Consumer goods markets

Consumer goods are goods that can be used by consumers without the need for
any further commercial processing. Consumer goods may be further classified
according to the method by which they are purchased:
(a) Convenience goods. Goods that consumers buy from a convenient location,
such as a local store or supermarket. These are goods that are often
purchased regularly and are low-priced. They often have close substitutes,
which may be sold under different brand names.
(b) Shopping goods. Goods that consumers may buy after having looked at
different products from different manufacturers or retailers, before deciding
which product to buy. They usually have a higher unit value than
convenience goods and are bought less frequently, often from a specialist
retailer.
(c) Speciality goods. Goods where the consumer wants to buy a specific
product because of its unique features. These are generally high-priced
goods that are available only from a limited number of sellers. Consumers
will take time and trouble to find somewhere they can buy the product.
1.4 Industrial markets or business-to-business (B2B) markets

In industrial markets, the customer is another firm, such as for the sale of machine
tools or consultancy advice. In an industrial market more than a consumer market,
customers are motivated by financial and commercial considerations such as:
• Product quality
• Price
• Credit terms
• Delivery dates
• After-sales service
Industrial goods are purchased by companies in the middle of a supply chain. The
purchased goods are used to make other industrial goods, or to make consumer
goods. The demand for industrial goods depends on the demand for the consumer
goods that are sold at the end of the supply chain.
1.5 Marketing strategies and value creation

Marketing activities by a company create value by:
• Making potential customers in a target market aware of the company's
product (or products or brand name) and getting them interested in it
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• Making interested customers want to buy the product

• Getting them to buy it (and depending on the nature of the product, getting
them to buy the product repeatedly), many times over
Value is created in marketing by selling more products, and through a
combination of sales volume and sales price.
Competitive advantage may be created by success in making target customers
want to buy the company's products rather than the products of a competitor.
Marketing strategies are concerned with:
• Selecting target markets
• Deciding on the appropriate methods for marketing to the selected target
market
Companies may select several different target markets. However, there is no
single standard product that is sold to a universal global audience.
Every market is a variation of a geographical market, product markets and
customer markets.
2 Segmentation
Marketing strategies for a company's product are based on the concepts of
segmentation, selecting a target market and positioning the product within the
target market.
All markets can be analysed and divided into segments.
A market segment is a group of customers or potential customers within a total
market who have similar needs and interests, and who can therefore be targeted
by the same marketing activities (a marketing mix).
2.1 Market segments

Market segmentation has been defined as: 'the sub-dividing of a market into …
sub-sets of customers, where any sub-set can be selected as a target market and
reached with a distinct marketing mix'.
The purpose of segmentation is to identify one or more target markets for a
product or service. As stated previously, a market is not a mass, homogeneous
group of customers, each wanting to buy an identical product. Every market
consists of potential buyers with different needs and different buying behaviour
in different geographical locations.
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These different customers may be grouped into segments.

A market segment is simply a group of potential customers that have been
identified for a product, who appear to have similar needs and interests.
Market segmentation is 'the subdividing of a market into distinct and
increasingly homogeneous subgroups of customers, where any subgroup can
conceivably be selected as a target market to be met with a distinct marketing mix'
(Kotler).
There are two important elements in this definition of market segmentation.

(a) Although the total market consists of widely different groups of consumers,
each group consists of people (or organisations) with common needs and
preferences, who perhaps react to different forms of marketing in much the
same way.
(b) Each market segment can become a target market for a firm, and would
require a unique marketing mix if the firm is to exploit it successfully.
It is important to understand that there is no 'correct' way to segment a market.
Companies may segment a market in different ways, and group potential
customers in different ways.
QUESTION Segmentation
Discuss how the market for motor cars might be segmented.
ANSWER
The market for motor cars can be segmented in a variety of different ways.
It can be segmented according to the type of car. People often buy a type of car for
a specific purpose
• Saloon car, hatchback, sports car, 4×4 car, people carrier
• Diesel or petrol-powered
• Engine size
• Price: luxury cars, middle-price, cheaper price cars
It can be segmented according to the target customer
• Commercial buyers, wealthy individual buyers, middle income individual
buyers
• Age (young, middle aged, older)
These are possible methods of segmentation. There will no doubt be others.
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2.2 Identifying market segments for consumer goods

An important task in marketing is to identify how the market may be
segmented. Segmentation applies more obviously to the consumer market, but it
can also be applied to an industrial market.
There are different ways in which a market may be segmented.
Basis of segmentation: consumer markets

Geographical Geographical segmentation is very simple, but useful,
especially in business-to-business marketing, which relies
heavily on personal selling.
A geographical consumer market can be sub-divided into
socio-demographic sub-segments (see below).
Lifestyle Lifestyle segmentation is based on how people see
segmentation themselves, and their attitudes towards a particular
product or service, or towards their life in general. A
market may be segmented according to the interests,
activities, personality and opinions of individuals. This is
very useful for many consumer goods, since they can be
designed and promoted to appeal on the basis of these
factors.
For example, a company that makes soft drinks may
identify a segment in the market of individuals who are
concerned about their weight (and so may want to buy low
calorie drinks) or individuals who like to have soft drinks
when playing a sport (and so may want to buy high-energy
drinks).
Socio-demographic A market may be segmented according to the age of
segmentation potential customers, their position in society and their
social or religious background. Markets may be segmented
according to:
 Age
 Religion
 Gender
 Ethnicity/national origin
 Income
 Social class
 Occupation
 Family size
 Education
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Basis of segmentation: consumer markets

Behavioural A market may be segmented according to the way that
segmentation different customers respond to, know about or use a
product. A market may be divided into behavioural
segments based on:
(a) Occasion – when customers buy or use the product. For
example, manufacturers of food products may segment
the market according to the time of day that customers
eat the product.
(b) Volume of usage – heavy, medium or light/occasional
usage.
(c) Loyalty – a market may be divided between customers
who are loyal to a product or product provider, and
those who are not.
(d) The benefits the customers are seeking – what
benefits do customers look for in a product? As an
example, a manufacturer of toothpaste may seek to
appeal to customers on the basis of price (economic
benefits), medicinal quality, taste of the toothpaste, or
cosmetic benefits (effect on the user's appearance).
QUESTION Segmentation strategy

A firm of accountants is considering how to develop its businesses and whether to
focus on a particular segment of the client market.
Discuss ways in which the market may be segmented, for the purpose of
developing a strategy for the business.
ANSWER
Possible basis for segmentation

Type of client Business customer, private individuals
Size of client Large, small, medium-size business clients
Geographical focus Focus on customers located in the region
Services required Tax, book-keeping etc
Occupation of client (private clients) For example, specialisation in services to
dentists or doctors
Religion For example, specialising in banking
requirements for certain religions
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2.3 Identifying market segments for industrial goods

Industrial goods are goods for which the customers are businesses that will use
the purchased items in their own business operations. Business customers are
generally assumed to be more rational in the buying decisions they make than
many consumers.
Several approaches to segmentation of an industrial market have been suggested.
2.3.1 Two-stage approach to industrial market segmentation

A two-stage approach to the segmentation of industrial markets is based on
analysing the market in two stages:
(1) Macro-segmentation of the market
(2) Micro-segmentation of the macro-segments
Macro-segmentation segments the market according to a broad factor such as:
(a) Size of company/customer organisation
(b) Geographical location of customers
(c) Industry in which customers operate
(d) The general benefits that customers want from the product. For example,
manufacturers of automated physical access systems (systems controlling
the access of people to a location) may want to buy the product for security
reasons (to control access to a secure location, such as a bank's inner offices)
or for facilitating automatic entry and reducing manual ticket handling
requirements, such as entry to a sports stadium.
Macro-segmentation is used to define broad market segments in different ways.
Micro-segmentation identifies more specific segments within a broad market
segment. 'Micro-segments are homogenous groups of buyers within the macro-
segments' (Webster, 2003).
Dividing a macro-segment into micro-segments may be on the basis of:
(a) Criteria that customers consider most important when making a buying
decision, such as product quality, delivery, technical support, price, or supply
continuity. A manufacturer may divide the market based on supplier profiles
that appear to be preferred by decision makers, such as high quality, prompt
delivery but premium price; or standard quality, lower price, but less
prompt delivery.
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(b) Purchasing strategy. Some industrial customers only buy from suppliers on
their approved supplier list. A manufacturer may therefore segment a
market according to the purchasing strategy of potential customers, and
target customers with approved supplier lists only if they are already an
approved supplier or if they are prepared to spend the time and money
needed to get on to approved supplier lists.
2.3.2 Nested approach to industrial market segmentation

The nested approach to industrial market segmentation developed from the two-
stage approach. Markets can be segmented in a multi-stage approach that includes
the following five stages.
(1) Demographics: the industry, company size, and/or customer location
(2) Operating variables, such as the technology used by customers company
technology and their strategic capabilities
(3) Purchasing factors, such as role of the purchasing function, buyer-seller
relationships, purchasing policies, and purchasing criteria (benefits sought)
(4) Situational factors: urgency of order, size of order
(5) Buyers' personal characteristics
Segmentation begins at stage 1 and can be refined gradually by working down
through stages 2, 3, 4 and 5.
2.3.3 Bottom-up approach

Kotler suggested a 'build-up' approach to segmentation of industrial markets. In
this approach, a manufacturer collects and analyses large amounts of data about
customers and their buying decisions and habits. Through this detailed analysis,
the manufacturer can identify groups of customers (market segments) with
similar attitudes and approaches to buying.
2.4 Reasons for segmenting markets
Reason Comment
Better satisfaction of The same product will not satisfy all customers. A
customer needs company should identify the segment of
customers who may buy its products, or it must
develop products that appeal to a specific segment
of the market.
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Reason Comment
Growth in revenue and Some customers will pay more for certain features
profits of a product. By targeting a product at a specific
segment of the market, a company can hope to sell
more successfully than competitors and make
more profit.
Targeted communications Segmentation means that communications with
targeted customers (advertising and sales
promotions) can seek to appeal to their particular
needs and values.
Innovation By identifying unmet needs of an identified
market segment, companies can innovate and
develop variations of a product to satisfy them.
Segmenting a market also helps marketing managers to think about the reasons
why customers in each segment of the market may have different reasons for
buying a product. Having identified the reasons why people might want a product,
companies can plan how to design and market their product to meet those specific
needs.
2.4.1 Lowest price

In most markets, there will be one or more segments of the market in which
customers want to buy a basic product for the lowest price possible.
The design features of the product may be relatively unimportant. Provided that
the product performs the function for which it is bought, customers will buy the
cheapest among the competing products available from different producers.
This means that in every market, there will be customers whose main concern is
with price. A company that can make and sell the product at the lowest price will
have a competitive advantage over its rivals, and should be able to dominate this
section of the market.
In many markets, particularly consumer markets, there will be some companies
seeking to be the least-cost and lowest price suppliers to the market.
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3 Segmentation, targeting and positioning (STP)

In most markets, especially consumer markets, it is unusual for companies to plan
their marketing activities so that they try to appeal to every potential customer in
the entire market. Marketing activities generally focus on one or more market
segments.
The purpose of market segmentation by companies is to identify the segment or
segments that will be targeted with marketing activities.
Having identified target market segments, a company must then decide what
position in the market segment it should try to achieve for its product.
3.1 Segment validity

A market segment should be targeted only if a company thinks that it is
sufficiently large that it is worth designing and developing a unique marketing
mix for that specific segment. In other words, the purpose of identifying market
segments is to:
• Select one or more market segments
• Ensure there are enough potential customers
• Ensure that there are reasonable hopes for making a profit from selling to
customers in that segment
• Use a particular set of marketing activities and features (a unique marketing
mix) that is designed to appeal to customers in that segment
The following questions are commonly asked to decide whether or not the
segment can be used for developing marketing plans.
Criteria Comment
Is the segment big There has to be a large enough potential number of
enough? customers so that the product can be sold at a profit.
Can the segment be There has to be a way of getting to the potential
reached? customers by means of the company's marketing
activities, including its sales promotions and
distribution channels.
Is the segment The stability of the segment is important, if the
suitably stable? organisation is to commit huge production and
marketing resources to serve it. The firm does not want
the segment to 'disappear' next year.
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The commercial validity of a market segment may also be assessed according to

the MASDA factors.
MASDA factor
Measurable A market segment should ideally be measurable, which means
that it should be possible to measure the total number of
potential customers in the segment. (In practice, an
organisation may have insufficient data about market size, and
so may judge the size of the market on the basis of qualitative
evidence).
Accessible It must be possible to market a product (with a unique
marketing mix) to the market segment. A segment has no
commercial viability if a producer is unable to access the
customers in it.
Substantial The segment needs to be large enough to offer the possibility of
making a profit from selling to it (with a unique marketing
mix).
Differentiable It should be possible to differentiate the market segment
clearly from the rest of the (broader) market that it is part of.
Actionable The producer needs to be in a position where it can take action
to market its products to the target market – for example, it
needs the resources (including finance) to implement
marketing activities for the market segment.
3.2 Target markets

Target markets are the market segments that are chosen by a company for
marketing their products.
A target market can be approached with a marketing mix that is specifically

designed for potential customers in the target segment. A concentrated marketing
approach that focuses on a specific target market segment will often be more
effective than 'mass marketing' of a standard product to all customers in the entire
market.
Because of limited resources, competition and large markets, organisations are
not usually able to sell with equal efficiency and success to every market segment.
It is necessary to select target markets. A target market is a particularly
attractive segment that will be served with a distinct marketing mix. The
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marketing management of a company may choose one of the following policy

options.
Marketing strategy and target markets

Undifferentiated This policy is to produce a single product and hope to get as
marketing many customers as possible to buy it; that is, ignore
segmentation entirely. Undifferentiated marketing (or 'mass
marketing') is usually based on offering the cheapest prices,
and so is appropriate only for those companies that target
their products at customers who want to buy either at the
lowest price or in the most convenient way.
Concentrated The company attempts to produce the ideal product for a
marketing or single segment (or 'niche') of the market (for example,
niche marketing Rolls-Royce cars or ocean-going boats for the very wealthy).
Differentiated The company attempts to introduce several product versions,
marketing each aimed at a different market segment. For example,
manufacturers of soap products make a number of different
brands, marketed to different segments.
The choice between undifferentiated, differentiated or concentrated marketing as

a marketing strategy will depend on the following factors.
(a) The extent to which the product and/or the market may be considered
homogeneous. Mass marketing may be 'sufficient' if the market is largely
homogeneous and it is difficult to make differentiated products that appeal
to different segments of the market An example may be safety matches. As
stated above, with undifferentiated marketing or mass marketing, lowest
price and convenience for buying are usually the key factors in persuading
customers to buy.
(b) The company's resources must not be over extended by differentiated
marketing. Small firms may succeed better by concentrating on one segment
(one targeted segment or niche of the market) only.
(c) The total market must be sufficiently large; otherwise segmentation and
target marketing is unlikely to be profitable, because each segment would be
too small in size.
3.3 Positioning
Having selected one or more target market segments, or having decided in favour
of undifferentiated marketing, a company must next decide how it wants to
position its product in the selected target markets.
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The market position of a product defines how the company wants customers to
perceive it, and how the product differs from other competing products in the
market.
According to Porter, there are two basic strategies for gaining a competitive
advantage in a market or market segment:
• Cost leadership. This means selling the product at the lowest prices for
products in the market as a whole, or in a targeted market segment. To be
successful with cost leadership, it is necessary to be able to make and sell the
product at a lower cost than competitors.
• Product differentiation. Differentiation means making the product
different from rival products in the mind of potential customers. Products
may be differentiated partly on the basis of price, but other factors such as
product quality, design features, use features, advertising message and
brand image also help to create a differentiated product.
3.3.1 Map of product positioning

A map of product positioning can be used to identify gaps in the market. For
example, a company may decide that in a target market for its product, potential
customers will be influenced largely by product quality and price. A map can be
drawn showing the mix of quality and price that competitors are offering. This will
help a company to identify a potentially profitable and distinctive way of
positioning its own product in the target market.
An example of a product positioning map is shown below.
High price
Cowboy Premium



 

Low quality High quality
Economy Bargain




Low price
A company wanting to sell to this target market will probably consider positioning
the product either in the higher quality and higher price part of the map, or the
lower quality and lower price quartile. It may need to consider whether it can
offer a more attractive balance between quality and price than competitors.
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3.4 The STP process

In developing its marketing strategies, a company should have a clear vision of
market segmentation, the selection of its target markets (target market segments)
and its intentions for product positioning within the selected target markets. This
is the STP process.
STP stands for segmentation, targeting and positioning.
Having made its strategic choice about STP, a company can develop marketing
activities – a marketing mix – that will appeal to customers in the target market in
a way that will give the product its targeted position in this target market.
QUESTION Strategic positioning

Discuss what issues should be considered by a company that operates a chain of
hotels in making its strategic decisions about the positioning of its hotels in the
hotels market.
ANSWER
The company should first identify segments of the market and select the segments
of the market that it intends to target.
It may decide that its hotels will be located in particular countries or regions, and
that the hotel group should not be 'global'.
Within its selected geographical markets, it should identify different market
segments: these may include the market for business guests or the market for
tourists; the market for short-stay guests or long-term guests. The company may
decide that it wants to attract customers in one or more of the identified segments.
For each targeted market segment, it should analyse the position of rival hotel
companies in the market segment. These may be positioned in the market
according to the number of stars awarded to the hotels (three-star, four-star, five-
star) or the size of the hotel. Hotels may also be positioned in the market
according to where they are located within the area – a city centre location or a
location closer to tourist attractions. The price of rooms will also be a factor in
positioning.
Another aspect of positioning may be whether hotels offer conference facilities to
businesses; or the quality of food and service provided by the hotel restaurant.
Having considered different potential ways of differentiating the company's
hotels, management should decide how the company's hotels should be positioned
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and how its hotels will appeal to the targeted market segment more successfully
than other hotel companies.
4 The marketing mix

The marketing mix is basically the combination of factors that marketing
managers put together, to make products that meet the needs of different
customers, price them, inform potential customers about them and deliver them
to customers who want to buy.
Successful marketing depends on addressing a number of key issues. For products

(rather than services) there are four key issues:
• What a company is going to produce
• How much it is going to charge
• How it is going to deliver its products or services to the customer
• How it is going to tell its customers about them
These four elements in the marketing mix for products are known as the 4 Ps.
The 4 Ps of the marketing mix are product, price, place and promotion.
The 4 Ps Aspects of marketing

Product What is the basic or core product?
How should the design or features of the product be changed to
meet the needs of the target market segment?
How might the product line be extended, to include more
products that customers will buy?
How should products be modified to meet the changing needs of
customers in the target segment?
What new products might be developed to meet the needs of
customers in the target market segment?
Price What should be the price for the product? Need to balance price
and expected sales demand in order to optimise profit.
• What prices do customers expect to pay?
• What prices are competitors charging?
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The 4 Ps Aspects of marketing

Promotion This is the communication of the marketing proposition to
potential customers, through direct selling, advertising, sales
promotions, e-communications, public relations and direct
marketing.
Communications may be intended to make customers aware of a
(new) product, create customer interest in the product or make
them want to buy the product.
Place Place is where customers are able to buy the product. A company
must provide distribution channels for customers, so that
customers can make their purchases.
Channels of distribution include retail outlets, online purchases
with delivery to the customer's home, vending machines and so
on. Marketing managers also need to decide how many
distribution channels there should be and where they should be
located.
The choice of distribution channels will differ between, for
example, convenience goods such as bread and specialty goods
such as Ferrari sports cars.
For each product and each target market, companies should develop a marketing
mix for selling the product. The following sections look at each of the 4 Ps of the
marketing mix in turn.
5 Managing products and brands

An essential requirement for successful marketing is to develop products that
meet the needs of customers in the target market. Products and brands must be
managed to ensure that they are developed to meet the identified needs of
customers in the target market, and they should be altered over time to meet the
changing needs of those customers.
5.1 Definition of product

A product is a 'package' of benefits that satisfies a set of 'wants' that customers
have. The package of benefits includes:
(a) A physical aspect, which relates to the components, materials and
specifications (such as colour and size) of the product. For example, a large-
sized sweater made of 100% pure wool in a natural colour.
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(b) A functional aspect, which is a statement of how a product performs and for
what purpose it is likely to be bought. For example, a woollen sweater may
give its wearer warmth and comfort.
(c) A symbolic or status aspect, which represents the qualities the product suggests
to, or confers on, the buyer. For example, a '100% pure cashmere wool' sweater
may represent quality and status to potential buyers.
The concept of 'product' embraces:
• Product quality and durability
• Product design
• Brand name
• Logo
• Packaging
• The product range
• After-sales service
• Optional extras
• Guarantees and warranties
5.2 Marketing management and 'product'

Marketing a product involves deciding what combination of product features will
appeal to potential customers in the target market. The starting point for making
these decisions should not be with the product itself, but instead with the
customer and what the customer wants from a product.
• By understanding the needs and wants of customers, an appropriate product
or service can be developed to meet them.
• Potential customers need to be satisfied with an organisation's product or
they are unlikely to buy it.
• For customers, the quality of a product will be judged by the extent to which
it meets their needs.
Useful questions about a product from a marketing point of view include the
following:
• Are customers satisfied with existing products?
• Will these products fulfil their needs in the future? (Are their needs
changing?)
• How are competitors altering their products in answer to the same
questions?
• Can competitors' products satisfy customers' future needs? How can we do
better?
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5.3 Core, augmented and potential product

The 'total product' represents the tangible and intangible elements that the
product offers to customers. Marketing managers should consider the following
different aspects of 'product', as described by Kotler.
Core product This is the key benefit that the consumer obtains from
buying the product. It represents the minimum features that
consumers expect the product to have and the main reason
why they purchase it.
The core benefit of a product can be functional (as in a
hairdryer) or psychological (as in an expensive designer
perfume or anti-ageing cream).
The core benefits of a smartphone are its ability to make and
receive voice calls, send and receive text messages and
instant messages, and access the internet. For some
consumers, ability to download video images and ability to
take photographs could be added.
Actual or tangible This consists of the features of the product that are easy for
product consumers to identify, such as ingredients, design, quality, size
and packaging. It is the means by which marketers can clearly
represent and communicate the core benefits of the product.
In a BMW sports car, for example, this will include the physical
design of the bodywork and wheels, leather seats, convertible
roof, electronic gadgets, BMW logo and attractive choice of
colours.
Expected product These are the attributes and characteristics of the product
that the consumer expect from the product when they buy it.
iPhone purchasers, for example, may expect their product to
be stylish and elegant.
Augmented or These are additional factors and benefits that differentiate
extended product the products from the competition. They do not form part of
the physical product, but they are features that are added to
increase the product's attractiveness to the customer.
For a sports car, for example, these additional product
features may include after-sales service, a three-year
warranty and low-interest finance.
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Potential product This represents what the product could be and should be in
the future. It is all the possible features and benefits that
customers could desire from the product. The potential
product recognises the fact that there are other additional
features that can be added to the product over time to
further differentiate it from the competition and increase its
attractiveness to customers.
At the lower levels, customers are provided with what they expect; all providers
must supply this or they gain no business at all. To gain a competitive edge, a
company must provide something of benefit to the customer above and beyond
the basic expected benefits.
This target is not static since customers' expectations grow. What delighted them
five years ago is now taken for granted. For example, in business hotels five to ten
years ago, internet access in all rooms would have been an attractive 'extra'. Now
it is an expected requirement.
5.4 Product line and product mix

A product line is a range of related products that a manufacturer may produce.
For example, a clothing manufacturer may produce a line of clothing products for
men that includes shirts, ties, socks and suits. Similarly, a manufacturer of soap
products may make soap bars (of different fragrances and sizes), shower gel,
shampoo products, face cleansing products and so on.
A product line can be extended by adding new, similar product items to the
existing product line. For example, a men's clothing manufacturer may add to the
product line by adding jackets and coats.
A product mix refers to the number of different products or product lines that a
producer makes. For example, a company may manufacture a line of soap
products, a different line of cosmetic products, and a third line of detergent
products such as washing machine powder and dishwasher tablets.
When a producer makes more than one line of products, the mix may be analysed
according to:
• How many different lines the producer makes (product mix width)
• The similarity between the different product lines
All the products in a product line may be sold under a single brand name. (Brand
management is discussed later.)
A producer of several different product lines is unlikely to use the same brand
name for all its product lines. For example, a producer of cosmetic products and
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detergents is unlikely to use the same brand name for both product lines. (On the
other hand, a supermarket may sell a wide range of products under the
supermarket's own company name or brand name.)
An important strategic decision for a company that has ambitions for growth and
expansion may be:
• Whether to extend a product line by making and selling new, related
products under the product line brand name, or
• Diversifying its business and making and selling a new product line (making
its product mix wider).
5.5 Brand management

A brand is a product or product line (mostly for consumer products) that is
marketed by a company under a particular name. A brand may in fact be any of the
following:
• A name (displayed in a particular lettering style)
• The producer's company name (such as Coca-Cola)
• A pictorial design
• A symbol
The brand name of a product or the brand name of the manufacturer of a product
helps to establish the expectations of customers about the branded items. A brand
has been described as a 'shorthand marketing message that creates an emotional
bond with consumers'. Brands can create customer loyalty and motivate the buyer
to purchase the branded product instead of rival (often cheaper) products.
• Many brands are 'high value' brands, where the customer understands that
they are buying exclusivity or top quality when they buy the branded
product. Other brands are low-price brands, where the customer
understands that they are buying a product of reasonable quality for the
price they are paying.
• Advertising can promote the name of the brand as much as specific products
in the brand range.
• Another important advantage of branding is the ability to extend the
branded product range to new products. For example, a manufacturer of
running shoes with a strong brand name can add sports shoes and sports
clothing to the brand range. Potential customers will normally associate the
new products with the quality image of the products already in the branded
range.
A brand may affect consumer perceptions in different ways.
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Brand meaning
Elements of a brand These are the name, logo, colour, shape, letters and
images that make up the visual brand – what people
see when they look at the branded product. These
elements cause an impression or association in the
mind of the consumer.
Attributes of a brand The attributes that are associated with a brand may
relate to design, performance, quality, value or taste.
Benefits from a branded Attributes of a brand are translated into a
product combination of perceived functional or emotional
benefits from a product in the brand product line. For
example a BMW car may suggest an expensive, well-
built, well-engineered product, and raise the prestige
of the car owner.
Values A brand may be associated with particular values,
such as value for money, high performance, safety or
prestige.
Culture A brand may suggest the culture of the producer's
organisation, which may appeal to a segment of
consumers.
Personality A brand may suggest a personality of the buyers of
the branded product. The 'personality' of a brand
may be reinforced through advertising. For example,
some brands may be associated with 'independence',
'rebellion', 'outdoors', 'conservative', and so on.
Some brands are associated with products for
women, and other brands with products for men.
User A brand name may indicate the type of consumer
who is likely to buy and use the product.
For example, some brands may be associated with
environmentally-friendly ('green') products. Buyers
of these products show themselves to be concerned
about the state of the natural environment.
Having established the name of a brand, a company must protect the brand. This
means:
• Making sure that all new products added to the branded product line meet
the same quality standards as the existing branded products
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• Promoting the brand to maintain its image in the mind of potential

customers
• Taking legal action against any other company that tries to imitate the
company's brand, but selling lower-quality products.
5.5.1 Brand strategy

A brand strategy is a long-term plan for the development and protection of a
successful brand.
Brand positioning means formulating and implementing a strategy for how the
brand should seek to influence consumers. The purpose of brand positioning is to
set the producer's products apart, in a meaningful way, from the products of
competitors.
Brands may be positioned according to:
(a) Product quality
(b) The combination of or balance between price and value
(c) Benefits: for example, some cars are branded to associate them with small
size, economical driving and ease of parking
(d) Users: for example, men or women
(e) Providing a solution to consumers' problems: cosmetic products and paint
products are sometimes branded in this way
(f) Through comparisons with rival brands
(g) Through association with an entertainment star celebrity. Consumers may
be persuaded to associate a brand with a celebrity (through advertising);
they may be more willing to trust the recommendations of celebrity than the
claims of the product manufacturer
Requirements for successful

brand positioning
Relevance The branded products should be positioned in a
way that has meaning for consumers and meets
consumers' needs.
Clarity The 'meaning' of the brand should be distinct,
and should be easy to communicate to
consumers and easy for consumers to
understand.
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Requirements for successful

brand positioning
Coherence The same 'image' of the brand should be
promoted consistently through all aspects of
the marketing mix. For example, a high-quality
brand needs to be supported through
high-quality products and high prices, and
possibly exclusive distribution.
Patience It can take a long time to establish a successful
brand.
Occasionally, a company may seek to re-position its brand. Brand repositioning

means changing the position of a brand in the perception of consumers, from its
current position to a new position. For example, a brand may be associated with
'low price and cheap'; a company may try to re-position the brand so that it mean
'low price and value for money'.
The need for brand re-positioning may be caused by:
• Environmental factors, such as a growing consumer preference for 'green'
products. Producers may try to re-position their brand so that it is seen to be
environmentally-friendly.
• Consumer-driven. Consumer tastes may change, and the existing brand
position may lose its attractiveness to potential customers.
• Competitor-driven. A company may need to re-position its brand in response
to a successful marketing initiative by a competitor. The brand re-
positioning should be designed to make the brand more attractive and
distinctive, differentiating it in a favourable way from the competitor's
brand.
• Technology-driven. A development in technology can be used to re-position
the brand and give the branded products a new and valuable differentiating
feature.
5.5.2 Brand equity

Brand equity is the value of a brand name. The owner of a well-known brand is
able to sell products in the basis of the strength of the brand name.
Using the brand for product line extension can also be a successful way of creating
more sales and profits.
However, although a successful brand definitely has value, it is difficult to measure
the financial value (market value) of a brand.
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6 Pricing strategies
Price is another element of the marketing mix. Pricing strategy is concerned with
deciding the price level at which a company should try to sell its products.
For most products, it is important that potential customers:

• Are aware of the price level for the product
• Believe that they will receive good value if they buy it at that price
Pricing decisions are important to the firm. This may be stating an obvious fact,
but it is useful to understand that pricing is the only element of the marketing mix
that generates income, revenue and profits, rather than creating costs.
The other elements of the marketing mix are concerned with adding value to the
product and tailoring it to the consumers' needs, to ensure that the choice
between two products is not simply based on their different prices. Price is the
factor by which customers decide whether they are getting good value if they buy
the product and the benefits that it provides.
Price can go by many names, including fares, fees, rent and assessments.
6.1 The role of price in the marketing mix

Price contributes towards the organisation's business and financial objectives in
the following ways.
• As stated above, price is the only element of the mix that generates revenue
rather than creating costs.
• Price can be important for differentiating a product or brand from
competitive products; this enables a company to exploit market
opportunities.
• Pricing must be consistent with the other elements of the marketing mix,
since it contributes to the overall image created for the product.
6.2 Pricing strategies

There are various pricing strategies that a company may select for its product. The
choice of strategy will often depend on conditions in the market.
Pricing strategies
Demand-based The company is aware that the volume of sales demand
strategies will vary according to the selling price, and that sales
demand will fall if the price is set at a higher level.
Demand-based pricing strategies recognise the
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Pricing strategies
relationship between price and demand, and the
selected price is one that seeks to achieve an optimum
balance between them – possibly a profit-maximising
price.
For innovative products that are introduced to a new
market, a company may select one of the following
demand-based strategies:
• A market penetration pricing strategy. This is to
set the price of the new product low, so that a large
number of customers will buy it, thereby creating a
large market for the new product quickly. (Some
producers of software apps for smartphones offer
their new products free of charge, in order to attract
users.)
• A price skimming strategy. This strategy is to
charge a very high price for a new product. Only a
few customers may buy it, but until competitors
introduce rival products to the new market,
customers have to pay the high price. Although sales
volumes will be low, unit profit margins should be
high.
Price discrimination A company may sell the same product to customers in
different markets at different prices, in order to
maximise revenue. This is a particularly useful strategy
when most of its costs are fixed costs, so that
maximising revenues will also maximise profits.
Price discrimination is successful only if customers in
one segment are unable to buy the product in the
cheaper segment. Examples of price discrimination are:
• Reduced prices for children and old age pensioners,
for example on transport services or in cinemas
• Reduced prices for a product such as phone calls or
energy at certain times of the day or week, in order
to reduce 'peak load' demand at the busiest times of
the day or week
 Geographical price discrimination: charging more for
a product in some geographical areas and charging
a lower price in others
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Pricing strategies
Product mix pricing A company that sells a branded product line should
price all the products in the range consistently, in order
to promote the image and position of the brand. If the
band has a 'high quality, high price' image, all products
in the range should be given a high price.
Pricing methods
Competitor-based With competitor-based pricing, a company sets its
pricing prices at a level similar to (or the same as) those
charged by competitors.
Alternatively, a company may try to offer prices below
those charged by competitors (to win more sales) or
higher than competitors' prices (to emphasise the high-
quality image of its products).
Cost-plus pricing In some markets, particularly jobbing markets and
contract markets, such as the market for building
construction, there may not be an established market
price. Each job or contract is different, which means
that there is no such thing as a market price.
In these circumstances, the company may charge for its
products or services at a margin above full cost, to
ensure that it makes a profit.
Retailing organisations often sell their products at a
margin above marginal cost (purchase price).
However, retailers are aware that customers are often
sensitive to price and they will often vary the size of
their profit mark-up in response to current conditions
in the retail market.
6.3 Competitive pricing actions

Instead of setting prices to match those of major customers, a company may
decide to take aggressive competitive pricing action.
(a) Reducing price below that of competitors in order to win a contract gives
certain messages.
• The company is desperate for sales volume
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• It believes it is the lowest cost supplier

• The target customer is strategically important
(b) Reducing price by the same amount as a competitor, in order to win back
business, demonstrates to that competitor that contracts cannot be won or
lost on price considerations alone.
(c) Substantial price reductions and public announcements of new
manufacturing facilities show the market that despite price reductions, sales
are set to expand and revenues will not decrease in the long term.
(d) Promotional pricing may be used by retailers and some manufacturers as a
short-term marketing measure to boost sales. For example, a supermarket
company may offer very low prices on some of its products, for a short
promotion period, in order to attract customers into its stores and buy a
large range of different products, not just the products in the price
promotion offer. A promotional pricing offer may be used as a temporary
measure to boost sales volume at a time of the year when sales demand is
generally low.
7 Place: distribution channel management

Place is concerned with the selection of distribution channels used to deliver
goods to the consumer. The 'place' element of the marketing mix is really
concerned with the processes by which the product reaches the consumer in a
convenient way. Other terms for 'place' include distribution, delivery systems or
channels.
Channels of distribution were described in Chapter 2. The selection of channels of

distribution and distribution channel management are aspects of marketing
strategy.
Getting 'place' right in marketing terms means effective distribution: getting the
right products into the right places at the right time, so that the customer has the
choice of buying your product, not your competitors. 'Place' in marketing
therefore refers to:
• Distribution channels, and the choice of distribution channels
• Distribution coverage, and the number or spread of distribution channels
• Locations of sales outlets, the arrangements of sales areas or sales offices
• Outward logistics
Questions from a marketing point of view include:
• Is the place of purchase convenient to customers and does it fulfil their
needs?
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• Is the means of distribution appropriate?

• Is the product available in the right quantities?
Warehousing and logistics have been described in an earlier chapter. Other
aspects of 'place' in the marketing mix are as follows.
Selling through What type of product is being sold, so what types of

retailers retailer are best for the product?
Convenience goods are best sold through stores,
supermarkets or kiosks.
Shopping goods may be best sold through selected
specialist retailers (such as furniture stores for
furniture items) or through department stores.
Specialty goods are best sold through exclusive retail
agents.
Selling online Over time, we can expect more growth in online
purchasing. Companies will need to have websites that
provide an online purchasing facility, and to have
arrangements either for delivering purchased items to
the customer's address or for the customer to collect
the item at their convenience from a local store (a 'click
and collect' service).
Companies should learn from experience where and when most of the purchasing
of products takes place, and in formulating a policy for distribution channels, they
should try to ensure that their products are available for purchase in those
locations and at the appropriate times.
7.1 Key decisions in channel management

A business organisation needs to decide how it will select its channels of
distribution – and how many different channels it should use. It also needs to
ensure that the channel operates efficiently and effectively.
Key decisions in channel management include:
• Price policy. A manufacturer needs to consider its price lists and discount
policies, so that the interests of 'middle men' – wholesalers and retailers –
are taken into consideration, not just the interests of the manufacturer.
• Terms and conditions of sale. Channel management also involves making
agreements about payment terms, guarantees and warranties, and delivery
times. Wholesalers and retailers will refuse to handle a manufacturer's
goods if these terms are not acceptable.
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• Territorial rights. See below.

• Definition of responsibilities. For example, if a manufacturer uses
wholesalers or retailers for distributing its goods, who will be responsible
for handling customer complaints or dealing with repairs to faulty or
damaged items?
Territorial rights
A manufacturer may choose to distribute its goods in any of the following ways:
Method of distribution
Extensive distribution The manufacturer seeks to sell its goods through as
many retailers as possible, in order to obtain
'saturation coverage' of the market. For this method
of distribution, it is necessary to use a large number
of wholesalers and retailers; otherwise the costs of
distribution may become excessive.
Extensive distribution is appropriate for low value
items and commodity products that are regularly
purchased by consumers, such as chocolate bars,
soft drinks, and other food and drink products.
Selective distribution The manufacturer uses a limited number of
intermediaries to distributing its goods and selling
them to the end customer. For example, a
manufacturer of fashion clothing may use a limited
number of 'high quality' retailers for selling its
products.
Exclusive distribution The manufacturer gives exclusive distribution and
selling rights to one organisation, possible globally
but more usually within a specified geographical
area. No one else in the area is allowed to sell the
manufacturer's goods. This type of distribution
arrangement may be used, for example, by
producers of high performance cars, such as Ferrari.
Exclusive distribution is intended to enhance the
perceived quality and status of the goods that are
being sold.
Direct distribution A manufacturer may sell direct to consumers
through online sales and the internet.
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7.2 Vertical and horizontal marketing systems

Marketing systems and distribution systems are usually vertical marketing
systems (VMS).
In a vertical marketing system (VMS), all the participants in a channel of
distribution – manufacturer, wholesalers and retailers – co-operate to sell the
products to the end customer.
For example, an equipment manufacturer may appoint distributors with exclusive
distribution rights in a geographical area to sell and maintain its goods. The
manufacturer will provide sales support to these authorised dealers, such as sales
literature and technical information. The dealers in return will agree to apply the
manufacturer's rules on pricing, service levels and holding inventory.
In a horizontal marketing system, two or more unrelated business organisations
combine their marketing and distribution efforts to achieve results that
individually would not be possible. An example is an arrangement between a
company that sells seed and a grain merchant that buys the produce that is grown
from the seed. In their joint arrangement, the grain merchant may give an
undertaking to farmers that if they buy their seed from the seed company, the
grain merchant will buy all the crops grown by the farmers at the prevailing
market price.
This horizontal marketing system creates a distribution channel for the seed
merchant and at the same time creates a supply chain for the grain merchant.
8 Promotion strategies
Promotion covers all marketing activities that are focused on letting customers
know about a product or service and persuading them to buy it.
Promotion can take many forms and generally operates at one of three levels:
(a) Non-personal and mass promotions: these are aimed at a large segment of a
target market.
(b) Personal and direct promotions: these are typically one-way
communications with potential customers (for example, a letter to the
individual, delivered by mail).
(c) Personal and interactive, involving some dialogue between the salesperson
and the potential customer. This may involve face-to-face selling or selling
by telephone.
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In order to be most effective, the methods of promotion that a company selects

should:
(a) Project the image of the company and its products that the company wishes
to present to customers.
(b) Communicate a clear message that will raise awareness, create interest in a
product among potential customers, persuade customers to buy the product,
or build a relationship with customers (or a combination of all or some of
these).
(c) Reach a sufficient number of people in the target market.
In practice, companies normally use a combination of several communications
methods in a co-ordinated marketing campaign. The selected combination may be
called the commonly known as the promotional mix.
8.1 The promotional mix

The promotional mix is the combination of activities used by marketing
managers to promote a product or service.
The basic promotional mix consists of advertising, sales promotion, personal

selling and public relations (PR), but new promotional methods are emerging,
especially by means of information and communication technologies.
The following diagram indicates the extensive range of promotional tools that can
be used to communicate with a customer or potential customer.
The marketing communications mix
Promotional tools need to be combined to form a promotional mix, and promotion
itself needs to be combined with the other Ps in the marketing mix to create an
overall marketing mix.
You are probably familiar with most methods of promotion. Some are explained in
a bit more detail below.
(a) Personal selling is selling by sales representatives ('salesmen'), either
through face-to-face meetings with potential customers or by telephone.
Face-to-face selling is more common with industrial goods, because it is a
high-cost method of promotion. In addition to the cost of the sales
representative's time, there is also the cost of the travelling from one
customer to another. Selling by telephone is cheaper, and telephone sales
representatives can call many more potential customers than face-to-face
salesmen can visit.
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(b) Direct marketing involves sending sales promotion material, such as

brochures, direct to potential customers. The marketing material may be
sent by post or by email. To conduct direct marketing, the firm needs to build
up a database of potential customers.
(c) The design of packaging may help to promote sales of some consumer
products.
(d) Sponsorship involves providing financial support for sports events. The
association of a sponsor's name with a major sporting event, such as the
Cricket World Cup or the Olympics, may change the attitude of consumers
towards the sponsor and the sponsor's products in a favourable way.
(e) Public relations (PR) involves trying to get favourable news reports about
a firm in the media.
(f) Point-of-sale displays are displays of a firm's products at a place, usually
within a retail store, where customers are likely to see them. They often
involve a special price promotion, with the intention of tempting shoppers to
buy the product.
(g) Advertising is a well-established method of marketing products. There are
different advertising media: television, cinema, radio, newspapers,
magazines, billboard posters, website advertising, and so on.
8.2 Push and pull promotion policies

The traditional 'push' marketing policy is concerned with transferring goods out
to wholesalers and retailers, who then have the task of selling them to ultimate
final customers. A manufacturer may employ sales representatives to sell its
products to major retailers.
The emphasis of a 'push' policy is therefore on getting dealers to accept goods.
A 'pull' policy by comparison is one of influencing final consumer attitudes so that
a consumer demand is created that dealers are obliged to satisfy. A 'pull' policy
usually involves heavy expenditure on advertising, but holds the potential of
stimulating a much higher demand. For example, a manufacturer of a consumer
product may advertise its product heavily, creating customer demand to buy the
product. This customer demand should then persuade retailers to stock the
product.
In practice, manufacturers of consumer goods will often use a combination of both
push and pull promotional methods.
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8.3 Profile strategy

The profile strategy is about satisfying stakeholders’ needs by building awareness,
developing reputation and changing perceptions and attitudes towards an
organisation, brand or product. The organisation seeks to maintain a good
relationship with its stakeholders. This is usually a long term goal.
The key tools of a profile strategy are typically:
• Sponsorship
• Public relations
• Corporate advertising
A successful profile strategy will ensure that stakeholders are kept aware of any
changes and developments and feel that they are engaged in the conversation.
8.3.1 Benefits of customer profiling

Customer profiling helps an organisation to develop a profile of its 'ideal'
customer. An 'ideal' customer is the type of customer that the organisation:
• Needs to sell to
• Should want to attract in bigger numbers
This helps the organisation to develop a suitable marketing strategy and
marketing mix.
Other benefits of profiling are that it helps a business organisation to:
• Identify market segments and target those segments
• Identify potential new customers more easily
• Offer personalised promotional offers to customers: supermarket companies
may offer 'money-off' vouchers to individual customers, based on knowledge
of their spending habits and the types of product they buy
• Identify possible 'gaps' in the market
8.4 Advertising
Advertising is 'any paid form of non-personal presentation and promotion of
ideas, goods or services by an identifiable sponsor' (American Marketing
Association).
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Advertising can have any of the following purposes:

• To help the sales representatives to make sales
• To stimulate demand for the product
• To promote a specific brand
• To counteract the promotional activities of a competitor
• To remind consumers about the product
Advertising can take many forms and uses a number of media including online
media, press, broadcast (TV and radio etc) billboards, leaflets and point of sale
displays. Increasingly sophisticated methods of advertising are opening up to
marketers. The increased use of online media, and particularly social networking,
in recent years has meant that a promotional campaign may be launched online
first and circulated via a social network such as Facebook.
8.5 Sales promotion

Sales promotion means 'a range of tactical marketing techniques, designed
within a strategic marketing framework, to add value to a product or service, in
order to achieve a specific sales and marketing objective' (Institute of Sales
Promotion).
These may include price discounting, coupons, guarantees, free gifts, competitions,
vouchers, demonstrations and sponsorship.
Sales promotion activity is typically aimed at increasing short-term sales volume,
by encouraging purchases within a stated time frame ('offer closes on such-and-
such a date’). It seeks to do this by adding value to the product or service:
consumers are offered something extra – or the chance to obtain something extra
– if they purchase, purchase more or purchase again.
The following diagram shows commonly used consumer sales promotion tools.
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Consumer sales promotion methods
Reduced price
Point of sale
display Coupons
Frequent user Consumer

Gift with
incentives sales
purchase
promotion
Competitions
Money refunds and prizes
Premiums
8.6 Public relations (PR)

Public relations (PR) is 'the function or activity that aims to establish and protect
the reputation of a company or brand, and to create mutual understanding
between the organisation and the segments of the public with whom it needs to
communicate' (UK Chartered Institute of Marketing).
Although it may not directly stimulate sales, PR can be important for protecting or
enhancing the image of the company and its products with the general public. The
reputation of a company may affect whether it attracts and retains employees, and
whether consumers buy its products.
Typical PR activities involve maintaining strong relations with the media,
managing news events and ensuring that a company presents a consistent
corporate communications message.
8.7 Direct marketing

Direct marketing consists of 'all activities which make it possible to offer goods
or services or to transmit other messages to a segment of the population by post,
telephone, e-mail or other direct means' (UK Chartered Institute of Marketing).
Direct marketing covers a range of techniques, some traditional – and some based
on new technologies.
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(a) Direct mail (DM): a personally addressed 'written offering' (letter and/or
sales literature) with some form of response mechanism, sent to existing
customers from an in-house database or mailing list.
(b) Email: messages sent via the internet from an email database of customers.
Emails can offer routine information, updates and information about new
product
(c) Mobile phone text messaging (SMS): messages can be sent via mobile
phone to a captive audience, catching them wherever they are. This form of
marketing is still in its infancy, but with the proliferation of mobile phone
usage it is likely to be very significant, at least in terms of numbers reached.
It is also becoming increasingly sophisticated, with '3G' (third-generation)
mobile phone technology.
(d) Mail order: brochures typically contain a selection of items also available in
a shop or trade outlet, which can be ordered via an order form included with
the brochure and delivered to the customer.
(e) Catalogue marketing is similar to mail order, but involves a complete
catalogue of the products of the firm, which typically would not have retail
outlets at all. Electronic catalogues can also be downloaded on the internet.
(f) Call centres and telemarketing: a call centre is a telephone service
responding to or making telephone calls. This is a cost-effective way of
providing a professionally trained response to customer callers and
enquirers, for the purposes of sales, customer service, customer care or a
contact point for direct response advertising.
8.8 Personal selling

Personal selling is the presentation of products and persuasive communication to
potential clients by sales staff employed by the supplying organisation. It is the
most direct and longest established means of promotion within the promotional
mix.
It encompasses a wide variety of tasks including prospecting, information
gathering and communicating as well as actually selling.
(a) Personal selling, or sales force activity, must be undertaken within the
context of the organisation's overall marketing strategy. For example, if the
organisation pursues a 'pull' strategy, relying on massive consumer
advertising to draw customers to ask for the brands, then the role of the
salesforce may primarily be servicing, ensuring that retailers carry sufficient
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stock, allocate adequate shelf space for display and co-operate in sales
promotion programmes.
(b) Conversely, with a 'push' strategy, the organisation will rely primarily on the
salesforce to persuade marketing intermediaries to buy the product. The
following model demonstrates the tasks involved with personal selling.
Personal selling is used extensively in the promotion of industrial goods.
Elements and tasks of personal selling
Closing the The opening

sale
Need and
Negotiation Personal problem
selling identification
Presentation
Dealing with and
objections demonstration
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CHAPTER ROUNDUP
 Companies sell their products or services in markets they have chosen for
targeting. In order to sell their products and persuade customers to buy them,
companies must undertake marketing activities.
 Marketing strategies are plans developed by companies for selecting target
markets and marketing their products or services to potential customers in the
target market.
 Marketing creates value by creating interest in a product or service, and
persuading customers in the target market to buy it.
 Marketing strategies for a company's product are based on the concepts of
segmentation, selecting a target market and positioning the product within the
target market.
 All markets can be analysed and divided into segments.
 A market segment is a group of customers or potential customers within a total
market who have similar needs and interests, and who can therefore be targeted
by the same marketing activities (a marketing mix).
 In most markets, especially consumer markets, it is unusual for companies to plan
their marketing activities so that they try to appeal to every potential customer in
the entire market. Marketing activities generally focus on one or more market
segments.
 The purpose of market segmentation by companies is to identify the segment or
segments that will be targeted with marketing activities.
 Having identified target market segments, a company must then decide what
position in the market segment it should try to achieve for its product.
 The marketing mix is basically the combination of factors that marketing
managers put together, to make products that meet the needs of different
customers, price them, inform potential customers about them and deliver them
to customers who want to buy.
 An essential requirement for successful marketing is to develop products that
meet the needs of customers in the target market. Products and brands must be
managed to ensure that they are developed to meet the identified needs of
customers in the target market, and they should be altered over time to meet the
changing needs of those customers.
 Price is another element of the marketing mix. Pricing strategy is concerned with
deciding the price level at which a company should try to sell its products.
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 Place is concerned with the selection of distribution channels used to deliver

goods to the consumer. The 'place' element of the marketing mix is really
concerned with the processes by which the product reaches the consumer in a
convenient way. Other terms for 'place' include distribution, delivery systems or
channels.
 Promotion covers all marketing activities that are focused on letting customers
know about a product or service and persuading them to buy it.
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PROGRESS TEST
1 Match the following products with the category of consumer product
Product Category of consumer goods

A Rolex watch 1 Shopping goods
B Jars of instant coffee 2 Specialty goods
C Kitchen equipment 3 Convenience goods
2 Fill in the missing word:

____________________ is the process of breaking down large target markets into
smaller, sub-markets of consumers with common needs or interests.
3 Fill in the missing words:

The most important concept in STP marketing is to have all three stages mesh
together to form one fluid plan. Segmentation leads to the right ___________
markets, which leads to the right _______________ strategy.
4 A Sri Lankan company in the apparel industry sells nearly all its output (items of
clothing) to major retailers in the US and Europe, which sell the items under their
own retailer brand name. Which of the following best describes the type of market
in which this company operates?
A Specialty goods
B B2C
C Export
D Geographical
5 A policy of charging high prices for new products when they are first introduced to
the market is known as a price _______________________ policy.
6 Associate each of the following aspects of marketing consumer goods with one of
the 4 Ps of the marketing mix.
Aspect of marketing Product, price, place

or promotion?
A two-for-the-price-of-one offer for a tinned food item
in a supermarket
Available to purchase online
Packaging for the product
Three-year guarantee
Made from 21-carat gold
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1 A and 2; B and 3; C and 1
2 Segmentation
3 Target; positioning
4 The answer is C. The company's customers are retailers, so it is a B2B market.

Although customers are abroad, it is not a geographical market. The company
operates in an export market. Clothing products are shopping items (or possibly
convenience goods): they are only specialty goods if they are high fashion items:
this does not seem to be the case here.
5 Skimming
6
Aspect of marketing Product, price, place or
promotion?
A two-for-the-price-of-one offer for a tinned Promotion
food item in a supermarket (A short-term offer, so more a
promotion than a price strategy)
Available to purchase online Place
Packaging for the product Either product or promotion, or both
Three-year guarantee Product
Made from 21-carat gold Product
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CHAPTER
INTRODUCTION
The previous chapter explained the importance of segmentation, targeting and
positioning in marketing strategy. It also described how products are marketed to
customers in a target market by means of a marketing mix combining aspects of
product, price, place and promotion.
This chapter describes some further aspects of marketing strategy, and ways in which
marketing and sales, as a primary activity in the value chain, may add value for a
company.
Knowledge Component
4 Value creation through marketing
4.7 Managing the product life 4.7.1 Analyse the marketing strategies at different phases of the product life cycle
cycle (PLC)
4.8 Service marketing 4.8.1 Discuss the service marketing mix (7 Ps)
4.9 Customer relationship 4.9.1 Explain the importance of customer relationship management (CRM) in the
management value creation process
4.9.2 Discuss basic CRM techniques used by businesses
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KB5 | Chapter 5: Further Aspects of Marketing and Value
LEARNING
1 The product life cycle 4.7.1
2 Product life cycle and portfolio planning 4.7.1
3 Services marketing mix 4.8.1
4 Customer relationship marketing (CRM) 4.9.1
5 Collecting and using information about customer needs and 4.9.2
buying habits
6 CRM and customer databases 4.9.2
1 The product life cycle

The product life cycle is a concept that products have a life cycle, and that
products demonstrate different characteristics of profit and investment at each
stage in their life cycle. The life cycle concept is a model, not a prediction. (Not all
products pass through each stage of the life cycle.)
The model can be used by a company to examine its portfolio of products and
services as a whole. It can also be used to develop different marketing strategies
and a different marketing mix, according to the stage in its life cycle that the
product has reached.
The product life cycle is an attempt to recognise distinct stages in a product's

sales history, from introduction to the market, through periods of growth and
maturity to eventual decline.
It is important to understand what we mean by 'product'. A product can be

defined in any of the following ways.
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Product class This is a broad category of product, such as cars, televisions,

telephones, newspapers and so on.
Product form Within a product class, products take different forms. For
example, there are many different forms of car, such as four-
door saloon car, hatchback, two-seater sports car, 4×4 and so
on.
Forms of product may change over time. At one time, forms
of televisions were colour and black-and-white. Then we had
analogue and digital television. With advances in technology
newer product forms have emerged.
So product forms may change over time even though the
product class remains. And at any time there may be many
different forms of the same product class.
Product forms have a shorter life cycle than a product class.
Brand or specific Within each product form there are many specific models
model and brands of the product, made by different manufacturers.
For example, mobile phones and smartphones have been
produced, in different models, by manufacturers such as
Apple, Samsung, Blackberry, Nike and others.
Individual models may have a much shorter life cycle than
the product form to which they belong.
The 'typical' product life cycle of a product form is as follows.

Typical product life cycle of a product form
Introduction Growth Shakeout Maturity Decline
Sales
and
profits
Sales
Cash flow
+
Time
–
Profit
1.1 Introduction stage of the life cycle

A new product takes time to be accepted when it is first introduced to the market.
There is a slow growth in sales. Unit costs are high due to low output and costly
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sales promotions. Marketing costs are high in order to get the product recognised
by customers.
• At this stage, the product range is limited. With only one or a small number
of manufacturers making the product, the number of available product
models is small.
• The product for the time being is a loss-maker, and has negative cash flows.
• The product is high risk because it is new and has not yet been accepted by
the market.
• The product has few, if any, competitors.
• The product is only likely to be purchased by customers who like innovative
products and are interested in trying them out.
• At this stage, there is an opportunity for a company to establish a name for
itself, possibly as a brand, in the market.
Marketing strategy may be concerned with the following issues.
Element of marketing mix

Product Developing a product that meets the needs of customers in a
target market. If the product is very new, this may be difficult
and the first producers may not get the product features 'right'
first time. At this stage, there may be significant changes to the
product features to make the product more attractive.
Price The pricing strategy for a new product may be a price skimming
strategy – charging a high price in the belief that a sufficient
number of customers will be willing to pay this price – or a
market penetration pricing strategy – charging a low price in
order to build up demand for the new product quickly.
Place There will probably be limited distribution channels for a new
product, and the challenge for the manufacturer is to find ways of
making the product available to customers to buy.
Promotion Spending on advertising and promotions may need to be high,
initially to make potential customers aware of the existence of
the product; then to create interest; then to persuade customers
to buy it.
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1.2 Growth stage of the life cycle

If the new product gains market acceptance, sales will eventually rise. The market
will grow and at some stage in this growth phase, the product will start to be
profitable.
• Capital investment may be needed to meet the rising demand. If so, cash
flows may remain negative even when the product is making a profit.
However, cash flows improve as sales increase further.
• Growth in the market is achieved by attracting new customers.
• Competitors are attracted to the market and offer similar products, but as
sales and production volumes continue to rise for the market as a whole and
for individual producers in the market, unit costs fall.
• Manufacturers introduce additional features to their product, to differentiate
it from the products of competitors. Product complexity is likely to rise as
product differentiation increases. Alternatively, a company may attempt to
be the least-cost producer and compete by offering a basic product at the
lowest price.
• Continued marketing expenditure is required to differentiate the company's
product from those of competitors.
• As the market grows, companies may identify new market segments and
target these segments.

Product Products are differentiated as the market grows in size. With
market segmentation, products are developed for different
segments of the market.
Price If the early manufacturers charged skimming prices, prices in the
market will fall. The rate of growth in the market will depend to
a large extent on prices charged.
Place There will be more distribution channels for the product, and the
challenge for the manufacturer is to find ways of improving the
distribution of its products to customers. New methods of
distribution may be used.
Promotion Spending on advertising and promotions may continue at a high
level, due to the increase in competition in the market. However
as customers become more aware of the product, the advertising
message may change from trying to create awareness to trying to
persuade customers to buy.
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1.3 Maturity stage of the life cycle

At some stage on the life cycle of a product form, the market will stop growing, or
growth will slow down to a low rate.
• Purchases are now based on repeat or replacement purchases, rather than
new customers buying for the first time.
 Although the rate of sales growth slows down, the maturity phase is often
the longest period in the life cycle of a successful product's life.
 For producers, the product is profitable and generates positive cash flows.
 Prices may fall, as firms compete with one another to try to increase their
share of a fixed-size market.
 Firms try to use the brand name they have established to extend their
product range, and sell new products under the same brand name.
 The number of companies in industry falls, due to consolidation in the
industry by means of takeovers and mergers.

Product Extending the maturity phase of the life cycle by introducing new
features to the product and developing new and improved
models.
Some producers may look for different ways of segmenting the
market and identifying target markets, in order to improve
competitiveness.
Protecting and exploiting the brand name may be important.
Price Price competition in the market may increase.
Place Distribution channels in the market should be well-established.
Efficient channel management is important for producers.
Promotion Spending on advertising and promotions is managed as part of
the overall marketing mix.
1.4 Decline stage of the life cycle

Eventually, sales of a product form will begin to decline so that there is over-
capacity of production in the industry. There may be severe competition between
manufacturers, possibly resulting in price reductions. Profits fall as sales volume
and prices fall.
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Some producers leave the market. Others look for ways of prolonging the life of
the product, possibly by identifying different market segments and adapting the
product to the needs of that segment.
Producers may be reluctant to leave the market, although some do so because of
falling profits.
However, some products that have been in decline have received a boost and have
experienced a new growth phase, as improvements in technology have enabled
manufacturers to improve the appeal of the product to customers.

Product Making improvements to the product and try to maintain sales
demand and extend the life of the product.
Price Price competition in the market may continue, but as unit costs
rise with falling sales, volumes price reductions may be difficult,
because the profit needs to remain profitable if it is to continue.
Place There may be fewer distribution channels. Producers may need
to consider how to retain sufficient distribution channels in
order to reach remaining customers.
Promotion Spending on advertising and promotions will fall, because high
spending is no longer justified.
1.5 Example: the life cycle of television sets

Over time, the design and specification of television sets has changed. Black and
white screens have been replaced by colour; cathode ray tubes have been replaced
by flat screens and plasma screens; analogue televisions are being replaced by
digital TV; and manufacturers have also developed home cinema systems.
The emergence of online distribution methods of video content, to computers,
tablets and smartphones, is affecting the market for television sets. Manufacturers
of televisions are adapting to the changes, and have developed internet-enabled
televisions, and TV sets that connect directly with computers as part of a complete
home media system.
1.6 Problems with the product life cycle concept

There are practical difficulties with using the concept of a product life cycle.
(a) With the speed of technological change, some products may have a very
short life cycle. There is no time to change marketing strategies for each
stage of the life cycle.
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(b) Recognition. How can managers recognise what stage a product has
reached in its life cycle?
(c) Not always true. The theoretical curve of a product life cycle does not always
occur in practice. Some products never decline if they are marketed
competitively: radio as a form of entertainment seems to have been such a
product.
(d) Changeable. Strategic decisions can change or extend a product's life cycle.
Even so, the product life cycle concept can often help marketing managers develop
a suitable marketing mix, and recognise the need to change all the elements in
their marketing mix, as conditions in the market change.
QUESTION Life cycle

Discuss how accountants might provide assistance with marketing decisions
during the life cycle of a product.
ANSWER
Accountants can provide information about the expected effect on the
organisation's financial position of a change in marketing policy or a change in the
marketing mix.
Accountants can provide estimates of the likely effect of pricing decisions on sales
revenue, profits, cash flows and also the need for additional capital investment.
When a new product is introduced to the market, estimates of sales, profits and
cash flows by an accountant could help management to decide on the initial
pricing for the product, and whether a penetration or skimming policy might be
preferable to price the product.
As a product goes into its growth and then maturity stages, accountants can
provide estimates about the likely effect on sales, profits and cash flows of price
changes.
Accountants should also be able to provide information eventually to assist with
decisions about whether, and when, to stop producing a product as it nears the
end of its expected life cycle.
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2 Product life cycle and portfolio planning

Portfolio planning aims to create a balanced portfolio of products, with a spread of
different products at different stages in their life cycle. A balanced portfolio of
products helps a company to remain competitive in its markets.
Portfolio planning is planning which products to make and sell, so as to have a

balance of products that are currently successful and newer products that are
expected to be successful in the future.
2.1 The Boston classification (BCG matrix)

The Boston Consulting Group (BCG) matrix classifies products in terms of their
capacity for growth within the market and the market's capacity for growth as a
whole. It also considers the balance between established products in their
maturity phase of the life cycle, and products with the potential for growth. A
company should have a balanced portfolio of products.
The matrix is as follows.
BCG matrix
Relative market share
High Low
Question marks/
High Stars
problem children
Market growth
Low Cash cows Dogs
The product portfolio should be balanced, with cash cows providing finance for
stars and question marks. There should be a minimum number of dogs in a
company's product range, and the aim should be to withdraw these from the
market.
• Stars. In the short term, these require capital expenditure in excess of the
cash they generate, in order to maintain their market position, and to defend
their position against competitors' attack strategies, but they promise high
returns in the future.
• Cash cows. In time, stars will become cash cows as the market matures. Cash
cows need very little capital expenditure (because opportunities for further
growth in a mature market are low), and they generate high levels of cash
income. Cash cows can be used to finance the stars or question marks that
are in their development stage.
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• Question marks. The question with these products is whether they justify
considerable capital expenditure in the hope of increasing their market
share and improve their market share. Or will they be squeezed out of the
expanding market by rival products? Question marks have the potential to
become stars if they are successfully developed. However, if their
development is not successful, they may end up as 'dogs'.
• Dogs. These may be former cash cows that have fallen on hard times, or
question marks that did not succeed. They may have a useful strategic role,
either to complete a product range or to keep competitors out. However, the
remaining life of dogs is unlikely to be long.
Although developed for use with a product portfolio, the BCG matrix is also used
in diversified conglomerates to assess the strategic position of subsidiary strategic
business units (SBUs). This is an important point to note: the BCG matrix can be
applied either to a product portfolio or a business portfolio.
The BCG matrix offers management a simple and convenient way of looking at the
company's entire product range. It encourages management to look at the
portfolio as a whole rather than simply assessing the needs and performance of
each product individually.
QUESTION Stars and question marks

A company has used the BCG matrix to assess its product portfolio, and has
identified the fact that most of its products are either stars or question marks.
Explain the possible implication for the company of this discovery.
ANSWER
Stars and question marks do not provide a positive cash flow and many are not yet
profitable. They also need further investment. The main implication of having a
large proportion of stars and question marks in the product portfolio is that the
company will need a large amount of cash to support it.
It may also have one or two cash cows capable of providing the cash required. If
not, the company will have to consider either raising new finance to develop its
products or to reduce the size of its portfolio, probably by ceasing to develop
products that it has identified as dogs and also some products that it has identified
as question marks.
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3 Services marketing mix

The original marketing mix had just four elements: product, price, place and
promotion – these were sufficient for planning the marketing of products. As
marketing of services developed, it was recognised that the original 4 Ps did not
cover all the issues that should be considered for marketing.
So for services, the marketing mix was extended to 7 Ps by adding three more Ps
to the original four: people, process and physical evidence. Some texts refer to the
7 Ps as the 'extended marketing mix'.
The extended marketing mix (7Ps) for services consists of product, price, place,
promotion, people, physical evidence and process.
People 'People' refers mainly to employees. Most (but not all) services
are delivered to customers by employees of the company.
Employees are therefore important in helping to market the
service: they have a direct effect on the value that the customer
receives from the service.
Physical Physical evidence refers to intangible aspects such as the look
evidence and feel of the organisation and its brand, through physical
evidence such as the buildings they operate in, and the use of
company livery, uniforms, letterhead and so on.
Process Process refers to the way that services are delivered using user-
friendly systems for buying and selling.
All seven Ps should be considered when creating a marketing mix for a service.
The relative importance of each of the Ps will depend on the nature of the service
provided.
3.1 Product, price, place and promotion for services

The original 4 Ps apply to the marketing of services as well as the marketing of
products.
The 'product' is the service provided to the customer and the features of the
service. It is important to remember, however, that there are widely different
types of services. For example:
(a) The services provided to clients by accountants are very different from the
provision of mobile phone services by telecommunications companies.
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(b) Some services require substantial capital investment, and others require
much less capital. Even within the same industry, service companies operate
with different levels of capital investment. For example, in the travel
industry, many tour operators have only a small capital investment, whereas
providers of ocean cruises need to invest in expensive ships.
The 'place' is the place where the service is provided from, as well as the place
where the customer receives it. These are not always the same place. For example,
mobile phone services are delivered from a communications network, but
customers receive the service wherever they happen to be with their mobile
phone.
Pricing and promotion issues are much the same with services as with products.
3.2 People
The greater the amount of customer contact in the delivery of a product or service,
the more crucial is the role of people. In many cases, the delivery of a service and
the physical presence of the staff involved are inseparable. This is why the term
'people' was specifically added to the services marketing mix in order to reflect
services marketing more fully.
In some cases, the physical presence of people actually performing the job is a
vital aspect of customer satisfaction. The service provided by waiters in a
restaurant or the hairdressers in a hairdressing salon are perhaps obvious
examples. The people involved are performing or 'producing' the service, selling
the service and also liaising with the customer to promote the service, gather
information and respond to customer needs.
When employees deal directly with customers in providing a service, they should
understand that what they do has a direct impact on the satisfaction and value
that the customer receives. 'People' issues in marketing may include the following.
• Appearance
• Attitude in dealing with the customer
• Behaviour
• Competence, or perceived competence
• Commitment to providing a good service
• Discretion/confidentiality
• Integrity/ethics
• Professionalism
Managers must promote values of customer service in order to create a culture of
customer service that employees understand and accept. Front-line staff must be
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selected, trained and motivated with particular attention to customer care and
public relations.
Marketing management should consider how the service should be delivered and
how staff should be expected to provide the service in order to satisfy the
customer.
Front-line service staff are also important for customer relationship management,
which is described later.
3.3 Process
'Process' within the marketing mix is concerned with the processes and
procedures for delivering the service.
Think about the processes associated with a trip to the dentist. The dentist will
have a particular method for you to book your appointment – there may be an
online booking facility for example, or telephone bookings or a practice of making
your next check-up appointment at each visit. Your practice may have a procedure
or routine that you also go through when you arrive at the surgery; for example,
there may be a specific queuing system in place and some method of dealing with
latecomers or urgent cases. The complete process of delivering a quality service is
sometimes referred to as end-to-end customer service, and encompasses every
aspect of the service encounter from start to finish.
In providing a service to customers, it is important that the processes and
procedures function smoothly, and that the customer receives the service in a way
that is trouble-free and meets the customer's expectations.
3.4 Physical evidence

Physical evidence refers to 'the tangible elements that support the service
delivery, and offer clues about the positioning of the service or give the customer
something solid to take away with them to symbolise the intangible benefits they
have received' (Brassington and Pettitt).
Because of the intangible nature of services, prospective customers have little or
no tangible evidence to assess when making a choice between different service
providers. For example, if you have a choice between two accountants for
receiving tax advice, and both will charge the same rate, how do you decide which
accountant to use?
In marketing, physical evidence represents the tangible aspects of intangible
service products that constitute the means through which customers can judge the
quality of the service.
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Physical evidence of a service can be provided in different ways that are intended
to make the customer more willing to buy the service or more satisfied with the
service that is received – even though the service is essentially intangible in
nature.
Physical evidence
Environment of Facilities Tangible evidence of
service delivery purchase
• Colours • Vehicles/aeroplanes • Labels and other
• Layout • Equipment/tools printed information
• Staff uniforms • Tickets, vouchers and
• Noise levels purchase
confirmations
• Smells
• Ambience • Logos and other visible
evidence of brand
• Website design
identity
• Packaging
3.4.1 Environment and atmosphere

Services are intangible. Physical evidence provides something tangible, enabling
people to 'feel' the quality of the service. How many people come into a shop? How
long do they spend in the shop? What they buy is affected by the environment and
physical layout of the store. Lighting, heating, sound (such as music), colour and
even smell all contribute.
Airlines, theatres and museums all take care with their physical environment.
4 Customer relationship marketing (CRM)

Customer relationship marketing means using marketing resources to retain,
rather than simply attract, customers. It focuses on establishing loyalty among the
existing customers.
Relationship marketing is the use of marketing resources to maintain and exploit a
firm's existing customers, rather than using marketing resources solely to attract
new customers.
Firms can implement their relationship marketing strategy through effective
customer relationship management.
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Customer relationship marketing: using marketing resources to retain, rather

than simply attract, customers. It focuses on establishing loyalty among the
existing customers.
For most companies, by far the largest proportion of their revenue comes from
existing customers who make repeat purchases or follow-up purchases.
This suggests that although a large part of marketing effort should be directed at
winning new customers and increasing market share, it is also important to retain
customers and secure their repeat business.
This emphasis on customer retention has led to an increasing focus on customer
relationship management. Sales and marketing staff should not simply look for
ways of making 'one-off sales', they should look for ways to create a long-term
relationship, which is mutually beneficial for both the company and the customer.
This is the logic behind relationship marketing and customer relationship
management.
Customer relationship management (CRM) is the establishment, development,
maintenance and optimisation of long-term, mutually valuable, relationships
between consumers and organisations.
Differences between transactional and relationship marketing:
Transactional marketing Relationship marketing

Importance of single sale Importance of customer relationship
Importance of product features Importance of customer benefits
Short timescale Longer timescale
Less emphasis on service Strong emphasis on customer service
Quality is the concern of production Quality is the concern of everyone
Competitive commitment High customer commitment
Persuasive communication Regular communication
4.1 The need for customer relationship management (CRM)

There are several reasons why CRM is an important consideration in marketing.
Loyalty What is to stop customers from using other suppliers for

repeat purchases of a product? Why should customers be
loyal to a specific supplier?
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Cost It is cheaper to focus on retaining existing customers than to

have to attract new ones. Attracting new customers is
expensive, due to low initial prices or promotion expenses, for
instance
Revenue and In mature markets, existing customers provide the most likely
profit source of future revenue and earnings
Extending the Strategies to extend the range of products that the company
product range sells makes no sense if existing customers cannot be retained.
It is important that when selling a product or service to customers, the customer

should be satisfied, and should feel that they are getting value for the money they
pay.
CRM is concerned with more than the quality of the product or the service, and the
level of customer satisfaction.
It is concerned with developing a stronger relationship with the customer and
building customer loyalty. Important aspects of CRM are therefore:
• Getting to know the customer better
• Getting the customer to understand that the company appreciates their
business
• Developing the customer's interest in and loyalty to the company
The key requirements
of successful CRM
Get the customer to Use the knowledge

Get to know the understand that the about the customer
customer company knows to provide more
(preferably about them and customer
individually) appreciates their satisfaction
business
Improve and add to Both the company

this knowledge and the customer
over time should benefit from
CRM
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4.2 The difference between customer and consumer (user)

Customers are the people who buy an organisation's products and services. To
communicate with them effectively, an organisation needs to know:
• Who they are
• What needs the products or services are required to meet
• Where their customers are located
• The most cost-effective methods of communicating with them
By doing this, it will be easier to develop effective communications, such as
advertising, sales literature, packaging and product instructions, that appeal to,
and are understood by, the customer.
It is important to distinguish in some cases between the customer for a product
and the consumer of the product. A customer is the person who buys the product,
and the consumer is the person who uses it or consumes it. These are not always
the same individuals.
The person or persons who make a buying decision may be referred to as the
decision-making unit or DMU.
QUESTION Customer v consumer

State who might be the differing customer and consumer for:
(a) A laptop computer
(b) A bicycle
ANSWER
A laptop computer may be purchased by the buying department of a company (the
customer) for use by a manager in the company (the consumer).
Parents (the customer) may buy a bicycle for use by their child (the consumer).
The buying decisions of a customer may be influenced by what they consider to be
the needs of the intended consumer, but the consumer's influence on a buying
decision may be limited.
4.3 The benefits of a marketing-oriented approach

The main benefits of a marketing-orientated approach are:
(a) By making customer needs a primary focus, companies are more likely to
develop products and services that meet the needs of the customers. The
likelihood of repeat purchases and brand loyalty is increased as customers
experience a higher level of satisfaction.
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(b) Consistently understanding and delivering what customers wants leads to

long-term profitability.
Market-oriented companies can turn one-time buyers into repeat customers, with
the ultimate goal of developing many loyal customers who are more willing to pay
higher prices.
To turn buyers into repeat customers, a company should seek ways of developing
a relationship with them.
5 Collecting and using information about customer needs

and buying habits
A key requirement with CRM is to gather information about the customer, their
needs and how they make their buying decisions. This information can be used to
strengthen the relationship with customers, strengthen customer loyalty and
succeed with customer retention.
Customer relationship management methods differ according to the number of

potential customers in the target market.
(a) For industrial products and high-value consumer goods, there will be a fairly
small number of customers. When the customer base is small, it is possible
to devote more time and effort to each customer, and even to build a
personal relationship.
(b) For goods where the number of customers is large or very large
(convenience goods or shopping goods), a different approach is required to
build an understanding of customers and to establish a relationship with
them. Retailers such as department stores and supermarkets may, for
example, use a system of loyalty cards to learn about the buying habits and
preferences of each customer, and offer personalised promotions (such as
money-off vouchers for products that the customer buys regularly).
There are several ways in which companies can find out more about their
customers.
Direct questioning When a company uses sales representatives to sell their

products, there is face-to-face communication between a
company's employee and the customer. The sales
representative can find out about the customer's
motivations by asking questions and making notes
afterwards about the answers they were given.
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Conversation In some business organisations such as small retail stores

and garages, a company's employees can get to know a
customer better through regular meetings and casual
conversation.
Questionnaires Customers may be asked to fill in a questionnaire after
they have purchased a product, or they may be contacted
by telephone a short time after the purchase and asked if
they will answer some questions.
Complaints Companies can take a positive view of customer
complaints and use the feedback they are receiving to
provide a better product or service in the future.
Loyalty cards Retailers may invite customers to apply for a loyalty card,
which is put through an electronic reader every time the
customer makes a purchase at the store. This enables the
store to record in detail the nature of the goods that the
customer has purchased. Over time, a detailed pattern of
the customer's purchases and buying habits can be built
up.
Social networking Some companies have set up a page on Facebook that they
use to communicate with potential customers,
encouraging two-way communication and a sense of
familiarity.
5.1 Using information to build the relationship

To develop a relationship with customers, it is not sufficient to gather information
about them. This information should be put to use in a way that strengthens the
bond between company and customer.
Dealing with Companies may communicate with industrial customers

industrial customers regularly. They can use information obtained about the
customer's future intentions and buying preferences to
make selling propositions.
If they know what makes the customer buy a product,
and if the sales representatives have established a good
relationship with the customer's buyers, the company
may be able to use its knowledge and relationship to
improve the prospects of further sales.
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Dealing with repeat For example, many hotels record guests' details and
customers for preferences so that they do not have to be re-entered
consumer goods or each time a guest checks in.
services
Using knowledge If a retailer is able to establish a database of its
about the customer to customers, it may try to encourage customer loyalty and
improve the product repeat purchases by sending money off vouchers, either
or service through the post or by email.
If a retail store has a loyalty card system, and uses the
cards to build up a database of the customer's buying
history, its knowledge of customer buying habits will
enable it to offer money-off vouchers or other sale
promotions, for products that the customer buys
regularly. This will strengthen the relationship between
customer and store, and increase the probability that
the customers will continue to use the store for their
regular purchases.
Using knowledge of A company may use its knowledge of a customer to send
the customer to send personalised communications to customers, by email or
personalised sales letter, providing information about new products or
promotions containing a sales promotion offer.
However, a problem with personalised communications
is that individuals may receive many such
communications from companies they have never
bought from, or even heard of.
6 CRM and customer databases

Database systems enable companies to acquire, accumulate and store information
about a customer and their buying history.
Databases improve the process of obtaining information about a customer

because they can be used to:
• Accumulate more data about customers than could be held in manual
records
• Analyse the information to understand more about the customer
• Use the information to make personalised marketing communications with
the customer
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• Improve customer loyalty by showing that the company knows about the
customer personally
Using database technology, relationship marketing enables the sales person to
greet the customer by name, know what they purchased last time, avoid taking
their full delivery address, know what their credit status is and what they are
likely to want.
It enables new products to be developed that are precisely tailored to the
customer's needs and new procedures to be established that enhance satisfaction.
6.1 CRM software

The goal of relationship management is to increase customer satisfaction and to
minimise any problems. By engaging in 'smarter' relationships, a company can
learn customers' preferences and develop trust. Every contact point with the
customer can be seen as a chance to record information and learn preferences.
Complaints and errors must be recorded, not just fixed and forgotten. Contact with
customers, whether over the internet, through a call centre, or through personal
contact, is recorded and centralised.
Many companies achieve this goal by using customer relationship management
(CRM) software. Data, once collected and centralised, can be used to customise
service. In addition, the database can be analysed to detect patterns that can
suggest better ways to serve customers in general. A key aspect of this dialogue is
to learn and record preferences.
CASE STUDY
Using a CRM database and software
The Ritz-Carlton Hotel Company makes a point of observing the choices that
guests make, and recording them in a database. If a guest requests extra pillows,
then extra pillows will be provided every time that person visits a Ritz-Carlton
hotel anywhere in the world.
At upmarket retailers, personal shoppers will record customers' preferences in
sizes, styles, brands, colours and price ranges, and notify them when new
merchandise appears or help them choose accessories.
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6.2 CRM applications and CRM databases

The use of a database makes marketing with CRM much easier.
Electronic marketing A high volume of all communication takes place via

email. A basic application for any CRM system is to
send an email to any customer who has previously
purchased certain items, which should lead the
company to think that the customer may be interested
in related items. CRM systems allow this list to be
created in minutes and campaigns put into action
instantly.
Targeted mailing A simple example of this is to send this season's
catalogue to customers who purchased from the last
catalogue. To achieve this, the mailing lists need to be
linked to sales history.
Sales analysis For example, it should be easy to generate a list of
customers who have not purchased a product for over
a year. These could then be targeted by email, direct
mail or telephone by asking them if they want to
receive the next catalogue, or offering them a discount
to become a customer again.
Order building Regular customers placing orders online can be
reminded of their usual order requirements, any
related products on offer and further product
information. As well as increasing sales, this also helps
to build the customer relationship.
Front office solutions These involve using a customer database when dealing
directly with the customer.
Many call centres use CRM software to store all of their
customers' details. When a customer calls, the system
can be used to retrieve and display information
relevant to the customer. By serving the customer
quickly and efficiently, and also keeping all
information on a customer in one place, a company
aims to make cost savings, and also encourage new
customers.
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CHAPTER ROUNDUP
 The product life cycle is a concept that products have a life cycle, and that
products demonstrate different characteristics of profit and investment at each
stage in their life cycle. The life cycle concept is a model, not a prediction. (Not all
products pass through each stage of the life cycle.)
 The model can be used by a company to examine its portfolio of products and
services as a whole. It can also be used to develop different marketing strategies
and a different marketing mix, according to the stage in its life cycle that the
product has reached.
 Portfolio planning aims to create a balanced portfolio of products, with a spread of
different products at different stages in their life cycle. A balanced portfolio of
products helps a company to remain competitive in its markets.
 The original marketing mix had just four elements: product, price, place and
promotion – these were sufficient for planning the marketing of products. As
marketing of services developed, it was recognised that the original 4 Ps did not
cover all the issues that should be considered for marketing.
 So, for services, the marketing mix was extended to 7 Ps by adding three more Ps
to the original four: people, process and physical evidence. Some texts refer to the
7 Ps as the 'extended marketing mix'.
 Customer relationship marketing means using marketing resources to retain,
rather than simply attract, customers. It focuses on establishing loyalty among the
existing customers.
 Relationship marketing is the use of marketing resources to maintain and exploit a
firm's existing customers, rather than using marketing resources solely to attract
new customers.
 Firms can implement their relationship marketing strategy through effective
customer relationship management.
 A key requirement with CRM is to gather information about the customer, their
needs and how they make their buying decisions. This information can be used to
strengthen the relationship with customers, strengthen customer loyalty and
succeed with customer retention.
 Database systems enable companies to acquire, accumulate and store information
about a customer and their buying history.
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PROGRESS TEST
1 During which stage of a product's life cycle should a company expect a successful
product to change from being loss-making to profit-making?
A Introduction
B Growth
C Shakeout
D Maturity
2 A company presenting a major entertainment event, for which ticket prices are
high, decides to produce and sell expensive programmes for the event to sell to
customers. Management believe that the programmes will enhance the sense of
value that customers get from the event.
Which aspect of the 7 Ps of the service marketing mix is addressed by the sale of
the programmes?
3 A company builds a customer database of its customers (consumers) and sends

them regular emails containing information about its products and sale offers.
This form of marketing is known as ______________________ ________________________ .
4 In the BCG matrix, a product with low market growth but which has a large share
of the market is known as a:
A Cash cow
B Dog
C Question mark
D Star
5 Customer relationship management (CRM) is most likely to be effective when:

A Profitability is low
B The company has a large number of customers
C The pace of technological change is slow
D Customer loyalty is strong
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1 The answer is B. Growth. The product should start to become cash-positive at the
end of the growth stage and the beginning of the shakeout phase (or the beginning
of the maturity phase, if a shakeout phase is not recognised). The product should
become profitable during the growth phase, but cash flow remains negative due to
high marketing costs and continued capital investment.
2 Physical evidence
3 Targeted marketing
4 The answer is A. Cash cow
5 The answer is D. The main purpose of CRM is to retain existing customers. When
customer loyalty is strong, CRM can be most effective. When customer loyalty is
weak, and customers are prepared to buy from any supplier (for example, buy at
the lowest price), CRM will be less effective.
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KB5 | Part E: People and Value Creation
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CHAPTER
INTRODUCTION
Human resource management (HRM) is a support activity in the value chain.
As such, it is a value activity. Its ability to create value for an organisation
depends on the ability of HR managers to attract talented people as employees
into the organisation and develop their skills and motivation so that they
contribute substantially to achievement of the organisation's objectives.
The topic of people and value creation is an important part of the syllabus.
Various aspects of HRM are discussed in this chapter and the following
chapter.
Knowledge Component
5 People aspects of value creation
5.1 Role of human resource 5.1.1 Discuss the contribution of human resource management (HRM) to value
management in value creation in businesses
creation
5.2 HR planning 5.2.1 Explain the process of HR planning
5.3 Talent attraction and 5.3.1 Compare and contrast the main methods of recruitment (recruitment
retention process and talent attraction strategies), selection and socialisation
5.3.2 Compare and contrast methods available for employee motivation and
talent management
5.4 Performance 5.4.1 Compare and contrast the main methods of performance appraisals
management (including feedback and setting goals)
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KB5 | Chapter 6: People and Value Creation
LEARNING
1 Human resources management and value creation 5.1.1
2 Human resources planning 5.2.1
3 The recruitment and selection process 5.3.1
4 Recruitment 5.3.1
5 Selection 5.3.1
6 Socialisation 5.3.1
7 Employee motivation 5.3.2
8 Pay and reward systems as motivators 5.3.2
9 Performance management 5.4.1
1 Human resources management and value creation

The success of most organisations depends on the skills, experience and effort of
the people working for it. Although many operations are automated, people are
active in all parts of the value chain, and contribute to the creation of value.
People can be a unique resource (because of their knowledge and ability) and they
can help the organisation to create a core competence (such as highly talented
management). They can help the organisation to create other unique resources,
such as intellectual property.
The success of employees in creating value for an organisation depends largely on
the success of HR management in attracting, developing and motivating them.
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Ways in which people

create value
They are active in all parts of Value is created by all activities in the value chain,
the value chain and people perform these activities.
Having enough trained people to carry out
activities is a threshold resource requirement.
Skilled and motivated staff can be a unique
resource and can develop a core competence – in
areas such as management, marketing, product
design and innovation and so on.
Efficient employees produce Greater productivity increases output (and sales)
more or reduces costs.
Well-trained employees can Effective employees make fewer mistakes and
be more effective create less waste. They can add to value by
improving quality.
Well-motivated employees Employees who are motivated to achieve targets
try harder in their work are more likely to succeed in
achieving their targets than employees who lack
the same motivation.
Some employees have the potential to create more value than others. HR
managers should give particular attention to employees with the potential to
create the most value. These include:
• Senior management
• Employees with particular skills, such as R&D engineers and scientists,
professional accountants and IT specialists
2 Human resources planning

The people within organisations, especially large organisations, change
continually. People are recruited; others leave; others move to different jobs
within the organisation, possibly through promotion. An organisation may need
more employees with certain skills, but fewer employees with skills that are no
longer required as much. HR managers need to plan future requirements for
numbers and skills.
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HR planning is the process of estimating future requirements for employees,

analysed according to the work or jobs they will do and their level or position in
the organisation structure: these estimates should specify the expected numbers
of each type of employee.
(a) The forecast should cover a planning period of several years, although the
plan for the short term, possibly the next 12 months, will be more detailed
that the forecasts for the longer term due to greater uncertainty about the
long-term future.
(b) The HR plan should also estimate the available numbers of employees of
each type, allowing for losses through resignations and retirement.
(c) There will be a gap between forecast requirements and forecast staff
available, and the HR plan should include provisions for closing the gap.
The process is illustrated in the following diagram.
Forecast requirements for Forecast availability of

employees employees, allowing for
losses
Difference = gap
For most jobs there will
be a shortfall of available
employees.
Occasionally there may
be a surplus of some
types of employee.
Plan to fill gaps with

promotions and transfers.
Estimate numbers of
promotions and transfers.
These will create gaps in

other areas. Some gaps
will remain.
Plan recruitment
numbers to fill the gaps.
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When estimating future requirements for employees, the HR planners need to

consider expected changes in the business and its activities, and any other factors
that may change:
• The numbers of employees required
• Their skills
The HR plan should cover all employees and all jobs within the organisation;
however, it is probably particularly important to plan staff requirements for
employees with particular talents and the potential to contribute most to value.
QUESTION Planning
A company's HR managers are planning the requirements for qualified
accountants in the finance and accounting department in the next five years.
Discuss what factors will need to be considered when making this plan.
ANSWER
A forecast should be made of the number of trained accountants who will be
required in each year for the next five years. This forecast should allow for
expected changes in the business, such as plans for business growth and
expansion.
The forecasts should also estimate requirements for accountants in different areas
of the business, such as financial records and financial reporting, management
accounting, treasury activities, business planning, taxation and so on.
A forecast should be prepared of the expected numbers of accountants who will be
employed with experience in each area, allowing for resignations and retirements.
This forecast may also include estimates for student accountants employed by the
business who will be expected to become qualified.
The difference between numbers required and numbers available should be
identified as a recruitment gap, and plans should be made to fill gaps by
promotion, transfers and external recruitment. Plans for re-training staff
transferred between accounting and finance functions should also be drafted.
The HR plan should be reviewed regularly, at least annually, and updated.
2.1 Talent management

HR planning will include plans for talent management.
Talent management, a term that emerged in the late 1990s, refers to methods
used by an organisation to acquire, develop and keep talented individuals.
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HR plans for talent management should cover several inter-related areas of HR

management.
• Talent consists of those individuals who can make a difference to the
performance of an organisation, either through their immediate contribution
or, in the longer term, by demonstrating the highest levels of potential.
• Talent management is the systematic attraction, identification, development,
engagement, retention and deployment of those individuals who are of
particular value to an organisation, either in view of their 'high potential' for
the future or because they are fulfilling critically important roles in the
organisation.
These definitions emphasise that it is not sufficient simply to attract talented
individuals with high potential. It is equally important to develop, manage and
retain these individuals as part of a planned strategy, as well as adopting systems
to measure the return on this investment.
Aspect of talent
management
Sourcing talent This begins with the HR plan and includes activities
such as recruitment and selection.
Alignment and engagement This is the process of educating new recruits about
the objectives of the organisation, so that they
understand what is expected from them.
It also includes the process of accepting new
recruits into the organisation and making them feel
welcome and valued.
Learning and development Talented individuals should be given suitable
training and helped to develop in other ways.
Retain Talent should be retained, by means of rewards,
promotion or other forms of recognition.
Through effective talent management, the right people in the right positions will
provide the organisation with a competitive advantage, and this should benefit
both the individual and the company. Effective talent management should also
ensure that the right people are available at the right time, so that the business can
achieve its key objectives.
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2.2 The War for Talent

The War for Talent is the name of an article published by consultancy firm
McKinsey in 1997, about the increasing competition between organisations to
recruit and retain people with talent.
Research by McKinsey (in 1997) found that, on average, companies that were
more successful in attracting, developing and retaining talented managers earned
higher returns for shareholders (22 percentage points higher). They concluded
that the most important resource for companies over the next 20 years would be
talent.
McKinsey argued that companies are engaged in a continuing battle to attract and
retain multi-talented individuals. This can be expensive and it requires a
commitment at senior management level to pursue a strategy for talent
management.
A problem, however, is that it is difficult to define talent exactly. McKinsey defined
talent in only the following general terms: ‘A certain part of talent eludes
description: you simply know it when you see it … We can say, however, that
managerial talent is some combination of a sharp strategic mind, leadership
ability, emotional maturity, communications skills, the ability to attract and
inspire other talented people, entrepreneurial instincts, functional skills, and the
ability to deliver results’.
3 The recruitment and selection process

The employees of an organisation are valuable assets. Without them, an
organisation would not exist and could not operate. The efficiency and
effectiveness of an organisation depend on their skills and abilities.
HR management is responsible for the recruitment and selection process. The aim
should be to encourage suitable individuals to apply for job vacancies and to select
the best candidates from among those who apply.
Recruitment and selection is a two-stage process.

Recruitment starts when a job vacancy is identified. It is the process of obtaining
a supply of suitable possible candidates to fill the vacancy.
Selection is the process of appointing the most suitable candidate to a job
vacancy, by choosing the best individual from the candidates available.
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When job vacancies arise, an organisation should want to have a choice from
among individuals:
• Who seem able to do the job
• Who want to do the job
Recruitment
Vacancy or vacancies
identified
Identify skills and

personal qualities needed
for the job
Obtain applicants for the

job
Selection
Select candidates for

interview
Selection interviews
Prepare a short-list; offer

the job to the person at the
top of the list
Typically, the recruitment process is managed internally by the HR department,

and the selection process is carried out jointly by HR managers and operational
managers (who may have a better understanding of the detailed job
requirements).
In some cases, an organisation might use the services of an external recruitment
agency (or firm of 'head hunters') to identify potential candidates for job
vacancies. However, although the recruitment process may be delegated to an
external agency, responsibility for recruitment remains with the HR department.
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4 Recruitment
Organisations need to attract and retain talented individuals who will,
immediately or at some time in the future, contribute significantly to creating
competitive advantage and adding value for the organisation. The first stage in
this process is to recruit suitable individuals.
4.1 Planning the recruitment process

Recruitment should be properly planned. The main aspects of recruitment are as
follows:
Job analysis
Job description Person specification
Advertise the
vacancy/vacancies
Provide an application
form for applicants to
use (in paper form
and/or online)
4.2 Job analysis, job description and person specification

Job analysis involves looking at a job and identifying what it consists of (or what it
will consist of). Its purpose is to recognise what tasks the jobholder will be
expected to do, and what tasks will take up most of the jobholder's time. An
analysis of the job will also show what particular skills are required to do the job.
The purpose of a job analysis is to:
• Produce a detailed specification of the job (a job description)
• Produce a specification of the qualities needed from the individual who will
do the job (a person specification)
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4.3 Advertising the vacancy

Jobs must be brought to the attention of individuals who might want to apply for
them.
A job vacancy might be 'advertised':
• Within the organisation (internally) to existing employees
• Externally, to people outside the organisation
• Both internally and externally
Internal promotion advantages External recruitment advantages

Internal promotion can improve the The organisation may not have
morale and motivation of the employees with the skills required for
workforce. the job.
Internal recruitment provides a career External recruitment may introduce
development opportunity to existing 'fresh thinking' and new ideas into the
employees. Career development helps organisation.
with talent retention.
Existing employees have a There may not be an existing employee
performance record. The employer who is the right person for the job.
should already know about their Appointments to senior management
strengths and weaknesses. Making positions, for example, are often made by
internal appointments may therefore external recruitment.
be less risky than external Similarly, appointments of talented
appointments. individuals for career progression are
often external – from business schools
and universities.
The employees may already know the There may be more vacancies than there
people they will be working with, if are candidates to fill them by internal
they are successful in getting the job. promotion.
Internal promotion is an inexpensive The vacancies may be for junior jobs that
method of recruitment – avoiding the existing employees do not want to apply
costs of advertising or recruitment for.
consultants' fees. Internal recruitment
may also be much quicker.
4.4 Methods of advertising vacancies

The methods used to advertise job vacancies should depend on:
• Whether the vacancies are advertised internally or externally
• The nature of the job or jobs
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The aim should be to:

• Select an effective method of advertising, so that there will be a suitable
number of applicants for the job
• Avoid excessive spending: choose a cost-effective method of advertising
Several methods of advertising the same job vacancy (or vacancies) may be used.
Method of advertising vacancies

External recruitment
Recruitment External recruitment agencies may specialise in finding
agencies applicants for particular types of job, such as jobs in
book-keeping and accountancy, secretarial work and
information technology (IT) workers.
Some recruitment agencies ('head hunters') specialise in
finding suitable external applicants for senior
management positions.
Media advertising An organisation (or a recruitment agency) may advertise
job vacancies in the media, particularly newspapers or
journals.
Advertising in national newspapers is much more
expensive than advertising in local newspapers, but
should attract applicants from a wider geographical area.
Journals may be used to attract applicants with
particular skills, such as qualified or part-qualified
accountants.
The internet Many organisations advertise job vacancies – both
internally and externally – on their own website.
Advertising on the organisation's own website is
inexpensive. Recruitment agencies also advertise job
vacancies on the internet, as another way of attracting
individuals to contact them and use their services to find
a job.
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Method of advertising vacancies

Internal recruitment
Performance Performance appraisal systems may be used to identify
appraisal candidates for promotion, and they may be invited to
apply for a job vacancy.
In-house magazine If an organisation publishes an in-house journal, it may
use this to advertise job vacancies.
Internet/intranet An organisation may advertise vacancies on its website
or on an in-house bulletin board.
4.5 Job application form

Applicants for a management job are often asked to fill in a job application form,
which may be either a paper document or an electronic document downloaded
from the employer's website. This is usually a standard application form, used by
an organisation for all its job vacancies.
Each applicant for the job fills in an application form, providing some basic
information about himself or herself. In many cases, the applicant for a job is also
asked to write a covering letter to accompany the job application form, stating
briefly why they are applying for the job.
An application form usually asks questions about the following.
• Personal details about the applicant – name, address, contact telephone
number or email address and age.
• Details of education and educational qualifications, or other formal
qualifications (diplomas, certificates and so on).
• Details of the individual's current job (possibly including details of the
applicant's current wage or salary) and previous work experience.
• The applicant's social and leisure interests and activities.
An application form also includes a question asking the applicant to explain why
they want the job, or what they are hoping to achieve in their future career. The
form should leave enough space for the applicant to provide a lengthy answer to
this type of question.
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4.5.1 The purpose of a job application form

A job application form serves several useful purposes.
• It provides basic details about the applicant for a job, so that the
organisation is able to contact them.
• It gives the applicant for a job an opportunity to 'sell' themselves to the
organisation. The way in which the application form is filled in could make
the difference between getting a selection interview and not being invited to
an interview.
• When a job is advertised externally, there are often many more applicants
than the organisation has time or resources to interview. The job application
forms from all the applicants are compared, and the numbers invited for an
interview can be restricted to a manageable number.
Instead of using application forms as a method of vetting applicants and reducing
the numbers invited to interview, an organisation may ask applicants to do a test
online. Only those candidates who pass the test are invited to interview.
4.6 References
On a job application form, applicants for a job are often asked to provide the name
and address of one or two 'referees'. The preferred referees are typically:
(a) A former employer, senior manager or supervisor that the applicant has
worked for in the past, or the applicant's current employer or boss.
(b) If the applicant has not had a job before, a senior teacher or course tutor who
has taught the individual.
(c) An eminent person who knows the applicant socially, such as a religious
leader, a solicitor, a doctor or an accountant.
The application form might state that the organisation reserves the right to
contact the referee to obtain a reference about the individual, and an opinion
about the suitability of the individual (the applicant for the job) for employment.
The organisation should normally ask for these references only if it intends to
offer the job to the individual. Alternatively, an individual may be offered the job
'subject to satisfactory references'.
The main problem with references is that the referee may not give an honest
opinion about the individual.
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4.7 Reasons for ineffective recruitment

The recruitment process might be ineffective, with the result that not enough
people apply for job vacancies.
The reasons for a failure to attract a sufficient number of suitable applicants for a
job may be any of the following.
(a) The requirements of the job are not properly considered before the job is
advertised, so that the vacancy is advertised to individuals with unsuitable
skills. (In other words, there is a failure to do a proper job analysis.)
(b) There is a failure to agree the minimum acceptable requirements for the
job, only the ideal requirements. Potential applicants may be deterred
because of the high level of skills and experience that the employer says it
wants from the successful applicant for the job.
(c) The job itself is not attractive enough, or the pay is too low, so that not many
people apply for the vacancy.
(d) The job vacancies are advertised in an unsuitable way, so that the vacancy
does not come to the attention of people who might apply if they knew about
it.
4.8 Evaluating the recruitment process

The HR department (or senior management) should monitor the success or failure
of recruitment practices.
Methods of monitoring the effectiveness of recruitment are to:
• Monitor the number of applicants for each job vacancy
• Monitor the number of applicants for each job vacancy who are suitable for
interview (in other words, monitor the quality of applications)
• Monitor the costs of employee recruitment
• Where appropriate, monitor the compliance of the recruitment process with
the laws or the organisation's policies on equal opportunities employment.
By monitoring these factors over a period of time, management should be able to
assess whether recruitment is becoming less effective or more expensive, and
decide whether appropriate corrective measures should be taken.
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5 Selection
Selection is the process of choosing the preferred individual or individuals for a
job from among those who apply. Typically, selection follows an interview
process; however the selection and interview process may be brief for filling
junior roles in the organisation.
The selection process is most important for selecting talented individuals to join
the organisation.
5.1 Selection methods

The most common methods of selection are:
• Application forms or online tests. These are used as a first screening process,
to reduce the number of applicants for interview to a manageable number
• Interviews
• Tests
• Group section methods
5.2 Interviews
Applicants who get through the first screening process may be invited to a
selection interview. A selection interview is a face-to-face interview at which the
applicant is asked a number of questions, and is assessed by the quality of their
answers.
Face-to-face interviews can take different forms:
(a) The applicants may be interviewed by one person, such as the manager or
supervisor with authority over the work group where the vacancy exists.
(b) The applicants may be interviewed by an 'interview panel' of two or more
people. Applicants are often intimidated by large interview panels, and it is
good practice to keep an interview panel fairly small.
(c) The applicants might go through a succession of face-to-face interviews, each
with a different person.
There are different ways of conducting selection interviews.
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Formal and informal Selection interviews may be held in a formal setting.

interviews However, small company employers may prefer to
hold more informal interviews between the 'boss'
and the applicant.
Stress interviews This is a type of face-to-face selection interview,
where the interviewers deliberately put the
applicant under stress, for example by asking
questions in an aggressive manner and criticising the
applicant's answers.
Stress interviews may be used to interview
applicants for a senior management position, in the
belief that it will show how well each applicant
stands up to stress, aggression and criticism.
Problem-solving The applicant for the job is given a hypothetical
interviews problem by the interviewer and asked to solve it. For
example, the interviewer might ask a question: 'What
would you do in the following situation … ?'.
A difficulty with this type of interview is that it may
be difficult to assess and compare the answers of the
applicants, and decide which applicant has given the
best answer.
5.3 Tests
An employer may require applicants for a job to take a test or series of tests as
part of the selection process, in addition to an interview.
The purpose of tests is to learn something about the applicants for the job. The
type of test that is used depends on the type of information the employer is
looking for.
There are four main types of selection test.
Intelligence tests These are tests (such as a general IQ test) to establish the
general level of intelligence of the job applicants. They may
also test the problem-solving skills of the job applicants,
and their speed of thought.
Aptitude tests These are tests designed to establish a particular aptitude
or ability of the job applicants. For example, an aptitude test
might test the mathematical ability, or manual dexterity, or
artistic ability of the candidates.
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Competence tests A test of competence is a test to establish whether the

candidate has reached a certain level of competence in a
specific area. It tests what the candidates have learned in
the past. For example, an applicant for a job in word
processing might be given a competence test to establish
their level of skill and ability in word processing.
Personality tests There are tests designed to analyse personality and
character. A test is commonly in the form of a series of
multiple choice questions. Candidates are asked in each
question about their likes and dislikes, what they would do
in a particular situation, their preferences and attitudes,
and so on. The purpose of a personality test is to identify
candidates who have a suitable personality for the job.
5.4 Group selection methods

Group selection is an alternative method of selection that can be used either:
• Instead of individual interviews and testing, or
• In addition to individual interviews and testing.
In a group selection process, a number of people from the organisation observe a
number of applicants for a job as they go through a series of specially-designed
activities. The activities may include role play, where each applicant is required to
perform a particular role in a work-related scenario.
For example, a group of candidates may be asked to discuss a number of items on
the agenda of a senior management meeting, with individuals given the roles of
chairman, chief executive officer, finance manager, human relations manager and
sales and marketing manager.
The candidates are observed, and compared with each other. The tests provide
useful comparisons of ability and character. Observing candidates in a role play
situation provides insights into various skills of the different individuals, such as:
• Verbal skills
• Leadership behaviour
• Ability to mediate successfully in disputes
Group selection methods are time-consuming, and so expensive. They should only
be used for particular types of recruitment, such as the selection of candidates as
management trainees for a large company.
Because of the time needed to arrange and conduct group assessment methods,
they are not widely used.
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5.5 Reasons for ineffective selection

The selection process may be ineffective, with the result that unsuitable
individuals are selected, or individuals do not stay in the job for long after their
appointment.
The reasons for poor selection could be any of the following.
(a) The application form for the vacancy is badly-designed, and applicants do
not provide enough relevant information about themselves. A candidate may
therefore be offered the job when there is insufficient relevant information
about them.
(b) There are weaknesses in the interview process.
(c) The effectiveness of the selection process is not monitored and reviewed
regularly, so that the need to improve the selection system is not recognised.
As a result, the best applicants are not selected, and in some cases unsuitable
candidates are offered the job.
5.6 Weaknesses in the interview process

Interviews may be criticised because they fail to provide accurate predictions of
how a person will perform in the job, partly because of the nature of interviews,
and partly because of errors of judgement by interviewers.
P AND MANAGING INDIVIDUALS AND TEAMS
Weakness
Scope An interview is too brief to 'get to know' candidates in the
kind of depth required to make an accurate prediction of
work performance.
Artificial situation An interview is an artificial situation. Candidates may be
on their best behaviour and not show their true
personality. Alternatively, they may be so nervous that
they do not do themselves justice.
The halo effect There may be a tendency for the interviewers to make an
initial general judgement about a person based on a single
obvious attribute, such as being neatly dressed or well-
spoken. This single attribute will affect their responses
that the individual gives to questions.
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Weakness
Contagious bias The interviewer may change the behaviour of the
applicant by unintended suggestion. The applicant might
be led by the wording of questions, or non-verbal cues
from the interviewer, to change what they are doing or
saying in response.
Incorrect Qualitative factors such as motivation, honesty or integrity
assessment are very difficult to define and assess objectively in an
interview.
Inexperienced If interviewers lack experience with selection interviews,
interviewers they may fail to reach a good decision about which
applicant to select for the job.
5.7 Evaluating the selection process

The HR department (or senior management) should monitor the success or failure
of selection practices. The effectiveness of the selection process may only become
apparent over time.
(a) Staff turnover should be monitored. How long do individuals stay in their job
after they have been appointed? What proportion of individuals who are
recruited leave within a given period of time, say within six months or one
year?
(b) Staff development should also be monitored. What proportion of individuals
who are recruited go on to a better job (or a different job) within the
organisation within a given period of time?
(c) How often does the selection process result in a failure to appoint anyone?
(This may indicate poor recruitment methods as well as poor selection
procedures.)
6 Socialisation
Socialisation is a process of getting a new employee to become more familiar
with the organisation, and to 'feel at home'.
This can be important, because if a new employee is uncomfortable and unsettled

in his new job, they:
• Will not be as productive or as committed to the work as they should be
• May decide to resign
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To reduce the anxiety that a new employee may have, measures should be taken
to integrate them into the organisation.
Stages in a socialisation process
The process of socialisation and getting new employees to fit into the organisation
happens in three stages.
Stage of socialisation
Before joining the Employers use the selection process, especially
organisation selection interviews, to inform the individual about the
organisation and what will be expected from them.
Interviews are also intended to ensure that the
organisation employs the 'right type' of person, who
seems likely to fit in well.
On first joining On first joining the organisation, the new employee will
have ideas about what to expect. Reality may match
these expectations, or the job may not be what the
individual was expecting.
When the employee's expectations differ from reality, a
socialisation process is needed to make the individual
familiar with the organisation's standards, methods and
culture.
If the new employee remains unhappy, they will resign.
Familiarisation After the employee has joined the organisation, the
socialisation process should begin. The process ends
only when the new employee:
• Is comfortable in the organisation and in their work
team
• Has internalised the 'norms' of the organisation and
their fellow workers
• Feels accepted and valued
• Understands the job, and also the rules, procedures
and informal practices of the organisation
• Knows what is expected of them in the job
As the new employee settles into the company, their productivity will improve.
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Responsibilities for socialisation
HR management HR management has some responsibility for orientation.

department The department must provide the new employee with
information about where to report for work, and when.
It also deals with administrative tasks, such as obtaining
details of the employee's bank account, for payroll
purposes.
Supervisor or The individual who will be the first supervisor or manager
manager of the new employee has an important role to play in the
socialisation process, and may be the person who takes
the new employee on a 'tour' of the workplace.
The supervisor may also be an important source of
information about the culture, rules, procedures and
policies of the organisation.
Fellow workers Like the supervisor or manager, fellow workers are
important in the socialisation process.
Becoming a member of the team is usually an essential
element in the socialisation process.
Organisation Through fellow workers, supervisors and bosses, a new
culture employee learns the culture of an organisation.
Organisational culture itself can express the 'dos' and
'don'ts' of any organisation. Every organisation has its
own unique culture, and the 'dos' and 'don'ts' of
acceptable behaviour. Culture includes rules about the
way that things are done – often unwritten. It may also
include a special language for communication among
members (companies often have a unique vocabulary);
shared understanding of critical aspects of the work that is
to be done; standards for social etiquette and behaviour;
ways of talking to each other or communicating in other
ways; and standards of dress.
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7 Employee motivation
The ability of employees to add value for an organisation depends on their
performance in their job. Motivation is concerned with the view that employees
can be motivated to perform better.
However, there are differing views about what motivates individuals at work and
how management may improve performance of their staff by trying to provide
motivation.
Motivation is 'a decision-making process through which the individual chooses

desired outcomes and sets in motion the behaviour appropriate to acquiring them'
(Huczynski and Buchanan).
In business, the key issues with employee motivation are:

• What motivates an individual to do their job and perform in the way that
they do?
• What would motivate an individual to do their job better?
7.1 Needs and goals

People have certain personal needs and goals, and they expect their needs to be
satisfied if they can achieve those goals. They should be motivated to try to
achieve their goals, although this will depend on:
• The strength of their needs
• Their expectation that they can achieve their goals if they make a sufficient
effort
The basic assumptions about motivation in a work environment are that:
(a) People behave in such a way as to satisfy their needs and fulfil their goals.
(b) An organisation is in a position to offer some of the satisfactions that
people seek: such as human relationships and a sense of belonging, challenge
and achievement, progress on the way to self-actualisation, a sense of
security and so on.
(c) The organisation can therefore influence people to behave in ways it desires
(to secure work performance) by offering them the means to satisfy their
needs and fulfil their goals in return for that behaviour.
(d) If people's needs are being met, and goals being fulfilled, at work, they are
more likely to have a positive attitude to their work and to the organisation,
and to experience job satisfaction.
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Motivation is a useful concept, despite the fact that the impact of motivation, job
satisfaction and morale on performance are difficult to measure.
(a) The impact of motivation and job satisfaction on performance is difficult to
measure accurately.
(b) Motivation is about getting extra levels of commitment and performance
from employees, over and above mere compliance with rules and
procedures. If individuals can be motivated, by one means or another, they
might work more efficiently (and productivity will rise) or they will produce
a better quality of work.
(c) The case for job satisfaction as a factor in improved performance has not
been proved convincingly.
7.2 Theories of motivation

Many theories have been suggested to explain motivation at work, and why and
how people can be motivated to perform better.
Theories of
motivation
Content theories These theories ask the question: 'What are the things
that motivate people?'
Content theories suggest that the best way to motivate an
employee is to find out what their needs are and offer
them rewards that will satisfy those needs.
They assume that individuals have a set of needs or
desired outcomes.
Maslow's hierarchy of needs and Herzberg's two-factor
theory are examples of content theory.
Process theories These theories ask the question: 'How can people be
motivated?'
They explore the process through which outcomes
become desirable and are individuals are motivated to
pursue them.
7.3 Maslow's hierarchy of needs

Abraham Maslow identified a hierarchy of needs that an individual will be
motivated to satisfy, progressing towards higher order satisfactions, such as self-
actualisation.
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Maslow described five innate human needs, and put forward certain propositions
about the motivating power of each need.
Self- – Fulfilment of personal potential

actualisation
– For independence, recognition, status,
Esteem needs
respect from others
Love/social needs – For relationships, affection, belonging
– For security, order, predictability,

Safety needs
freedom from threat
Physiological needs – Food, shelter
Notes
1 An individual's needs can be arranged in a 'hierarchy of relative potency'
(as shown). Starting at the bottom of the hierarchy, each level of need is
dominant until satisfied; only then does the next level of need become a
motivating factor. A need that has been satisfied no longer motivates an
individual's behaviour.
2 The need for self-actualisation is rarely satisfied.
Maslow's hierarchy is simple and intuitively attractive: you are unlikely to worry
about respect if you are starving! However, it is only a theory, and has been shown
to have several major limitations.
(a) An individual's behaviour may be in response to several needs, and the same
need may cause different behaviour in different individuals, so it is difficult
to use the model to explain or predict an individual's behaviour in response
to rewards.
(b) The hierarchy ignores the concept of deferred gratification (by which people
are prepared to ignore current suffering for the promise of future benefits)
and altruistic behaviour (by which people sacrifice their own needs for
others).
(c) There is no empirical proof that the theory is correct.
(d) The hierarchy may reflect US cultural values, which may not transfer to
other nations and cultures.
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7.4 Herzberg's two-factor theory

Herzberg identified two basic need systems:
• The need to avoid unpleasantness
• The need for personal growth and fulfilment
He suggested factors that could be offered by organisations to satisfy both types of
need: hygiene and motivator factors respectively.
Need Motivating factors

To avoid Hygiene factors These relate to conditions at work, such
unpleasantness as working conditions, job security,
interpersonal relations at work,
supervision, company policies and pay.
Hygiene factors cause dissatisfaction in
the individual if the individual's needs
are not met. They do not motivate the
individual to perform better.
For personal Motivator factors These satisfy the need for fulfilment at
growth and work, and include factors such as
fulfilment challenging work, career advancement
(or the prospects of it), a sense of
achievement, recognition from bosses
and colleagues, responsibility, and pay.
Pay can be both a hygiene factor and a motivator factor. It causes dissatisfaction if
it seems too low, but incentive for pay rewards, such as bonuses, may motivate the
individual to perform better.
A lack of motivator factors for an individual will encourage employees to
concentrate on the hygiene factors.
Herzberg suggested that individuals can be motivated in their job if there are
motivator factors. A challenging job, responsibility and a sense of achievement can
all be created through improving job design – and job enrichment.
7.5 Process theories of motivation

Process theories of motivation help managers to understand the dynamics of
employees' decisions about what rewards are worth going for. One such theory is
Vroom's expectancy theory.
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Expectancy theory states that the strength of an individual's motivation to do

something will depend on the extent to which they expect the results of their
efforts to contribute to their personal needs or goals.
Victor Vroom stated a formula by which human motivation could be assessed and
measured. He suggested that the strength of an individual's motivation is the
product of two factors.
(1) The strength of their preference for a certain outcome. Vroom called this
valence: it can be represented as a positive or negative number, or zero –
since outcomes may be desired, avoided or regarded with indifference.
(2) Their expectation that the outcome will in fact result from a certain
behaviour. Vroom called this 'subjective probability' or expectancy. As a
probability, it may be represented by any number between 0 (no chance)
and 1 (certainty).
In its simplest form, the expectancy equation may be stated as:
FORMULA TO LEARN
F=V×E
where:
F= the force or strength of the individual's motivation to behave in a particular
way
V = valence: the strength of the individual preference for a given outcome or
reward and
E= expectancy: the individual's perception that the behaviour will result in the
outcome/reward
In this equation, the lower the values of valence or expectancy, the less the
motivation.
• An employee may have a high expectation that increased productivity will
result in promotion (because of managerial promises, say), but if they are
indifferent or negative towards the idea of promotion (because they dislike
responsibility), they will not be motivated to increase their productivity.
• Likewise, if promotion is very important to them – but they do not believe
higher productivity will get them promoted (because they have been passed
over before, perhaps), their motivation will be low.
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7.6 Equity theory and motivation

Equity theory was developed in the 1960s by John Adams. Adams argued that
employees seek to maintain equity (fairness) in the relationship between:
• The inputs they bring to their job and the outputs they receive from doing
the job
• The perceived inputs that work colleagues put into their job and the outputs
that they receive
He argued that people at work value fair treatment, and they are:
• Motivated to maintain fairness
• De-motivated if they believe that there is a lack of fairness
Adams suggested that equity (fairness) is perceived to exist when an employee
believes that:
Individual's outcomes Outcome of work colleagues
Ratio of  Ratio of
Individual's inputs Inputs of work colleagues
Inputs typically include:

• Time put into the job
• Effort put into the job
• Loyalty
• Hard work
• Ability and skill
• Enthusiasm
• Drive and ambition
Outputs typically include:
• Monetary compensation/remuneration
• Other non-monetary benefits
• Flexible working arrangements
• Recognition
• Responsibility
• Praise and thanks
Employees who perceive inequity or lack of fairness will feel distressed: the
greater the perceived inequity, the greater their sense of distress. They will react
in one of the following ways.
(a) They may distort their perception so that they begin to accept that fairness
does exist. They do this by adjusting in their mind their views of the value of
inputs or outputs. This response to lack of fairness is called 'cognitive
distortion').
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(b) They may do something to restore equality, for example by demanding more
pay or putting less effort into the work.
(c) They may leave the organisation.
Implications of equity theory for motivation and management include the
following:
(a) Employees judge equity by the total of perceived inputs and outputs. Not all
of these are monetary. For example, an employee may consider that it is fair
to receive less pay for more flexible working conditions.
(b) Employees may have different perceptions of the values of different inputs
and outputs.
(c) Employees will accept that senior management should be paid more, but
they are de-motivated when they think that senior managers are being paid
too much.
(d) An employee who considers themself superior to their colleagues, in terms
of skills and ability, may seek to restore equity by reducing their efforts at
work.
7.7 Job design as a motivator

The job itself can be used as a motivator, or it can be a cause of dissatisfaction. Job
design refers to how tasks are organised to create 'jobs' for individuals. Three
approaches to motivating individuals by changing their jobs are as follows.
Job enrichment Making the job more challenging and more fulfilling.
Herzberg suggested that this would provide
motivation for individuals.
Job enlargement Adding more responsibilities to the job. However,
adding more tasks that do not provide a challenge will
not be sufficient to motivate individuals to perform
better.
Job rotation Moving individuals from one job to another within the
organisation or department. Job rotation can reduce
the monotony of performing non-challenging work,
but will not provide motivation.
7.8 Participation in decision making as a motivator

Participation in decision making means engaging subordinates in the decision
making processes.
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If genuine, participation can make people more committed to the task.

People generally want more interesting work and to have a say in decision-
making. These expectations are a basic part of the movement towards greater
participation at work.
Participation can involve employees and make them feel committed to their task,
given the following conditions (5 Cs).
Certainty Participation should be genuine. Employees should not be

encouraged to make suggestions, only for these to be ignored.
Consistency Efforts to establish participation should be made consistently
over a long period.
Clarity The purpose of participation is made quite clear. What are
employees being asked to do – advise or make the actual
decision?
Capacity Employees should have the ability and should be provided with
information to participate effectively.
Commitment The manager in charge of the decision-making group should
believe in and genuinely support participation.
8 Pay and reward systems as motivators

There is a widely-held view in most organisations that pay is an important
motivator. If employees consider their pay to be insufficient, they will be
dissatisfied. On the other hand, they may be motivated to achieve or exceed
performance targets by means of a pay reward system.
8.1 How is pay determined?

A number of ways are used to decide the pay for an individual or a job.
Job evaluation This is a systematic process for establishing the relative

worth of jobs within an organisation. Its main purpose is to
provide a rational basis for the design and maintenance of a
fair pay structure. Rates of pay for the job are decided
according to how the job is evaluated.
The pay structure is based on job content, and not on the
personal merit of the jobholder.
Fairness Pay must be perceived and felt to match the level of work,
and the capacity of the individual to do it.
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Negotiated pay Pay scales, differentials and minimum rates may be

scales negotiated at plant, local or national level between
employer(s) and representatives of employees.
Pay scales may include annual increments, to reward
individuals for their additional experience.
Market rates For some jobs there may be a 'market rate' that most
employers pay.
Individual Individuals may be paid rewards for good performance, in
performance in addition to their basic pay.
the job
8.2 Remuneration structure

The pay structure for employees will depend on their position in the organisation.
A remuneration structure may contain the following elements.
Element of
remuneration
Basic pay or salary
Overtime payments Paid to reward employees for working hours in addition
to their normal hours of work. May be necessary to
persuade employees to work the extra hours.
Pension An employer may have a pension scheme for some of its
employees. The pension will become payable when the
employee (or former employee) reaches 'retirement age'.
Benefits in kind An example is the use of a company car. Senior managers
may expect certain benefits in kind in recognition of their
status in the organisation.
Annual bonuses Annual bonuses are usually paid in cash.
linked to the They are sometimes paid in the form of a grant of new
achievement of company shares.
performance
targets
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Element of
remuneration
Longer term For senior managers and perhaps also key employees, a
incentives company may give longer-term incentives in the form of
the grant of new company shares or share options. Share
options give the holder the right on or after a future date
to buy new shares in the company at a fixed exercise price.
Long-term incentives cannot usually be exercised for at
least three years after they have been awarded. They are
intended to motivate the employee to contribute to adding
value so that the share price will rise over the long term
(at least three years). The employee as well as other
shareholders will benefit from the rise in the share price.
Annual bonuses and long-term incentives are both forms of performance-related

pay and are intended to provide incentives for high levels of performance, among
senior managers and other key employees.
8.3 Performance related pay (PRP)

Performance related pay (PRP) is an incentive system, awarding extra pay for
extra output or performance.
For example, annual bonuses may be paid to certain individuals if they achieve or
exceed one or more performance targets each year.
There are at least three key elements in a system of annual bonus payments.
What aspects of At what level should What should be the

performance should be the performance size of the bonus?
rewarded? targets be set?
There is a view that If the performance The potential bonus
bonuses should be paid targets are set too high, should be sufficient to
only for achieving individuals may not try motivate the individual.
financial targets, for to achieve them, It needs to be large
profit, revenue, return on because they know the enough so that the
investment or cost chances of earning a individual very much
control. bonus are small. wants to earn it.
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What aspects of At what level should What should be the

performance should be the performance size of the bonus?
rewarded? targets be set?
A different view is that If the performance However, it is also
bonuses should be based targets are set too low, widely recognised that
on a number of different individuals will not there should be a limit
measures of performance, have to make much or cap on annual
many of them non- effort to earn the bonus. bonuses.
financial in nature.
It is argued that achieving When performance It may be difficult to
non-financial targets of targets are set too low, decide what the bonus
performance will lead to the organisation is should be as a reward
improved financial effectively paying for achieving a target
performance in the employees extra money for performance,
future. In contrast, without getting extra particularly a non-
rewarding individuals for value. financial aspect of
financial performance is performance.
to give a reward for
historical performance,
and this has no bearing
on the future.
A reward system based
on both financial and
non-financial targets of
performance may be
called a balanced
scorecard (BSC) system.
It is also argued that
when bonuses are offered
for certain aspects of
performance, individuals
will ignore all those
aspects of performance
that are not rewarded.
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QUESTION PRP
Discuss why PRP might fail to motivate employees.
ANSWER
(a) The rewards from PRP are often too small to motivate effectively. Anyhow,
some employees may not expect to receive the rewards and hence will not
put in the extra effort.
(b) It is often unfair, especially in jobs where success is determined by
uncontrollable factors.
(c) If people are rewarded individually, they may be less willing to work as a
team.
(d) People may concentrate on short-term performance indicators rather than
on longer-term goals such as innovation or quality. In other words, people
put all their energy into hitting the target rather than doing their job better.
(e) PRP schemes have to be well designed to ensure performance is measured
properly, people consider them to be fair and there is consent to the scheme.
8.4 Rewarding the team

Various forms of group rewards can be used as an incentive to co-operative
performance and mutual accountability.
8.4.1 Group bonus schemes

Group incentive schemes typically offer a bonus for a team that achieves or
exceeds specified targets.
• Offering bonuses to a whole team may be appropriate for tasks where

individual contributions cannot be isolated, and team members have little
control over their individual output because tasks depend on each other.
• Group bonuses may enhance team-spirit and co-operation as well as provide
performance incentives.
• However, there needs to be a fair way of sharing a group bonus between the
individual members of the group. The bonus may be paid as a percentage of
basic salary.
For group bonus schemes to be successful, members of the group need to accept
that it is a fair method of rewarding them as individuals. Group members may
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resent similar bonuses being paid to team members who have not done a 'fair
share' of the work in the team.
8.4.2 Profit-sharing schemes

Profit-sharing schemes offer employees (or selected groups) bonuses that are
directly related to profits or value added.
For example, a company may decide that management above a certain level
should share a total bonus of, say, 20% of operating profit (before bonus), or 20%
of profit in excess of a target amount. Each employee entitled to a bonus is then
paid a share of the total bonus, probably a percentage of their basic salary.
Profit-sharing schemes have the advantage over individual incentive schemes in
that they are simpler to administer. However, they may have much less effect in
motivating employees.
9 Performance management
Performance management aims to get better results for the organisation via the
measurement and evaluation of individual performance.
Performance appraisal is part of the system of performance management,
including goal setting, performance monitoring, feedback and improvement
planning.
Performance management is a means of getting better results by managing

performance within an agreed framework of goals, standards and competence
requirements.
It is a process to establish a shared understanding about what is to be achieved,

and an approach to managing and developing people in order to achieve it.
9.1 Key features of performance management

This definition highlights key features of performance management.
Feature of performance management

Agreed framework of goals, standards The employee agrees with their
and competence requirements manager about a standard of
performance, goals and the skills
needed.
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Feature of performance management

Performance management is a process Managing people's performance is an
ongoing activity, involving continual
monitoring and assessment,
discussion and adjustment.
Shared understanding The goals of the individual, unit and
organisation as a whole need to be
integrated: everyone needs to be 'on
the same page' of the business plan.
An approach to managing and Managing performance is not just
developing people about plans, systems or resources: it
is an interpersonal process of
influencing, empowering, giving
feedback and problem-solving.
Achievement The aim of performance management
is to enable people to realise their
potential and maximise their
contribution to the organisation's
success.
9.2 The process of performance management

A systematic approach to performance management may include the following
steps.
Step
1 Identify Identify the requirements and competences
requirements and required to perform the job or task.
competences
2 Performance Draw up a performance agreement, defining the
agreement expectations of the individual or team, covering
standards of performance required, performance
indicators for measuring performance and the
skills and competences people need for the work.
3 Performance and Draw up a performance and development plan
development plan with the individual. This specifies the actions
needed to improve performance, normally
covering development in the current job.
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Step
They are discussed with the jobholder. This
provides the basis for assessing performance and
agreeing on measures to improve performance up
to the required level.
Typically, it will include details of what the
individual and manager agree is needed to
enhance performance, and details of development
and training initiatives to be taken.
4 Manage performance Managers should review the individual's
continually performance regularly, but informally, throughout
throughout the year the year. Any problems should be discussed, and a
way of resolving them agreed.
5 Annual formal At a defined time each year, actual performance is
performance assessed against targets or expectations. Having
appraisal discussed achievements in the year just ended, the
interview should go on to a discussion of the
future.
This appraisal interview should ideally not be
linked to performance-related pay. If pay is
involved in the discussions at the interview, the
purpose of the appraisal system will be lost.
In practice, however, organisations may use the
annual performance appraisal as an opportunity to
inform the individual about their bonus for the
year just ended and salary rise (if any) for the next
year.
9.3 Main components of performance appraisal

Appraisal can be used to reward but its main purpose should be to identify the
individual's potential for development. It is part of performance management
and can be used to establish areas for improvement, and training and
development needs.
The general purpose of any appraisal system is to improve the efficiency of the
organisation by ensuring that the individuals within it are performing to the best
of their ability and developing their potential for improvement. This has three
main components.
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• Reward review. Measuring the extent to which an employee is deserving of

performance-related bonuses or pay increases.
• Performance review, for planning and following-up training and
development programmes, identifying training needs, validating training
methods and so on.
• Potential review, as an aid to planning career development and succession,
by attempting to predict the level and type of work the individual will be
capable of in the future.
As stated above, however, to avoid a situation where pay dominates the appraisal
process, it is better for annual pay reviews and bonus payments to be dealt with in
a separate interview or separate process.
9.4 Specific objectives of appraisal

More specific objectives of appraisal may be summarised as follows.
• Establishing what the individual has to do in a job in order that the
objectives for the section or department are realised
• Establishing the key or main results that the individual will be expected to
achieve in the course of their work, typically over the next year
• Identifying the individual's training and development needs in the light of
actual performance
• Identifying potential candidates for promotion
• Identifying areas for improvement
• Monitoring the undertaking's selection procedures against the subsequent
performance of recruits
The main benefits of a formal appraisal system are that:
• Individuals know that their performance is being assessed and that the
employer has a strong interest in their development
• It provides a system for setting specific goals for the individual
• Individuals need feedback about their performance, to know how well or
badly they have performed and what their employer thinks of them
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Benefits of formal
performance
appraisals
To set To provide It is a system for

objectives for feedback to the employee
future individual about development;
performance performance developing employees
for the will add value for the
individual organisation
9.5 Appraisal techniques

A variety of appraisal techniques can be used.
Appraisal technique
Overall appraisal The manager writes in narrative form their judgements
about the employee. There is no guaranteed consistency
of the criteria and areas of assessment, however.
Managers may use different criteria for assessing their
employees, and they may not be able to convey a clear
or effective judgement in writing.
Guided assessment Assessors are required to comment on a number of
specified characteristics and aspects of the employee's
performance elements, with guidelines as to how terms
such as 'application', 'integrity' and 'adaptability' are to
be defined. This method of appraisal is more precise
than overall assessment, but it is still rather vague.
Grading Managers are asked to select one of a number of grades
(levels or degrees of performance) that the individual
has achieved in each of a number of different aspects of
performance. These are also known as rating scales.
Numerical values may be used for ratings (rather than
letter grades A, B, C, D etc) to give rating scores.
Behavioural incident These assessments concentrate on employee behaviour.
methods Behaviour of the individual is compared with typical
behaviour in each job, as defined by common critical
incidents of successful and unsuccessful job behaviour
reported by managers.
Critical incidents typically include absenteeism from
work and work accidents or mistakes.
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Appraisal technique
Results-oriented These review performance against specific targets and
schemes standards of performance, which are agreed in advance
by manager and subordinate together. There are
significant advantages to such an approach.
• The subordinate is more involved in the appraisal
because they are able to evaluate their progress in
achieving jointly-agreed targets.
• The manager does not act as a critic of the
subordinate; instead the manager is a coach and
helper.
• Clear and agreed targets for performance should help
to influence the subordinate's behaviour.
The effectiveness of the scheme will depend on the
targets set (are they clearly defined and realistic?) and
the commitment of both parties to make it work.
9.5.1 Performance is judged by achievement of predetermined objectives

One method of appraising performance is to compare an individual's actual
achievements with predetermined performance targets. This method, which at
one time was called management by objectives or MBO, is applicable to
individuals in management positions who can be given targets for achievement.
For this type of performance appraisal to be successful, it is necessary to have
objective performance targets that can be measured in quantifiable terms, and
where actual performance can be measured in the same way.
When targets are qualitative rather than quantitative, it becomes relatively easy to
interpret actual performance in a judgemental and possibly prejudiced way.
9.5.2 Graphical rating scales

Graphical rating scales are often used to assess performance. Employees are
assessed on the basis of work factors or work behaviour. For each aspect of work
performance or behaviour, there is a rating scale, and individuals are awarded a
score up to the maximum amount.
The individual's total score is the sum of the scores for each factor, and
performance is regarded as outstanding, good or sub-standard on the basis of the
individual's total score.
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The main criticism of this method of performance appraisal is that the scoring
depends on the personal opinion and judgement of the assessor.
9.5.3 BARS
BARS stands for behaviourally anchored rating scales. It is a method of appraisal
that combines graphical rating scales with critical work incidents and, in some
cases, quantified performance measurements.
A feature of BARS is that the factors to which rating scales are applied are unique
to the individual job, and are not generic factors applied to all jobs.
For each job, aspects of the work are analysed into performance dimensions.
Examples of effective and ineffective work performance for each of these
performance dimensions are collected (provided by individuals with a detailed
knowledge of the job). Individuals are given a rating score according to their
performance in each of the dimensions (taking critical incidents into consideration
too) and are then awarded an overall rating for performance in the job.
Constructing a procedure for performance measurement using BARS is time
consuming, and also requires input from individuals with an in-depth knowledge
of individual jobs.
9.5.4 360 degree appraisal

A 360 degree appraisal is an appraisal of an individual from a variety of different
sources:
(a) The individual's immediate manager
(b) People who report to the individual
(c) Peers and co-workers: most people interact with others within an
organisation, either as members of a team or as the receivers or providers of
services – they can offer useful feedback on performance
(d) Customers: if sales people know what customers thought of them, they might
be able to improve their methods of working
(e) The individual personally: all forms of 360 degree appraisal require people
to rate themselves
Sometimes 360 degree appraisal ends with a counselling session, especially when
the result of the appraisals are conflicting, and the individual is surprised by what
other people think of them.
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BARS: example
An example of rating scales in a BARS system may be the performance of an HR
manager whose responsibilities include recording all changes to personnel details
in the personnel file (such as changes in job position, pay, home address and other
contact details and so on).
This aspect of the job may be rated as follows:
5: Extremely good performance. The individual completes and submits all
'change notices' accurately within one hour of receiving notification.
4: Very good performance. The individual completes and submits all 'change
notices' quickly, and verifies the details of the change with the manager who
submitted the change notice.
3: Fully competent. The individual completes and submits all 'change notices'
accurately by the end of the day in which notification is received.
2: Marginal performance. The individual often argues when asked to prepare a
status change notice.
1: Unsatisfactory: There are incidents when the individual says that they have
submitted status change notices but have not actually done so.
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CHAPTER ROUNDUP
 The success of most organisations depends on the skills, experience and effort of
the people working for it. Although many operations are automated, people are
active in all parts of the value chain, and contribute to the creation of value.
 People can be a unique resource (because of their knowledge and ability) and they
can help the organisation to create a core competence (such as highly talented
management). They can help the organisation to create other unique resources,
such as intellectual property.
 The success of employees in creating value for an organisation depends largely on
the success of HR management in attracting, developing and motivating them.
 The people within organisations, especially large organisations, change
continually. People are recruited; others leave; others move to different jobs
within the organisation, possibly through promotion. An organisation may need
more employees with certain skills, but fewer employees with skills that are no
longer required as much. HR managers need to plan future requirements for
numbers and skills.
(a) The employees of organisation are valuable assets. Without them, an
organisation would not exist and could not operate. The efficiency and
effectiveness of an organisation depend on their skills and abilities.
(b) HR management is responsible for the recruitment and selection process.
The aim should be to encourage suitable individuals to apply for job
vacancies and to select the best candidates from among those who apply.
 Organisations need to attract and retain talented individuals who will,
immediately or at some time in the future, contribute significantly to creating
competitive advantage and adding value for the organisation. The first stage in
this process is to recruit suitable individuals.
 Selection is the process of choosing the preferred individual or individuals for a
job from among those who apply. Typically, selection follows an interview
process; however, the selection and interview process may be brief for filling
junior roles in the organisation.
 The selection process is most important for selecting talented individuals to join
the organisation.
 Socialisation is a process of getting a new employee to become more familiar with
the organisation, and to 'feel at home'.
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 The ability of employees to add value for an organisation depends on their

performance in their job. Motivation is concerned with the view that employees
can be motivated to perform better.
 However, there are differing views about what motivates individuals at work and
how management may improve performance of their staff by trying to provide
motivation.
 There is a widely-held view in most organisations that pay is an important
motivator. If employees consider their pay to be insufficient they will be
dissatisfied. On the other hand, they may be motivated to achieve or exceed
performance targets by means of a pay reward system.
 Performance management aims to get better results for the organisation via the
measurement and evaluation of individual performance.
 Performance appraisal is part of the system of performance management,
including goal setting, performance monitoring, feedback and improvement
planning.
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PROGRESS TEST
1 The systematic attraction, identification, development, engagement, retention and

deployment of those individuals who are of particular value to an organisation is
known as ______________________ ______________________ .
2 Which one of the following aspects of job design is most likely to be motivating for
employees?
A Job enlargement
B Job enrichment
C Job rotation
3 If a company wants to encourage team building and team effort, which one of the
following methods of reward is most likely to be effective in creating a motivated
work force?
A Benefits in kind
B Increase in basic salary
C Profit-related annual bonus
D Share options
4 In Herzberg's two-factor theory of motivation, which of the following can be both

a hygiene factor and a motivator factor?
A Job security
B Management style
C Pay
D Working conditions
5 Which of the following may be used as a first screening process in a selection

process?
1 Application form
2 Tests
3 Informal interviews
4 Formal interviews
A 1, 2 and 3
B 1, 2 and 4
C 1, 3 and 4
D 2, 3 and 4
6 A form of performance appraisal in which opinions about an individual are

obtained from the individual's manager, selected subordinates, colleagues and
other individuals who deal with the person, and presented to the individual, is
known as a ___________________________ .
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1 Talent management
2 The answer is B. Job enrichment
3 The answer is C. Profit-related annual bonuses, probably paid as a percentage of

basic salary. To maintain a strong work team and team ethic, a group reward
scheme should be more effective as a motivator than reward schemes for
individuals.
4 The answer is C. Pay
5 The answer is A. The application form and online tests can be used to eliminate
some applicants, to reduce the numbers who are invited to interview. In some
cases, for example the appointment of a person to a very senior position in a
company, a firm of 'head hunters' may interview potential candidates informally
before recommending them for interview by the company.
6 360 degree appraisal
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226 CA Sri Lanka

CHAPTER
INTRODUCTION
This chapter continues with the topic of human resources and human resources management, and the ways in
which people (if well managed and developed) can add substantial value for an organisation. This chapter deals
with the varied topics of employee development, knowledge management, managing culture, managing change
and leadership.
Knowledge Component
5 People aspects of value creation
5.5 Human resource 5.5.1 Analyse the staff training methods and strategies of employee development,
development return on investment (ROI) and human resource development
5.6 Knowledge management 5.6.1 Analyse how to incorporate knowledge management to enhance business
performance (including knowledge worker/knowledge codification,
knowledge abstraction and knowledge diffusion/managing tacit and explicit
knowledge)
5.7 Managing culture and 5.7.1 Explain different aspects of organisation culture
change
5.7.2 Evaluate ways to overcome resistance to change when implementing new
strategies (including cultural web by Johnson and Scholes, the three-stage
change process by Kurt Lewin, hierarchy in managing change, and Elizabeth
Kübler-Ross's grief cycle)
5.8 Leadership 5.8.1 Identify the main leadership approaches (including trait approach,
behavioural approach and the situational approach to leadership)
5.8.2 Recommend appropriate leadership styles for different business situations
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KB5 | Chapter 7: Further Aspects of People and Value Creation
LEARNING
1 Human resource development 5.5.1
2 Training and development, and return on investment 5.5.1
3 Knowledge management 5.6.1
4 Organisational culture 5.7.1
5 Change and change management 5.7.2
6 Leadership 5.8.1, 5.8.2
7 Trait theories of leadership 5.8.1, 5.8.2
8 Style theories (behavioural theories) of leadership 5.8.1, 5.8.2
9 Situational approaches to leadership 5.8.1, 5.8.2
1 Human resource development

Human resource development is concerned with developing employees for
future roles in the organisation. For the most talented employees, it is the process
of grooming individuals to be the future leaders of the organisation. Training is a
part of the process of development.
Employee development creates value by giving employees the knowledge and
experience to perform more effectively, and in doing so create more value. The HR
department needs to check that the benefits or returns from spending on training
and development justify the cost.
The purpose of employee development and training is to improve the knowledge

of employees so that they are able to make a better contribution to the
organisation. Since development is also about grooming the most talented
individuals for top positions in the organisation in the future, succession
planning is also an aspect of HR development.
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Education Education is the process of acquiring basic academic skills

that are taught in schools, colleges and universities, such as
reading, writing and arithmetic.
Training The purpose of training is to teach individuals something
specific. A training course should have a specific objective,
to teach the individual some theoretical or practical
knowledge, or to give the individual a new insight into an
aspect of their work.
Development Development is a process of acquiring knowledge and
understanding. Staff development within an organisation
includes training, but it also includes gaining experience in
other ways, in the job or learning from a coach or mentor.
Development is commonly associated with managers. They
benefit from development to become better managers,
capable of moving on to more senior positions.
1.1 Methods of training and development

You should be familiar with some or all of the following methods of training and
development to improve the knowledge of staff.
Job-related training Training courses may cover a wide range of work-related

topics that are intended to provide individuals with
information or skills related to their work.
Training courses may be provided internally by the HR
department, or externally by training organisations.
Cross-functional These are in-house training programmes where
training individuals learn more about the work done in other
departments. These courses also encourage dialogue
between delegates from different departments.
Leadership training There are courses in leadership skills, to help individuals
to develop into future leaders of the organisation.
Leadership training may also include releasing
individuals to attend an MBA (Master of Business
Administration) course at a business school.
On-the-job training More common with manual jobs. This involves training an
individual to do a job by showing them how to do it in the
real working environment.
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Apprenticeships Some organisations may employ young individuals as

apprentices, and provide them with training to acquire
particular skills.
Development Development planning between an individual and their
planning manager may be a part of the formal performance
management and appraisal process.
Formal coaching Just as top sports people may have a personal coach,
selected managers in a company may be given a senior
manager as a personal coach, to help with their
development towards a top position in the company.
High visibility Young talented managers may be assigned to projects
assignments where they will meet with top management. The
experience should help with their development as
managers.
Job rotation Job rotation involves moving individuals regularly
between jobs in the organisation, possibly within the
same department. Job rotation may be used for young
accountants, for example, to give them experience in
different aspects of accountancy work.
In many organisations, development is largely informal. The performance

management and appraisal system is used to monitor the development of
individuals, and identify candidates for promotion.
The HR department may also use the annual performance appraisals to consider
whether some individuals should be promoted or moved to their jobs within the
organisation, to further their development.
1.2 Strategies for development

A distinction could be made between HR development and employee
development.
HR development is concerned with ensuring that the organisation has the right
number of employees with the right amount of skills and experience, and in the
right jobs, to meet the needs of the organisation. The required skills of the
workforce will change over time, as the nature of working changes with
technology and the organisation changes in size and scope of operations. HR
development is concerned with ensuring that the workforce adapts and develops
to the changing needs of the organisation.
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Employee development is concerned with the development of individual

employees.
Whereas there may be plans for individual employee development, an

organisation should have a strategy for making changes in its workforce to meet
future demands. Where will the people with the required skills and experience
come from?
Element of HR development
strategy
Internal development or An organisation has a choice about the way
external recruitment? that it will recruit top management (succession
planning). It may choose to recruit individuals
at an early stage in their career and
development them to be leaders in the future.
Alternatively, they may recruit their leaders
from outside the organisation, whenever a
vacancy arises.
Sources of recruits An organisation may have to decide where it
will recruit the talent that it needs. A global
company, for example, should develop plans
for global recruitment.
Discrimination rules and Some countries are developing rules or
guidelines guidelines that employers should follow with
their recruitment programmes. In the UK, for
example, there is increasing pressure on top
companies to make more appointments of
women to the board of directors and senior
management positions.
Recruitment of graduates Some large organisations have a policy of
recruiting and training large numbers of
university graduates, expecting some to
develop into leaders in the future, but also
expecting many to leave the organisation after
a number of years.
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2 Training and development, and return on investment

Training can be expensive. Employee development is more difficult to cost, but
this too can be expensive. The HR department should be responsible for ensuring
that training initiatives provide benefits that justify the costs.
This principle is at the core of attempts to measure the return on investment from
training and similar HR initiatives.
In theory, it should be possible to assess the return on training expenditure as a

whole, but in practice it is difficult. In particular, measuring the benefits from
training is difficult. For this reason, attempts to measure the return on investment
(ROI) in HR may be restricted to a small number of training initiatives.
ROI in HR management can be defined as the benefits obtained from an HR
activity, converted into a money-equivalent value, expressed as a percentage of
the cost of the activity.
2.1 Measuring ROI for training

When measuring ROI for training programmes (or other HR initiatives), the
investment is the cost of the initiative. This cost should be fairly simple to
measure, although there should be guidelines about how the total cost should be
measured. For example, when measuring the cost of a training course, should the
costs include the cost of the time of all the delegates on the course? Should the
cost include an allowance for the cost of the premises, when the training course is
in-house? How should the costs of HR department staff who administer the
training programme be included?
Measuring the return is much more difficult, and clear rules should be established.
There are several issues to consider.
Identifying the types of data How should the return from training be
required measured? What types of benefit should be
measured? The return from the programme
can be accumulated in a scorecard, but what
should be the items in the scorecard?
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Principles for collecting data Having decided the types of data that should be
and analysing the data measured, the next problem is to decide on
ground rules for collecting and analysing the
data. Where should the data come from? What
method should be used to analyse the data?
For example, if there are two or more different
methods of analysing data, the ground rule may
be that the most conservative method should
be used, so that the measurements of return
are more credible.
How will the process of What are the sources of the data and how will it
collecting the data and be collected? Who will carry out the task? What
evaluating it work in procedures will be used to collect the data?
practice? Techniques include surveys and
questionnaires, work place observation,
interviews, focus groups, assignments,
performance monitoring and (possibly)
collecting financial data.
Measurements Measurements will be recorded on a scorecard
for various aspects of return and cost. There
need to be methods of measuring or scoring
items of 'soft data', such as the effect of the
training on work habits and attitudes.
Timing of the evaluation When will the data be collected? Should it be
collected during the training programme, or at
a time after it has ended? Or both? When the
benefits of a training programme are measured
in terms of the effect that it has had on
employee productivity or behaviour, for how
long should the post-course measurements
continue? Weeks? Months? Longer?
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2.2 Analysing return

To measure return form training, there must be a method of isolating the effects of
the training from all other factors. Any of the following methods may be used.
(a) Taking the same measurements for a 'control group' of individuals who did
not attend the training programme, and measuring the difference between
the employees on the course and those in the control group.
(b) Analysing the pre-training performance trends of the individuals on the
course, to predict what would have happened without the programme.
Compare this with what has happened as a result of the training.
(c) Asking participants on the course, their supervisors and managers what
improvements have been made in work performance – and to what extent
the training has been responsible for them.
The ROI method should also identify how the data about course benefits will be
converted to financial figures. This can be difficult, and methods of converting
non-financial benefits into a financial value are beyond the scope of this text.
However, the financial benefits of the training can then be compared with the
costs.
If a benefit is too difficult to convert into a financial value, it should be treated as
an intangible factor, and reported separately in addition to the ROI.
• The return from a training initiative could be measured as a benefits:costs
ratio. If the ratio is less than 1:0, it has not been worthwhile. For example, if
the benefits of a training programme are measured as Rs. 300,000 and the
costs are Rs. 100.000, the benefits:cost ratio would be 3:1.
Alternatively, we can measure the return on investment, which is the net benefit
as a percentage of the cost. In the above example, this would be 200%.
QUESTION Training systems

State what is likely to be the greatest difficulty in establishing a system for
measuring the return on investment in training.
ANSWER
Measuring the benefits for the organisation from a training programme. It will be
difficult to obtain measurements of benefits that are reliable and 'believable'.
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3 Knowledge management
Knowledge can be defined as patterns of information that are strategically useful.
It comes from a combination of information, experience and sharing experiences
with other people.
Knowledge management is a relatively new concept in business theory. It is
connected with the theory of the learning organisation and is based on the idea
that knowledge is a major source of competitive advantage in business.
The aim of knowledge management is to capture, organise and make widely
available all the knowledge that the organisation possesses. Knowledge is both
explicit (in recorded form) and tacit (in people's heads).
Knowledge management involves the identification, collection and use of

knowledge for the purpose of creating value for the organisation.
3.1 Data, information and knowledge

Data are simple facts. Data about all aspects of an organisation's operations and
environment are collected and analysed. Information is processed and organised
data; information creates meaning out of the unprocessed data.
Information is an essential requirement of management. Managers cannot do their
job effectively without relevant and reliable information.
Knowledge may be described as understanding that comes from a combination of:
• Analysing information
• Experience and training
An effective manager makes decisions by combining the information that they
have with knowledge of the situation.
• Knowledge may originate in the discovery of trends or patterns in
information.
• Knowledge may also come from experience, training, and understanding of
'how things work'. Experience enables an individual to put information into
context, and to give it meaning.
3.1.1 Data workers and knowledge workers

A distinction can be made between:
• Data workers, who are involved in processing data and providing
information to management from processed data.
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• Knowledge workers, who are involved in developing knowledge within an

organisation.
Knowledge workers have much more strategic significance for an organisation
than data workers.
3.2 Knowledge as a resource

Knowledge is seen as an important resource. To compete successfully, an
organisation must have much the same knowledge of the market as competitors.
(a) An organisation may have knowledge that is a unique resource, that
competitors do not have, and so which creates an opportunity for
competitive advantage. Knowledge gained through research and
development, and protected by patents, is an example.
(b) Knowledge enables an organisation to develop its competences. If managers
and other employees are knowledgeable, they are likely to make better
decisions, and perform better in their jobs.
Organisational knowledge is the total of the collective shared information and
experience that is accumulated by an organisation, through its employees.
Knowledge can be used to create value, but only if it is used.
All organisations possess a great deal of data, but much of it is disorganised and
inaccessible. Knowledge management technology helps structure data in a way
that makes it easily accessible so that it can be used to support knowledge.
Where is an organisation's knowledge held?
Explicit knowledge Tacit knowledge

Knowledge that is recorded in Information that is not recorded,
documents or files, and available but is in people's heads
to everyone Not available to others unless the
individual shares it
Total knowledge within an organisation is the sum of explicit knowledge and

tacit knowledge.
Explicit knowledge is knowledge that is available to everyone in an organisation.
It has usually been recorded in some way and is on file or documented.
Tacit knowledge is knowledge inside people's heads, which is not recorded and is
not available to everyone.
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A common problem is that much of the knowledge is tacit knowledge, in the heads
of individuals and acquired through experience. Unless an individual shares their
tacit knowledge with others, it is available only to the individual and not to anyone
else.
Knowledge management should seek to build up knowledge by analysing
information and detecting trends and changes in the market place; but another
challenge for knowledge management is to obtain the tacit knowledge from
individuals, record it and make it available to others – in other words, to change
tacit knowledge into explicit knowledge, so that it can be used more extensively.
3.3 Organisational learning

Organisational learning refers to the way in which an organisation acquires
knowledge (and learns from it), by:
• Using its existing knowledge
• Acquiring new knowledge, and using this new knowledge
The process of learning more and putting this knowledge to use should be a
continual process.
Organisation learning is improved by knowledge management.
Even when it is made explicit, by being recorded in some way, it may be difficult
and time-consuming to access the knowledge, especially when the knowledge is
buried in paper archives. Knowledge management is improved by information
technology.
3.4 From 'tacit' to 'explicit' knowledge

An aim of knowledge management should be to obtain tacit knowledge from
individuals and record it, converting it into explicit information. Nonaka and
Takeuchi describe four ways in which knowledge is transferred.
Socialisation This is the informal process by which individuals share and

transmit their tacit knowledge. Individuals share
experiences in conversation.
Externalisation This is converting tacit knowledge into explicit knowledge.
Unfortunately, this is a difficult process to organise and
control.
Internalisation This is the learning process by which individuals acquire
explicit knowledge and turn it into their own tacit
knowledge.
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Combination This is bringing together separate elements of explicit

knowledge into larger, more coherent systems; such as
computerised knowledge management systems and
management reports.
3.5 Managing explicit knowledge

A function of knowledge management is to identify and capture knowledge for the
organisation to use, and to share this knowledge.
Managing explicit knowledge
Discover or identify The first challenge is to identify what
knowledge knowledge there is (for example, from analysis
of information) in order to use it and record it.
Capture the knowledge Make the knowledge explicit by recording it.
Share the knowledge Make the knowledge available to people who
can use it.
One way of sharing knowledge is training.
Distribute the knowledge To make the knowledge available, IT systems
can be used to distribute it.
Use the knowledge Tacit knowledge can be used only by the
individuals who possess it. An organisation
should encourage its managers (and others) to
use the explicit knowledge that is available.
Maintain the knowledge Accumulating explicit knowledge is a continual
process. Knowledge must be kept up to date. If
it becomes out of date, it ceases to be reliable.
Knowledge management can be described as the process with five elements.
Element
Knowledge creation Knowledge has to be created. People are involved in this
process, and individuals should work together to create
knowledge. IT systems can assist the process.
• Computer assisted design/computer-assisted
manufacture (CAD/CAM) systems are used to create
knowledge in areas such as three-dimensional
machining, tool-making, three-dimensional designing
and modelling.
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Element
• Virtual reality systems also help users to acquire
understanding and knowledge.
Knowledge validation Some accumulated knowledge becomes obsolete over
time, and loses its value. Current knowledge should
therefore be tested to make sure that it is still valid.
Knowledge validation is a process of continually
monitoring, testing and refining the accumulated
knowledge base, to make sure that it is still relevant.
Knowledge Knowledge presentation is concerned with the way that
presentation knowledge is displayed to individuals within the
organisation. It may come from different information
systems, and these may present comparable data in
different ways.
Knowledge Knowledge distribution is concerned with encouraging
distribution debate, discussion and interpretation through
individuals sharing their different ideas and bringing
their own perspective to the analysis of problems.
The distribution of knowledge can be improved through
the use of intranets and the use of office automation
generally.
Knowledge application Knowledge application is concerned with making
knowledge active, by using it to create added value.
Whenever possible, the tacit knowledge of individuals should be extracted from

them, and recorded as explicit knowledge. Unless tacit knowledge is managed in
this way, it will be lost to the organisation when the individual retires or moves to
a different organisation – possibly a competitor!
QUESTION Tacit knowledge

Explain why it might be difficult to collect the tacit knowledge of experienced
individuals within an organisation.
ANSWER
Individuals may think that their value to the organisation consists largely of the
unique knowledge and experience they have acquired during their career. They
may be concerned that by sharing this knowledge, their value to the organisation
will fall.
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3.6 Knowledge management (KM) systems

Organisations can store information in many different ways using IT systems and
databases. Examples of knowledge management using IT systems are:
• Expert systems
• Data mining
3.6.1 Expert system

An expert system is a computer program that captures human expertise in a
specific area of knowledge.
It uses a knowledge base that consists of facts, concepts and the relationships
between them; and it uses pattern-matching techniques to solve problems. For
example, many banks now use expert systems to process simple loan applications.
The banker enters certain information about the applicant for the loan, such as
name and most recent addresses, income and monthly outgoings, and details of
other loans. The expert system will then:
• Check the facts given against its database to see whether the applicant has a
good previous credit record.
• Perform calculations to see whether the applicant can afford to repay the
loan.
• Make a judgement as to what extent the loan applicant fits the lender's
profile of a good risk (based on the lender's previous experience).
• A decision is then suggested, based on the results of this processing, about
whether to offer the individual a loan and if so, on what terms (such as what
rate of interest).
3.6.2 Data mining

IT systems can be used to store vast amounts of data in accessible form. A data
warehouse is a very large database. It receives data from operational systems,
such as a sales order processing system with details of customer orders. Analytical
software is used to analyse data in the data warehouse and produce reports for
management.
The value of a data warehouse is enhanced when data mining software is used.
Data mining software discovers previously unknown relationships and provides
insights that cannot be obtained through ordinary summary reports.
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These hidden patterns and relationships constitute knowledge, as defined above,

and can be used to guide decision making and to predict future behaviour. Data
mining is thus a contribution to knowledge and organisational learning.
3.7 The learning organisation and competitive advantage

The market place is changing continually. A company is more likely to sustain a
competitive advantage if it is able to adapt and change ahead of its competitors.
Knowledge helps a company to innovate and change.
A learning organisation recognises the importance of its employees in the process
of innovation and change. To remain competitive, an organisation needs elements
of a learning organisation.
A learning organisation has been defined as one 'where people continually
expand their capacity to create the results they truly desire, where new and
expansive patterns of thinking are nurtured, where collective aspiration is set free
and where people are continually learning to see the whole together' (Senge).
Features of a learning organisation

A learning approach to strategy Strategy development is based in
experimentation and feedback. The
organisation learns from its
experimenting, and adapts.
Participation in policy making All members of a learning organisation
have the opportunity to contribute to
policy making. Everyone can contribute
to the earning process.
Information Information is used, not as a method of
management control, but as a resource
for the entire organisation to use.
Accounting systems Accounting systems are designed so that
they assist learning. In particular,
accounting systems provide information
about how cash is generated and used,
because cash is a key resource.
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Features of a learning organisation

Boundary workers and gaining Members of the organisation who come
knowledge from the environment into contact with the external
environment (sales representatives,
customer service staff, buyers and so on)
should pass on to others within the
organisation all the information they
gather from the environment.
Learning culture The organisation has a learning culture.
Everyone who works for the
organisation understands that a part of
their task is to keep on improving their
knowledge and to share their knowledge
with other members of the organisation.
4 Organisational culture
Organisational culture is the 'basic assumptions and beliefs that are shared by
members of an organisation, that operate unconsciously and define in a basic
taken-for-granted fashion an organisation's view of itself and its environment'
(Handy). Culture defines the character of the organisation.
Organisational culture relates to ways of acting, talking, thinking and evaluating
issues and problems. It can include shared values beliefs and assumptions. Culture
may also include a set of shared ethical beliefs about what is right and wrong, and
how people in the organisation ought to behave.
All employees within an organisation may share the same cultural attitudes.
Alternatively, especially in large organisations, there may be different cultures
among different divisions or departments.
Senior management may attempt to define the culture of their organisation, and
include it in a formal statement such as the company mission statement.
Management may also try to control or direct the corporate culture by issuing a
corporate code of ethics, which sets out what employees should and should not do,
and specifies codes of behaviour.
However, much of the strength of the culture of an organisation is 'unofficial', and
is ingrained in the attitudes and beliefs of employees. Culture is a mixture of the
following.
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Behaviours The ways in which people within the organisation and the
organisation itself operate, including work routines, the
clothes worn at work, ways of meeting and having
conversations.
Taken for granted These are at the core of the organisation's culture, which
assumptions people find difficult to explain but are central to the
organisation.
Beliefs These are more specific than assumptions but represent
aspects of an organisation that are talked about, and may
be promoted by senior management.
4.1 Handy's classifications of organisation culture

Charles Handy, a writer on management theory, suggested that there are four
broad types of organisational culture.
Organisation culture
Power culture Power is concentrated at the 'centre' of the
organisation, and is held by one individual or a small
group of senior managers. There are few formal rules
for the organisation, and very little bureaucracy.
The power holder (or holders) is able to make swift
decisions, but decision making is autocratic and the
leader is a dominant force in the organisation.
Role culture In an organisation with a role culture, authority for
decision making is delegated to individuals who have
particular roles or positions within the organisation.
Jobs and responsibilities are clearly defined. The
authority structure is formalised into a bureaucratic
hierarchy. Individuals are expected to comply with
formal rules and procedures.
Decision making can be slow.
Task culture In a task culture, project teams are formed to solve
particular problems, such as designing and
implementing a new IT system to improve
operational performance. The power and authority of
individuals come from their expertise and
knowledge, and their ability to perform particular
tasks for the project team.
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Organisation culture
Teams often consist of a group of highly-skilled
individuals.
Project teams are disbanded when a project is
completed. New teams are created when a new
problem arises.
A task culture can exist within a large organisation
that in most areas of operation and management has
a role culture.
Person culture In a person culture, individuals believe themselves to
be superior to the organisation. The organisation
exists to serve their interests. Some small
partnerships may demonstrate this culture, where
two or more partners each bring a particular
expertise to the partnership. Another example of a
person culture is the personal retinue that serves an
important individual, such as a movie star.
4.2 Johnson and Scholes: the cultural web

Johnson and Scholes suggested that within any organisation, there is something
that they called a cultural web. This affects the way in which the employees
understand the organisation in which they work. This understanding of their
organisation called their 'paradigm' of the organisation. Employees find it difficult
to think and act outside this paradigm.
A cultural web is the combination of many different factors that together make up
the culture of an organisation.
The cultural web consists of six inter-related elements of culture that together
create the paradigm.
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The cultural web: Johnson, Scholes and Whittington
Stories Symbols
Routines Paradigm Power

and rituals
Controls Organisational
structures
Element of the cultural web

Routines and rituals These are 'the ways things are done around here'.
Employees get used to established ways of doing
things, and expect others to do things the same
way too.
Stories and myths Employees use stories and myths to describe the
history of the organisation, and to suggest the
importance of certain individuals or events in its
history. They are passed by word of mouth. They
help to create an impression of how the
organisation got to where it is today. When
employees have a strong sense of history, and
being part of the history, they are likely to resist
any attempts by management to change things.
Symbols An organisation's culture may also be defined by
a symbol, such as its head office building or a
common uniform that all employees and
managers wear.
Power structure Culture is influenced by the individuals who are
in a position of power. In business organisations,
power often comes from being in a top
management position. However, power can also
come from personal influence, or experience and
expertise.
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Element of the cultural web

Organisation structures The culture of an organisation is affected by its
organisation and management structure. For
example, hierarchical and bureaucratic
organisations often find it difficult to adapt to
change and are often conservative in their
outlook.
Controls and control Performance measurement and reward systems
systems within an organisation establish the views about
what is important and what is not so important.
Individuals will focus on performance that earns
rewards. As an example, the bonus culture within
international banks has been blamed for the high-
risks that traders and managers have taken in the
past.
The cultural web within a company defines its corporate ethics.
4.3 Edgar Schein: three levels of culture

Schein had similar views about corporate culture. He argued that organisation
culture is strong because it is regarded as something that helps the company to
succeed. An organisation culture is a set of assumptions that a group of people
working together have invented or discovered, by learning how to deal with
problems that the organisation faces. These assumptions work well enough to be
considered valid; they are therefore 'taught' to individuals who join the
organisation. New entrants therefore learn the culture of the organisation and
become a part of that culture.
According to Schein, there are three levels of culture that members of an
organisation acquire.
Levels of
culture
Outer skin These are the superficial signs of the organisation's culture,
such as the work environment and the way that people dress
and talk to each other. Culture may also be expressed in
superficial ethical statements such as: stated values and
mission statements are often expressed in general terms, such
as 'providing a service to the community' and 'providing the
best quality of service to customers'.
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Levels of
culture
Inner layer At this level, the employees in a company share common views
on specific issues. This layer of culture can be seen in the
ethical stance that the company takes. Whereas the outer layer
of culture is expressed in general terms, this inner layer is
expressed in relation to specific issues, such as: should we
insist that our suppliers in countries with emerging economies
must not use slave labour or child labour and should provide
reasonable working conditions for their employees?
The heart The third level of culture is the company's paradigm. These are
the shared assumptions and attitudes about what 'really
matters'. They are taken for granted and rarely discussed.
They make up the 'core' culture of the organisation.
Schein argued that changing the corporate culture is very difficult. The 'outer skin'
can be changed fairly easily, with a determined effort by management, but it is
very difficult to change the paradigm. When management propose changes that
affect the paradigm, employees will resist the change – even though change is in
the long-term interests of the organisation.
5 Change and change management

Business organisations operate in a rapidly-changing environment and
marketplace. To remain successful, they must adapt by responding to the changes
and taking advantages of any strategic opportunities that may arise.
However when major changes are required, there will often by strong resistance
from employees and the existing culture of the organisation. To overcome
resistance to change may require skilled 'change managers' as well as effective
leadership from the top of the organisation.
The subject of organisational change and change management is fairly complex,

and only a brief introduction is given here. The key points to understand are that:
(a) Major changes are more difficult to introduce than small changes: major
changes are those that will have a big impact on the way that many
employees do their work.
(b) There will often be strong resistance to change, which must be overcome if
the change is to happen successfully.
(c) The organisation's leaders have an important role to play in persuading
employees to accept the change.
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(d) Major change should be planned and managed carefully

An organisation may use specialist 'change managers' – perhaps a firm of
management consultants – to advise on and assist with the implementation of the
change.
QUESTION Change
State two examples of major change in a business organisation.
ANSWER
A company may negotiate the takeover of another company. Employees in the
company taken over will face restructuring of their organisation, possible
relocation and possible redundancy. They will also become part of a larger
company with a different culture.
A company may introduce a major change to its business processes. (This is called
business process re-engineering or BPR.) To implement the change, jobs may have
to be restructured and employees may have to work in different ways and with
different people. Their existing skills may become out of date, and they may need
to learn new skills.
There are many other examples that you could think of for an answer.
5.1 Approaches to change management

There are various ways in which organisations may approach the planning and
implementation of major changes. Here, we consider just a few of them.
5.2 Change and hierarchical organisations

Major changes are often difficult to implement in large hierarchical organisations.
There are several reasons for this.
(a) In hierarchical organisations, there are many employees, but it is only the
few people at the top of the management hierarchy who are in a position to
initiate change. Ideas for change from employees in the middle ranks of the
organisation will often be ignored, or even not heard.
(b) Even when the organisation's leaders see the need for change, they have to
persuade several tiers of managers beneath them (as well as other
employees) to agree on the need for the change. This can take a long time.
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(c) Large bureaucratic organisations have a tendency to be conservative and to

resist change. The culture of these organisations is generally hostile to
change. It is also difficult to impose change from on top when subordinates
are hostile.
Large hierarchical organisations should be well-managed and should be capable of
making small and medium-sized changes. The major difficultly is with large
transformational changes – which could be those that are most essential from a
strategic perspective.
This is why there is a risk that large organisations will lose competitiveness over
time, by failing to respond quickly enough to change, when smaller competitors
make the changes they need more quickly and more successfully.
5.3 Lewin's three-stage model for change management

5.3.1 Forces for and against change
Kurt Lewin, a psychologist, developed a model for change management in the
1940s. He suggested that in any situation where change may happen, there are
two opposing forces.
Forces for and against These forces are a combination of the attitudes,
change opinions, beliefs and behaviours of individuals and
groups. Elements in the organisation culture can be
strong restraining forces.
Driving forces These are forces that push in the direction of change
or support the need for change.
As the driving forces for change increase, the
probability that change will happen also increases.
Restraining forces These are the forces that hold back change and
resist change.
For change to occur, the driving forces need to be stronger than the restraining
forces.
The strength of driving and restraining forces will differ according to the nature of
the change. Small changes will meet less resistance. Large change may be resisted
very strongly.
If the leaders of an organisation want to make changes, they need to understand
what the driving forces for change are and what the restraining forces are. They
also need to understand the strength of each of these forces.
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In order to make changes successfully, the leadership may need to consider ways
of:
• Strengthening the driving forces for change, and/or
• Making the restraining forces weaker.
5.3.2 The three stages of successful change

Lewin described successful change as a three-stage process.
Stage 1 Stage 2 Stage 3
Unfreeze Movement Re-freeze
Stage of change
Unfreeze This is the process of finding a way to get people to end their
resistance to change, in both individuals and groups. This is
achieved by finding ways to strengthen the driving forces for
change or to weaken the restraining forces that resist
change (or a combination of the two).
Movement This stage involves making the change. It includes not just
making the changes to operations and activities, but making
changes to the thoughts, feelings and behaviour of the
people affected.
There may be a period of confusion during the move from
the old ways of doing things to the new. The task of the
'change manager' is to try to limit this confusion and
promote the change.
Re-freeze After a change has occurred, there may be a tendency for
people to revert to 'old ways' after a while, and for the
changes to become lost and forgotten.
Re-freezing involves establishing the change as a new mind
set, so that it now becomes the accepted and
'normal'/standard operating procedure.
Without refreezing, employees will go back to the old ways
of doing things – and the old ways of thinking.
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5.4 Kotter's eight-step model for change

John Kotter, a US author on change management, has developed an eight-stage
model for understanding and managing major change.
Kotter's eight-step change model

1 Increase the urgency Encourage people to change. Make the
objectives of the change real and relevant.
2 Build a guiding team Change has to be led by a management team.
Get the right people together, with the
commitment as well as the experience and
skills to drive the change forward.
3 Get the vision right The team needs to establish a vision and
strategy for the change. What will the change
help us to achieve? What are we trying to do?
4 Communicate for buy-in Communicate the vision and strategy to as
many people as possible, and get them to
accept ('buy into') the need for the change.
5 Empower action Remove obstacles to change. Encourage
employees to give constructive feedback to
the proposals for change. Recognise and
reward progress towards change and
achievements that are made.
6 Create short-term wins Set short-term aims along the road to the final
objective. Make these short-term aims easy to
achieve. Finish each stage before moving on
to the next one.
7 Don't let up Keep up the impetus for change. Encourage
reporting on progress. Highlight
achievements that have been made along the
way and the next stage or stages in the path
towards change.
8 Make the change stick Once the changes are achieved, try to make
them part of the organisation culture. If
necessary, recruit and promote individuals
who have bought into the change.
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5.5 The Kübler-Ross model

The Kübler-Ross model, also known as the five stages of grief, was originally
developed as a model for understanding the reactions of individuals to death or
other extreme events in life. In her book On Death and Dying (1969), based on her
work with terminally-ill patients, Kübler-Ross identified five emotional stages that
individuals may go through in reacting to the approach of death. These are the five
stages of grief.
(1) Denial
(2) Anger
(3) Bargaining
(4) Depression
(5) Acceptance
These five stages are not a complete list of all possible emotions that an individual
might feel, and they can occur in any order. However, they can provide an
understanding of what individuals might be feeling, and this can assist counsellors
and others seeking to provide help and support.
5.5.1 The Kübler-Ross model and change management

From the point of view of change management, it has been recognised that similar
emotions may be felt by individuals going through changes that are not nearly as
serious as facing up to death. They can be experienced by individuals facing major
changes at work, such as redundancy and moving to a different job location.
The 'grief cycle' is therefore seen as a model for change, and helping organisations
to deal with the responses of employees to a major change that is about to happen,
and is seen in some way as a threat by the individuals affected. Change managers
or counsellors may be able to identify the stage of grief that individuals have
reached, and try to help them move on to the next stage and towards eventual
acceptance.
It is important to understand that individuals do not react to change in the same
way. Some people may not see an impending change as a threat at all. For others,
the same change may seem to be a serious threat to their way of life. The Kübler-
Ross model is a model for understanding how people may feel and are feeling, not
a predictive model for forecasting how everyone will feel.
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5.5.2 The five stages of grief
The five stages

of grief
1 Denial This is a conscious or unconscious refusal to accept the fact
that change will happen. It is a defence mechanism.
2 Anger The individual becomes angry. Anger can be expressed in
different ways, but often involves feeling anger at others.
'Why me? It's not fair. Who is to blame?'
Knowing this may help managers to avoid over-reaction when
employees show strong anger at proposals for change.
3 Bargaining People may then seek to bargain and negotiate a compromise,
as a way out of their anger. Typically, they might seek to
postpone the change and 'buy some time'.
However, this does not lead to a sustainable solution.
4 Depression Depression sets in when the individual begins to recognise
that the change will happen and starts facing up to reality. It is
acceptance, but with regret and unhappiness. The individual
may experience sadness, regret, uncertainty, or fear for the
future.
It is unwise to try to cheer up the individual at this stage. Let
the individual go through their grief, because they are
beginning to accept the change.
5 Acceptance The individual accepts the change that will happen, and looks
at the change with more emotional detachment and
objectivity. 'I can't prevent it happening. I might as well
prepare for it.'
However, the nature of acceptance varies between individuals
and the situation that they face.
It is important to understand that Kübler-Ross did not intend this to be a rigid

series of sequential steps or a process. An individual might not experience all five
of the 'grief cycle' stages. They may go through one or more stages twice. Some
stages might be revisited. Some stages might not be experienced at all. Individuals
may feel some of the stages much more strongly than others.
Even so, the model provides a reference point that enables an organisation's
managers to understand what individual employees may be feeling, and deal with
the problem accordingly. The model predicts that individuals will accept the
change in the end. (People facing up to death will eventually accept it.)
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5.6 Change agent

Change is often difficult to implement in a business organisation. The forces
opposed to change can be very strong.
When senior management in an organisation want to implement a major change,
they may appoint an individual as the person who is responsible for implementing
the change. This individual is called a 'change agent' or 'change champion'.
The change agent may be a senior manager within the organisation, or may be
appointed externally – such as a management consultancy expert.
The role of the change agent is to ensure that the change is implemented
successfully, and to deal with problems and resistance.
6 Leadership
Organisations have leaders who determine the direction in which the organisation
will go. Whereas management is concerned with operations, leadership is
concerned with overall strategy, and getting employees to follow where the leader
wants to take them.
Effective leadership is critically important for the success of an organisation and
the creation of value.
But what makes a good leader? There are three basic schools of leadership theory
that try to answer this question: trait ('qualities') theories, style theories, and
situational theories.
Leadership has been defined as: 'the activity of influencing people to strive
willingly for group objectives' (Terry).
However, there are many different definitions of leadership. Key themes within
most definitions include:
• Interpersonal influence
• Securing willing commitment to shared goals
• Creating direction and energy
• An orientation towards change
The terms 'management' and 'leadership' are often used interchangeably, but
there is an important difference between them. Kotter (2001) argued that
leadership and management involve two distinct sets of action.
(a) Management is about dealing with complexity. Management functions
involve the use of logic, structure, analysis and control, and are aimed at
producing order, consistency and predictability.
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(b) Leadership is about dealing with change: its activities include creating a
sense of direction, communicating strategy, and energising, inspiring and
motivating others to translate the vision into action.
Management can be exercised over resources, activities, projects and other
essential non-personal things. Leadership can only be exercised over people.
6.1 Key leadership skills

There is a range of business and managerial skills important to a good leader.
These include the following.
Key leadership skills

Entrepreneurship The ability to spot business opportunities and mobilise
resources to exploit them.
Interpersonal skills For example, networking, influencing, negotiating,
conflict resolution, listening, counselling, coaching and
communicating assertively.
Decision-making But with an ability to 'see the big picture' strategically.
and problem-solving
skills
Self-development The ability to learn continuously from experience, to
skills grow in self-awareness and to exploit learning
opportunities.
6.2 Theories of leadership

What makes a good leader? Can an individual learn how to become a leader? As
stated earlier, there are three basic schools of leadership theory: trait ('qualities')
theories, style theories and situational theories.
Theories of leadership
Trait theories These state that the best leaders have certain
characteristics or qualities – traits. Trait theories are
therefore based on analysing the personality
characteristics or preferences of successful leaders.
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Theories of leadership
Style theories and These state that the most effective leaders are those
behavioural theories who have the right leadership style for the situation.
Style theories are therefore based on the view that
leadership is an inter-personal process, and different
leadership styles affect people in different ways.
Behavioural theories are based on the view that the
effectiveness of leadership depends on the way that the
leader behaves. For example, a leader may have a
participative approach to decision making, and seek to
involve others in the decision-making process.
Situational theories These theories are based on the view that the most
effective approach to leadership depends on the
situation. Different types of leadership are more
successful than others, depending on the situation they
are in.
7 Trait theories of leadership

Early theories suggested that there are certain personal qualities common to
'great men' or successful leaders. In other words: 'leaders are born, not made'.
Various studies attempted to determine exactly which qualities are essential in a

successful leader. One American study cited the following traits.
• Judgement
• Initiative
• Integrity
• Foresight
• Drive
• Human relations skill
• Decisiveness
• Dependability
• Fairness
• Ambition
• Dedication
• Objectivity
• Energy
• Emotional stability
• Co-operation
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Trait theory has been more or less discredited.

(a) The premise that certain traits (or qualities) are absolutely necessary for
effective leadership has never been proved.
(b) The lists of traits proposed for leaders are long, and in some cases have been
contradictory.
(c) Trait theories ignore the complexities of the business situation. Not
everybody with leadership 'traits' turns out to be a good leader.
8 Style theories (behavioural theories) of leadership

Leadership styles are different forms of leadership behaviour, which are used in
different ways in different situations. While there are many different
classifications of style, they mainly relate to the extent to which the leader is
focused primarily on task/performance (directive behaviour) or relationships/
people (supportive behaviour).
Examples of leadership style models are:

• The Ashridge Model: tells, sells, consults, joins styles
• Blake and Mouton's Managerial Grid: concern for task, concern for people
• Transformational leadership
There are various classifications of leadership style. Although the definitions of
styles vary, models of leadership style usually describe a range of continuum of
behaviours between:
• Exclusive focus on the task in hand (at one extreme)
• Exclusive focus on the people working for the leader (at the other extreme)
8.1 The Ashridge Management College model

The Research Unit at Ashridge Management College identified four different
management styles.
Management style: Ashridge model

Tells (autocratic) The 'tells' style of leader is a leader who makes all
of the decisions and issues instructions that must
be obeyed without question. Quick decisions can
be made when speed is required, but it does not
encourage initiative and commitment from
subordinates.
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Management style: Ashridge model

Sells (persuasive) The 'sells' style of leader still makes all the
decisions, but believes that subordinates have to
be motivated to accept them and carry them out
properly. Employees are made aware of the
reasons for decisions but they may not accept the
decisions. The leader 'sells' their decisions to their
subordinates.
Consults This style is where the leader consults with
subordinates and takes their views into account,
but has the final say in making decisions. This
encourages motivation and employees can
contribute their knowledge, but it may take much
longer to reach decisions.
Joins (democratic) The joins style is where the leader and followers
reach decisions by consensus (agreement). This
can provide high motivation and commitment from
employees, but decision making might become a
very long process.
The Ashridge studies found that:

(a) In an ideal world, subordinates preferred the 'consults' style of leadership.
(b) People led by a 'consults' manager had the most favourable attitude to their
work.
(c) Most subordinates feel they are being led by a 'tells' or 'sells' manager.
(d) In practice, consistency was far more important to subordinates than any
particular style. The least favourable attitudes were found amongst
subordinates who were unable to perceive any consistent style of leadership
in their superiors.
8.2 Blake and Mouton's Managerial Grid

Robert Blake and Jane Mouton carried out research (The Ohio State Leadership
Studies) into managerial behaviour, and observed two basic dimensions of
leadership: concern for production (or task performance) and concern for
people.
Along each of these two dimensions, managers could be located at any point on a
continuum from very low to very high concern. Blake and Mouton observed that
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the two concerns did not seem to correlate, positively or negatively: a high
concern in one dimension, for example, did not seem to imply a high or low
concern in the other dimension.
Individual managers could therefore have different permutations of task/people
concern.
Blake and Mouton modelled these permutations as a grid. One axis represented
concern for people, and the other concern for production. They marked nine
points on each axis, from 1 (low concern) to 9 (high concern).
A questionnaire was designed, to analyse and plot the positions on the grid of all
the respondents to the survey. This was to be used as a means of analysing
individuals' managerial styles and areas of weakness or 'unbalance', for the
purposes of management development.
8.2.1 The managerial grid

High 9
1.9 (country club) (team) 9.9
8
7
Concern for people
5 5.5
(middle road)
4
1
1.1 (impoverished) (task) 9.1
Low
Low Concern for production High
The extreme cases shown on the grid are:

• 1.1 impoverished: the manager is lazy, showing little interest in either
staff or work.
• 1.9 country club: the manager is attentive to staff needs and has
developed satisfying relationships. However, there is little attention paid to
achieving results.
• 9.1 task management: almost total concentration on achieving results.
People's needs are virtually ignored.
• 5.5 middle of the road or the dampened pendulum: adequate
performance through balancing (or switching between) the necessity to get
out work with team morale.
• 9.9 team: high work accomplishment through 'leading' committed people
who identify themselves with the organisational aims.
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The managerial grid was intended as an appraisal and management development

tool. It recognises that a balance is required between concern for task and concern
for people, and that a high degree of both is possible (and highly effective) at the
same time.
8.3 Transformational leadership

A more recent theory of leadership style is transformational leadership. According
to this theory, there are two types of leader: transformational leaders and
transactional leaders.
Transformational leaders are the leaders who are capable of seeing a need for
strategic change, and leading the organisation through the change. They are
capable of 'transforming' organisations, individuals and groups.
Transactional leaders are leaders who are more capable at dealing with
operational and transactional problems in the business.
There are four elements in transformational leadership, sometimes called the 4 Is:
4 Is of transformational
leaders
Idealised influence (II) The leader acts as an 'ideal' role model for others to
follow.
Inspirational The leader can inspire and motivate followers
motivation (IM)
Individualised The leader shows real concern for the needs and
consideration (IC) feelings of followers. This personal attention to each
follower is a key element in the leader's ability to
bring out their very best efforts.
Intellectual stimulation The leader challenges followers to be creative and
(IS) innovative, and to achieve higher levels of
performance.
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9 Situational approaches to leadership

Situational approaches to leadership theory propose that the most effective
approach to leadership depends on the work situation. There is no one right way
to lead that will fit all situations. The ability of a manager to be an effective leader
depends on the particular situation (which can vary) and the leadership style that
they use.
Examples of a situational approach to leadership are:

• Fiedler's 'psychologically close' and 'psychologically distant' styles
• John Adair's 'action-centred' leadership model – based upon 'situations' or
'functions'
• Hersey and Blanchard's situational leadership
9.1 Fiedler's contingency theory of leadership

Fiedler carried out extensive research on the nature of leadership, and found that
people become leaders partly because of their own attributes and partly because
of their situation. He studied the relationship between style of leadership and the
effectiveness of the work group, and identified two types of leader.
Psychologically distant managers Psychologically close managers

(PDMs) (PCMs)
They maintain distance from their Closer to their subordinates than PDMs
subordinates.
They formalise the relationships They do not seek to formalise roles and
between themselves and their superiors relationships with superiors and
and subordinates. subordinates.
They choose to be withdrawn and They are more concerned to maintain
reserved in their dealings with other good relationships with other people at
people in the organisation work than to ensure that tasks are
carried out efficiently.
They prefer formal consultation They prefer informal contacts to regular
methods with their subordinates, rather formal staff meetings
than seeking the opinions of their staff
informally.
PDMs judge subordinates on the basis
of performance, and are primarily task-
oriented.
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Fiedler suggested that the effectiveness of a work group depended on the

situation, made up of three key variables.
Key variable in the work situation The situation is favourable for the
leader when:
The relationship between the leader The leader is liked and trusted by the
and the group (trust, respect and so group
on)
The extent to which the task is defined The tasks of the group are clearly
and structured defined and unambiguous
The power of the leader in relation to The position power of the leader (to
the group (authority, and power to reward and punish) is high
reward and punish)
Fiedler suggested that:

(a) A structured (or psychologically distant) style works best when the situation
is either very favourable, or very unfavourable to the leader.
(b) A supportive (or psychologically close) style works best when the situation
is moderately favourable to the leader.
(c) 'Group performance will be contingent upon the appropriate matching of
leadership styles and the degree of favourableness of the group situation
for the leader' (Fiedler).
This is summarised in the diagram below.
Task-
oriented
Style of 0
leadership
People-
centred
Very unfavourable 0 Very favourable
Favourableness of
the situation
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9.2 Adair: action-centred leadership

John Adair's model (also called 'action-centred’ or 'functional') is part of the
situational school of thought, because it sees the leadership process in a context
made up of three interrelated variables:
• Task needs
• The individual needs of group members
• The needs of the group as a whole
The priority that a leader should give to each of these needs depends on the work
situation, and priority should be given to different needs according to the
situation.
Effective leadership is a process of identifying and acting on that priority,
exercising a relevant cluster of roles to meet the various needs.
Task roles
Initiating
Information-seeking
Diagnosing
Opinion-seeking
Evaluating
Decision-making
Task
Individual maintenance roles
Group maintenance roles needs Goal-setting
Encouraging
Peace-keeping Feedback
Clarifying Group Recognition
Standard-seeking Individual Counselling
needs Training
needs
Total
situation
Adair argued that the common perception of leadership as 'decision making' was
inadequate to describe the range of action required by this complex situation. He
developed a scheme of leadership training based on precept and practice in each
of eight leadership 'activities', which are applied to task, team and individual:
hence, the 'action-centred leadership' model.
• Defining the task
• Evaluating
• Planning
• Motivating
• Briefing
• Organising
• Controlling
• Setting an example
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9.3 Hersey and Blanchard: situational leadership theory

Hersey and Blanchard (1968) developed another situational theory of leadership.
Like Fiedler's contingency theory, they argued that the most appropriate
leadership style depends on the work situation.
A leader should therefore adjust their leadership style to meet the requirements of
the work situation. Leaders must be able to use any leadership style, and should
switch from one style to another as circumstances require. (In this respect, their
views differ from Fiedler's. Fiedler did not believe that individuals could change
what they are, or their style of leadership. Fiedler argued that an organisation
should pick the appropriate type of leader for the particular situation.)
Subordinates or team members are at different levels of personal development.
Some are more mature psychologically, and more experienced and skilled in the
job than others. The appropriate leadership style depends on the extent to which
the subordinates are mature. For the purpose of their theory, Hersey and
Blanchard identified subordinates' maturity in terms of:
• Competence in their job – job maturity
• Commitment to the organisation's goals – psychological maturity
Leaders are involved in:
(a) Directive activity – giving guidance and direction: this is similar to 'concern
for the task' and can be described as 'task behaviour'.
(b) Supportive activity – giving emotional and social support to subordinates:
this is similar to 'concern for people' and can be described as 'relationship
behaviour'.
The amount of involvement by leaders in directive activity and supportive activity
can range from low to high. The appropriate level of activity required from an
effective leader varies with the work situation, which in turn depends largely on
the maturity of the subordinates or team members.
Hersey and Blanchard identified four leadership styles, which can be presented in
the form of a 2x2 matrix.
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Amount of directive activity (task focus)

LOW HIGH
LOW Delegating style Telling/directive
The leader gives style
responsibility for decision The leader
Amount of making to subordinates. supervises
supportive subordinates closely.
activity Supporting/participating Selling style
(relationship style The leader makes all
focus) HIGH The leader shares decision the decisions, but
making with subordinates, explains them and
and consults them. 'sells' them to
subordinates and
allows them to ask
questions.
9.4 Limitations of situational theories of leadership

Contingency theory usefully makes people aware of the factors affecting the choice
of leadership style.
However:
• Key variables such as task structure, power and relationships are difficult to
measure in practice.
• Contingency theories do not always take into account the need for the leader
to have technical competence relevant to the task.
Perhaps the major difficulty for any leader seeking to apply contingency theory,
however, is actually to modify their behaviour as the situation changes.
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CHAPTER ROUNDUP
 Human resource development is concerned with developing employees for future

roles in the organisation. For the most talented employees, it is the process of
grooming individuals to be the future leaders of the organisation. Training is a
part of the process of development.
 Employee development creates value by giving employees the knowledge and
experience to perform more effectively, and in doing so create more value. The HR
department needs to check that the benefits or returns from spending on training
and development justify the cost.
 Training can be expensive. Employee development is more difficult to cost, but
this too can be expensive. The HR department should be responsible for ensuring
that training initiatives provide benefits that justify the costs.
 This principle is at the core of attempts to measure the return on investment from
training and similar HR initiatives.
 Knowledge can be defined as patterns of information that are strategically useful.
It comes from a combination of information, experience and sharing experiences
with other people.
 Knowledge management is a relatively new concept in business theory. It is
connected with the theory of the learning organisation and is based on the idea
that knowledge is a major source of competitive advantage in business.
 The aim of knowledge management is to capture, organise and make widely
available all the knowledge that the organisation possesses. Knowledge is both
explicit (in recorded form) and tacit (in people's heads).
 Organisational culture is the 'basic assumptions and beliefs that are shared by
members of an organisation, that operate unconsciously and define in a basic
taken-for-granted fashion an organisation's view of itself and its environment'
(Handy). Culture defines the character of the organisation.
 Organisational culture relates to ways of acting, talking, thinking and evaluating
issues and problems. It can include shared values beliefs and assumptions. Culture
may also include a set of shared ethical believes about what is right and wrong,
and how people in the organisation ought to behave.
 All employees within an organisation may share the same cultural attitudes.
Alternatively, especially in large organisations, there may be different cultures
among different divisions or departments.
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 Business organisations operate in a rapidly-changing environment and

marketplace. To remain successful, they must adapt by responding to the changes
and taking advantages of any strategic opportunities that may arise.
 However, when major changes are required, there will often by strong resistance
from employees and the existing culture of the organisation. To overcome
resistance to change may require skilled 'change managers' as well as effective
leadership from the top of the organisation.
 Organisations have leaders who determine the direction in which the organisation
will go. Whereas management is concerned with operations, leadership is
concerned with overall strategy, and getting employees to follow where the leader
wants to take them.
 Effective leadership is critically important for the success of an organisation and
the creation of value.
 But what makes a good leader? There are three basic schools of leadership theory
that try to answer this question: trait ('qualities') theories, style theories, and
situational theories.
 Early theories suggested that there are certain personal qualities common to
'great men' or successful leaders. In other words: 'leaders are born, not made'.
 Leadership styles are different forms of leadership behaviour, which are used in
different ways in different situations. While there are many different
classifications of style, they mainly relate to the extent to which the leader is
focused primarily on task/performance (directive behaviour) or relationships/
people (supportive behaviour).
 Situational approaches to leadership theory propose that the most effective
approach to leadership depends on the work situation. There is no one right way
to lead that will fit all situations. The ability of a manager to be an effective leader
depends on the particular situation (which can vary) and the leadership style that
they use.
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PROGRESS TEST
1 The purpose of measuring return on investment in training is to assess whether:

A The costs of the training are reasonable
B Employees benefit from the training
C The head of the HR department should receive an annual bonus
D The training provides value for the money spent
2 Analysing a database in different ways in order to identify and extract knowledge

that has so far been undiscovered is known as _______________ __________________ .
3 According to Johnson and Scholes, how many inter-related elements make up the
cultural web?
4 Put the following five stages of grief in the order in which they most often occur.
1 Bargaining
2 Acceptance
3 Denial
4 Depression
5 Anger
5 According to Lewin, in order to initiate a major change within an organisation, it

may be necessary to __________________ the driving forces for change.
6 An approach to leadership theory that states that the most effective leadership
style depends on a combination of factors, including leadership style, the work
situation and the skills of employees, is known as:
A Action-centred leadership
B The managerial grid
C Situational theory
D Style theory
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1 The answer is D. ROI measurements are concerned with both the benefits and the
costs (investment), and from the perspective of the organisation rather than
individual employees.
2 Data mining
3 The answer is 6. Together these make up the 'paradigm'.
4 Denial, anger, bargaining, depression, acceptance
5 Strengthen. It may also be necessary to weaken the restraining forces.
6 The answer is C. Situational theory. This term was first used by Hersey and
Blanchard, although it applies to similar theories, such as Fiedler's contingency
theory of leadership.
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KB5 | Part F: Value Creation Through Technology and Innovation
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CHAPTER
INTRODUCTION
Technology development is a support activity in the value chain. Advances in technology create
opportunities for new ways of operating and new product innovations. Technology creates
opportunities for increasing revenue and reducing costs.
This chapter looks at three aspects of technology and innovation: the role of IT in business
organisations, e-business and the management of research and development for product innovation.
Knowledge Component
6 Value creation through technology and innovation
6.1 Technology and business 6.1.1 Discuss the role of technology in creating competitive advantage for
value organisations
6.2 Information technology 6.2.1 Compare and contrast different types of information technology
infrastructure in infrastructure employed in different functional areas of business
organisations
6.3 E-business 6.3.1 Discuss the e-business process and its value to businesses
6.3.2 Analyse the application of e-business in different businesses (B2B and

B2C)
6.4 Managing research and 6.4.1 Discuss the role of research and development in creating value for
development businesses
6.5 Managing innovation 6.5.1 Assess the importance of innovation in today's context and the role of
innovation in driving competitive advantage
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KB5 | Chapter 8: Technology, Innovation and Value Creation
LEARNING
1 Technology and business value 6.1.1
2 Information technology infrastructures 6.2.1
3 E-business 6.3.1
4 B2C e-commerce 6.3.2
5 B2B e-business 6.3.2
6 E-procurement 6.3.2
7 Managing research and development (R&D) 6.4.1
8 Managing innovation 6.5.1
1 Technology and business value

The pace of technological change has been rapid, particularly in the areas of
computerisation and communications technology. However, there are also major
developments in microbiology, medicine, space technology, food technology and
other areas in which business is closely involved.
In many different ways, technology contributes significantly to value creation.
Technology contributes to business value in three main ways.
Adding to value
Operations Technology has changed business operations and practices
radically.
Many operations that used to be done manually are now
automated. Technology in many areas is much more efficient
than people, and has replaced people in the organisation.
Many procedures and processes are automated, from office
procedures (data processing systems) to the factory floor
(robotics) and the provision of services.
New products Technological change has led to the development of innovative
and services products. Many of the developments in consumer products
have been in the area of media and communications.
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Adding to value
Information Information technology has enormously increased the ability
of organisations to collect, store and analyse data, to transfer
information and to create knowledge.
1.1 Impact of technology on the value chain

Value chain analysis can be used to assess the impact of technology and identify
processes within the value chain where it can be used to add value.
Value chain activity Examples of technology adding value

Inbound logistics The use of IT includes inventory control and systems
such as material requirements planning (MRP),
enterprise resource planning (ERP) and just-in-time
purchasing.
Operations Technology can be used to automate and improve tasks;
examples include robots, process control, and machine
tool control, computer aided manufacturing (CAM),
computer integrated manufacturing (CIM) and
enterprise resource planning (ERP).
Outbound logistics Warehouse management systems can help managers
with control of warehouse operations. The use of
technology in areas such as RFID tagging was described
in an earlier chapter.
Marketing and sales Retailers use EPOS systems (electronic processing at the
point of sale) at checkouts. The use of technology for
customer relationship management was described in an
earlier chapter. There is growing use of the internet for
online marketing and selling.
Service Customer databases allow organisations to sell after-
sales services and to deal with customer complaints and
queries.
Procurement IT can automate purchasing decisions and can be used as
a link to a supplier with EDI.
Human resources IT applications include the maintenance of a skills
management database and staff planning.
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Porter and Millar provided a diagram of the value chain in which they give
examples of the ways in which IT was influencing the various activities at the time
the article was written (1985). Although the technologies themselves have
developed since then, the ideas in the model are still very relevant.
Support Firm Enterprise resource planning Intranets Extranets
activities infrastructure
Human resource Automated personnel scheduling
management
Technology Computer aided design Electronic market research
development
Procurement Online procurement of parts (e-procurement)
Automated Flexible Automated Electronic Remote

warehouse manufacturing order marketing servicing of
processing equipment
Electronic CRM
data Vehicle Computer
interchange EPOS
tracking scheduling
(EDI) Remote and routing of
terminals for repair trucks
salespersons
Inbound Operations Outbound Marketing and Service

logistics logistics sales
Primary
activities Margin
Porter and Millar made the point that there is a trend towards supplying
increasing amounts of information with products. For example, freight and
courier services now provide online tracking of consignments.
1.2 How technology adds value

Technology adds value in any of the following ways:
• It reduces costs.
• It enhances operational capability and increases the organisation's
competences.
• It improves communications (speed and efficiency) and information content:
better information adds to knowledge and improves decision making.
• It improves customer service and so adds value for the customer.
• It leads to product innovation.
• Innovation can create competitive advantage.
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1.3 IT and competitive strategy

IT enhances competitive advantage in two principal ways:
• By reducing costs
• By making it easier to differentiate products
1.3.1 Reducing costs to achieve competitive advantage

Companies that use technology to reduce costs are able to compete effectively by
offering lower prices to customers. To do this, they need to be faster than
competitors in reducing costs, or successful in reducing costs by more than
competitors.
Perhaps the most obvious examples of IT-driven cost reductions have occurred in
the automation of much clerical work that has been apparent since the
introduction of mainframe computers in the middle of the twentieth century.
However, although IT can be used to reduce costs, it may not be able to provide
long-term (sustainable) competitive advantage. Competitors will eventually catch
up, because the rate of technological change is so fast.
1.3.2 Differentiation to achieve competitive advantage

Companies can use IT to create a differentiated product for customers. Technology
can be an important part of a marketing strategy for segmentation, targeting and
positioning (STP). One way an organisation might seek to differentiate itself from
its competitors is by meeting customers' needs and requirements more closely
than their competitors.
Technology could also enhance competitive advantage by forming the basis of
complete new businesses. It makes new businesses technically feasible; it creates
derived demand for new products; and it creates new businesses inside old ones.
In recent years, giant global companies have emerged and grown on the strength
of technological enhancements within their industry and market place. Apple,
Google, Facebook and Twitter are examples.
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2 Information technology infrastructures

Information technology systems for many companies are a threshold resource,
which is used to establish a threshold competence. Without IT systems, they could
not compete successfully. IT systems may possibly become a unique resource for
some companies, and may be used to create a core competence and competitive
advantage.
Companies may use different types of information technology infrastructure in
different functional areas of the business.
IT infrastructure refers to the arrangements within an organisation for using

technology.
The following table provides a brief summary of different structures.
IT infrastructure
Standalone computers Standalone computers are computers that are used
on their own (with peripheral equipment such as
printers, scanners, drives for discs and memory sticks
etc), without connection to other computers in a
network.
In the early days of computing, large organisations
used large mainframe computers for large
transaction processing systems. As IT technology
developed, desktop computers were introduced into
the office. More recently, laptop computers have been
developed which can, if required, be used as a
standalone device.
Networks A network is a number of computers linked to each
other so that they can communicate with each other
and share the same files, software and peripheral
equipment (such as printers). The linked computers
may be dumb terminals (terminals that cannot
operate as standalone computers), desktop
computers or larger computers for holding files and
routing traffic through the network.
Local area networks link computers together with
local cabling. Wide area networks cover a wider
geographical area, and link computers through either
dedicated lines or via the internet.
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IT infrastructure
An organisation may have several local area
networks linked to each other in a wide area
network.
Intranets and extranets These are networks connecting computers and other
devices to each other, and also providing access to
the internet. These are explained in more detail
below.
Connected devices As well as connecting dumb terminals, computers
and printers, a network may also use other devices
for input and output of data, such as barcode readers
and plastic swipe cards.
Centralised and Within a network, the actual processing of data may
decentralised be at a local level or may be centralised in one of the
processing network's larger computers. It is possible to access
processed data from any part of the network, when
required.
2.1 The internet

The internet enables computers across the world to communicate via
telecommunications links. Information can be exchanged through email, or by
accessing and entering data via a website.
A website is a collection of screens providing information in text and graphic form,
any of which can be viewed by clicking the appropriate link on the screen (shown
as a button, word or icon).
The World Wide Web is a navigation system within the internet. It is based on a
technology called hypertext that allows documents stored on host computers on
the internet to be linked to one another. When you view a document that contains
hypertext links, you can view any of the connected documents or pages simply by
clicking on the link.
In order to 'surf' or navigate the web to find documents or websites, users need a
web browser that interprets and displays hypertext documents and locates
documents pointed to by links. Internet Explorer is the browser from Microsoft:
alternatives include Mozilla Firefox and Enigma.
While we tend to use the terms internet and World Wide Web interchangeably,
the internet describes the entire system of networked computers and the World
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Wide Web describes the method used to access information contained on

computers connected to the internet.
The availability of a common internet infrastructure – of computers, networks and
protocols – and the development of an easy-to-use graphical user interface
(GUI) have been the catalysts for the growth of e-commerce. It has created an
open community that is easy to join and easy to use.
2.2 Intranets and extranets
Internet, intranets and extranets

Internet The internet is used to disseminate and exchange information
among the public at large.
Intranet An intranet is used to disseminate and exchange information 'in-
house' within an organisation. Only employees of the
organisation are able to access this information. An intranet is
therefore an internal network for an organisation, but one that
allows users access to the internet.
Extranet An extranet is an intranet that also allows access to the network
to selected people outside the organisation, such as key
customers and suppliers.
2.3 Intranets
An intranet is an internal IT network used to share information. Intranets also
make use of the internet.
The network has firewalls, in the form of software or hardware, that protect it
against access by unauthorised people from outside the organisation.
The idea behind an intranet is that companies set up their own mini version of the
internet. Each employee has a desktop computer (or dumb terminal), and a
browser that is used to access a server computer that holds internal corporate
information, and also offers access to the internet.
Intranets are used for many purposes, but the key features are that users of the
network share files and software. Several terminals in the network can share a
single processing task, such as the input of data to a database.
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2.4 Extranets
Whereas an intranet resides behind a firewall and is accessible only to people
who are members of the same company or organisation, an extranet provides
various levels of accessibility to outsiders, such as key suppliers and customers.
An extranet is similar to an intranet, except that it also allows access to certain
external users, such as major customers and suppliers.
Only those outsiders with a valid username and password can access an
extranet: varying levels of access rights enable control over what people can view.
Extranets are becoming a very popular means for business partners to exchange
information. They can share data or systems to provide smoother transaction
processing and more efficient services for customers.
2.5 Electronic mail

The term electronic mail (email) is used to describe various systems for sending
data or messages electronically via a telephone or data network and a central
server computer. Email has replaced letters, memos, faxes, documents and even
telephone calls, combining many of the possibilities of each medium with new
advantages of speed, cost and convenience. Messages are written and read in a
special program such as Microsoft Outlook Express (for an individual) or part of a
groupware package such as Microsoft Exchange or Novell if used in a large
company.
An alternative to the use of computers for sending emails is the use of mobile
phones and smartphones to text messaging and instant messaging.
2.6 WiFi internet access

Wireless Fidelity (WiFi) is a technology that links computers (and mobile
phones) to the internet or to a network without the need for cable connections.
WiFi facilitates the connection of laptop computers to the internet or to an

intranet. This means that employees who are away from their office can link
themselves to the company intranet via their laptop.
WiFi networks are created through an array of local hotspots throughout
metropolitan areas. Hotspots can now be found in major airports, hotels,
bookstores, coffee houses, shopping centres, and even car dealerships.
Municipal WiFi is a newer application that is gaining popularity quickly. Many
cities globally are building wireless networks that cover the entire city. This new
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technology removes the need to be near a localised hotspot, and provides wireless
access to all residents and businesses within the city limits including open spaces
such as parks and highways.
2.7 Home working

WiFi connection to a company intranet means that employees do not have to be on
the employer's premises to do their work.
Managers can work from outside the office, linked to the organisation's computer
system through their laptop.
Sales representatives can use their laptop at meetings with customers, to obtain
information and respond quickly to customer queries and requests.
Employees can be permitted to work from their home. It is now quite usual in
some countries for organisations to allow employees to work from home on at
least one day a week, connected to the office through their laptop and smartphone.
In this way, there can be a saving in valuable office space.
Companies may also employ some individuals to do all their work from their
home.
3 E-business
Electronic business, or e-business, is the automation of business processes of all
types through electronic means. This may be restricted to email or may extend to
a fully-featured website or an e-marketplace. E-business that includes a financial
transaction is known as e-commerce.
E-business has been defined by IBM as 'the transformation of key business
processes through the use of internet technologies'.
E-business differs from other aspects of IT because it uses the internet. E-business
processes include:
• Online marketing
• Online selling
• Online payments
• Supply-chain and channel management
• Manufacturing and inventory control
• Financial operations
• Employee workflow procedures across an entire organisation
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Essentially, e-business technologies give customers, employees, suppliers,

distributors, vendors and partners powerful tools for information management
and communications.
3.1 E-business and e-commerce

E-business is often confused with e-commerce.
(a) Any transaction with an electronic process using internet technologies is
e-business.
(b) If there is a financial transaction involved with the electronic process using
internet technologies it is e-commerce. Buying a product on the internet is
e-commerce. Exchanging information with a supplier through an extranet is
e-business.
E-commerce is just one aspect of e-business.
E-commerce: aspects of e-business that involve buying and selling transactions
and payments for transactions via the internet.
E-commerce has several aspects, which include:

(a) Electronic ordering of goods and services that are delivered using traditional
channels such as post or couriers (indirect electronic commerce).
(b) Online ordering, payment and delivery of intangible goods and services such
as software, electronic magazines, entertainment services and information
services (direct electronic commerce).
• Electronic fund transfers (EFT)
• Direct consumer marketing and after-sales service
3.2 B2B and B2C

Most e-commerce is one of the following two types.
B2B (business-to-business). This involves companies doing business with each
other, as when manufacturers sell to distributors and wholesalers sell to retailers.
B2C (business-to-consumer). This involves businesses using the internet to deal
with consumers to the general public. A large part of B2C e-business takes the
form of buying and selling online and online marketing (e-commerce).
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4 B2C e-commerce
E-commerce business models take different forms. Businesses that consider
moving into e-commerce need to consider the model that they will use, the market
that they will target, the potential for profit, and whether they have any
competitive advantage that will enable them to succeed.
There are several different types of B2C model for e-commerce.
Model
Advertising model The business provides a product or service for consumers,
but does not charge them. Instead, it obtains its revenue
from advertising revenue. Search engines such as Google
and social networking sites such as Facebook earn their
money from income for advertising and marketing services.
Infomediary The business collects data about consumers and their
model purchasing habits, and sells this information to other
businesses.
Price comparison websites are another form of this model.
A company operates a website for consumers to compare
the prices of similar products from different suppliers (such
as the price of insurance from different insurance
companies). The consumer does not pay and the price
comparison company earns its money from commissions
when consumers order products through its website.
Merchant model Companies use the internet to sell their goods and services.
Customers are able to order the item online, and also pay
for it online.
If the purchased item is a physical product, the company
must then arrange for distribution of the product to the
customer's address.
Some products, such as music, film and books, can be
supplied online. Digitally-delivered music and books, for
example, are threatening the existence of the markets for
compact disc and printed books.
'Shadow banking' organisations may provide loans to
consumers online.
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Model
Manufacturer The company in this model is a manufacturer who sells its
model products to customers through its website rather than using
a retailing intermediary.
Subscription With this model, consumers (users) pay for access to a
model website that usually contains high added-value content.
Examples are companies that sell financial information, and
also online newspapers and specialist journals.
When a company is considering whether to develop its e-commerce business, it

should consider how the model it plans to use will create value.
QUESTION Business model

A small software company has developed a software application that customers
can download on to their computer, tablet or smartphone, but it is aware that
customers will expect to obtain this 'app' without having to pay for it.
Identify what business model is likely to be the most appropriate for the company
if it wishes to make a profit from its software application.
ANSWER
If customers will not pay, someone else must. An advertising model is likely to be
the one that is most likely to make the software application commercially viable.
An alternative approach would be to persuade manufacturers of computers,
tablets and smartphones to pay the company to make the 'app' available on their
products.
4.1 Starting an e-commerce operation: issues to consider
Starting an e-commerce operation: issues to consider

Value proposition How will the e-commerce arrangement provide
value for the customer?
Revenue How will the business generate revenue for the
company?
Market opportunity The company should consider the market and its
segmentation. What are the commercial
opportunities that exist in this market? What is the
potential size of the market?
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Starting an e-commerce operation: issues to consider

Competitive How many competitors are already operating in the
environment market with a similar business model?
Competitive advantage What can the company offer to customers that
competitors cannot?
Market strategy How does the company intend to enter the market
and attract customers?
Organisation of How will the company organise the work to deliver
operations the service? What changes are needed to operational
procedures
Management team Who will be responsible for managing the operation?
4.2 How the internet has changed B2C business

The internet has changed B2C business operations in radical ways.
The internet and changes in B2C business

Direct contact with the The internet enables suppliers/manufacturers to
customer interact directly with their customers, instead of
using intermediaries such as retail shops, travel
agents, insurance brokers, and conventional banks.
Businesses can cut out the middle man (retailer or
broker): insurance is just one example.
Convenience for the The consumer can make purchases at any time of the
consumer day or week, from any location that provides internet
access.
This affects consumer buying habits.
Small companies can Although the internet is global in its operation, its
succeed benefits are not confined to large (or global)
organisations. Small companies can move instantly
into a global market place.
Virtual businesses A virtual company is one that does not have a
physical presence anywhere. It may consist simply of
a number of individuals linked to each other through
the network. In some cases a virtual company can be
one individual working from home, using a network
of sub-contractors to provide services to customers.
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The internet and changes in B2C business

New economics of With the internet, much information is free of charge
information to the user. Those with internet access can view
many of the world's major newspapers and
periodicals without charge.
There may be a tendency for consumers to expect to
obtain information (and some computer games) for
free, without having to pay.
Speed of transactions The internet creates a capacity to complete
purchasing transactions within seconds.
4.3 Market place channel structures

Channel structures are the means by which a manufacturer or selling organisation
delivers products and services to its customers.
The simplest channel structure is direct: the business deals directly with the
customer without the assistance of any intermediaries.
The main changes to channel structures facilitated through the internet include
disintermediation (direct selling) and reintermediation (new intermediaries).
4.3.1 Disintermediation
Disintermediation is the removal of intermediaries in a supply chain that formerly
linked a company to its customers.
Instead of going through traditional distribution channels, with intermediaries
such as a retailer or agent, companies may now deal with every customer directly
via the internet.
4.3.2 Reintermediation
Reintermediation is the establishment of new intermediaries in place of the
intermediaries that were used before. An example is online retailers, such as
Alibaba and Amazon, which have replaced the traditional retailer. These new
intermediaries do one of two things.
(a) They provide customers with new and important value-added services. They
allow customers to view a large range of products from the comfort of their
own home, and compare product details and prices. They have a bigger
product range, provide more information and offer greater convenience than
traditional retailers.
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(b) They provide customers with more efficient means of transacting business.
Consumers can buy goods and pay for them online.
4.4 Example: reintermediation

Alibaba Group is a China-based internet services company whose businesses
include a shopping search engine. In 2012, two of Alibaba's portals handled 1.1
trillion yuan (US$170 billion) of consumer purchases.
5 B2B e-business
Companies also use the internet to communicate with other businesses. Some B2B
business takes the form of e-commerce, but there is also extensive sharing of
information, for example, using Electronic Data Interchange or through extranet
connections.
5.1 The development of B2B e-business

Rayport and Jaworski suggested a four-stage model of the evolution of internet-
based B2B e-business. They argued that, in general, a company goes through these
stages in utilising the internet for its business-to-business activities:
Stages of B2B development

1 Emission – broadcast The company begins by creating an informational
website for its clients
2 Interaction Using the internet for interaction with customers
such as emails, customer surveys and feedback
3 Transaction The use of the internet to take, manage and support
transactions with customers such as online
ordering systems
4 Collaboration The use of the internet to provide inter-
organisational activities, that can be accessed and
utilised by the company and its trading partners
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5.2 B2B applications

Examples of B2B applications of e-business are as follows.
B2B application
Supply chain By linking systems and exchanging information,
management companies are able to communicate more easily with
suppliers and customers. Better information can be
used to make supply chain operations more efficient.
For example, order scheduling and just-in-time
purchasing are more practical when supplier and
customer have linked computer systems for
exchanging information.
Customer relationship A company can use information links with major
management (CRM) customers to improve the relationship and
understanding with the customer.
Outsourcing Companies may be more willing to outsource some
of their activities to external suppliers when they
have linked computer systems. With connected
systems, it is easier to monitor the performance of
suppliers of outsourced services, and to exchange
operational information.
E-procurement See below.
6 E-procurement
E-procurement is a term for purchasing goods by businesses by electronic means,
for example, by means of electronic data interchange (EDI) with major suppliers
or by purchasing through the internet.
When purchasing from established suppliers, transactions are usually made

through a secure website or through direct links between computer systems.
E-procurement includes the electronic exchange of commercial documents, such
as purchase orders, purchase confirmations, delivery advices and purchase
invoices.
The links between computer systems also provide for the management of
correspondence, bids, questions and answer and previous pricing.
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6.1 E-procurement websites

Typically, e-procurement websites are operated by a supplier. The website allows
authorised and registered users to log in using a password. The supplying
organisation will set up its website so that it recognises the purchaser once logged
in, and presents a list of items that the purchaser regularly buys. (This saves
searching for the items required and also avoids the need to key in name, address
and delivery details.)
• Depending on the approach, buyers or sellers may specify prices or invite
bids.
• Transactions can be initiated and completed.
• Once the purchases are made, the organisation will periodically be billed by
the supplier.
• Ongoing purchases may qualify customers for volume discounts or special
offers.
6.2 Benefits of e-procurement
Cost reduction Might include process efficiencies, reduction in the actual

cost of goods and services, and reduced purchasing agent
overheads.
Reduced inventory Knowing product numbers, bid prices and contact points
levels can help businesses close a deal while other suppliers are
struggling to gather their relevant data.
Control The ability to control inventories more effectively.
Wider choice of In theory, resources can be sourced from suppliers
supplier anywhere in the world, perhaps at much lower prices than
could be obtained if the organisation only considered local
suppliers.
Improved Moving to e-sourcing speeds up the sourcing process
manufacturing dramatically but the increased efficiency and speed can
cycles also put the rest of a supply chain in chaos if it is not
prepared to step up its performance to meet the increased
speed in the purchasing link of the chain.
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6.3 Models for e-procurement

Model How it works
Public Web Individual buyers find individual suppliers on the World Wide
Web and make a purchase. There is no structural relation
between buyer and supplier.
Exchange Suppliers and buyers trade through a third party open market
place. They have no structural relationship even though they
may regularly deal with each other.
Supplier An individual supplier gives access to its website or computer
centric system to buying organisations for a pre-negotiated product
range. Buyer and supplier have a contractual relationship.
Buyer Individual companies have contracts with a number of different
centric suppliers. The catalogue and ordering system are maintained
within the buying organisation. The system is fully integrated
into corporate financial control and reporting systems.
B2B An independent third party has agreements with a number of
marketplace buying and supplying organisations.
Buyers and suppliers deal with each other through a
marketplace. Both are bound by agreements with the
marketplace.
7 Managing research and development (R&D)

Research and development (R&D) can be an important source of innovation for
companies. Successful innovation – in products or processes – can create a
competitive advantage and create value for the company.
However, many research projects take a long time to complete, and are expensive.
Many new product developments fail to reach the stage of market launch. Some
new products launched on to the market are commercial failures.
R&D must therefore be managed carefully, to ensure that the additional profits
obtained from selling new products do not exceed their R&D costs.
Research may be pure or applied. Research differs from development.
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Stages in R&D
Pure research This is original research to obtain new scientific or technical
knowledge or understanding. There is no obvious
commercial or practical end in view.
A large proportion of pure research is government-funded or
carried out in universities.
Applied research This is also original research work, like pure research, but it
has a specific practical aim or application, which often has a
commercial aspect. For example, specific medical research
could eventually lead to the development of new medicines.
Applied research in aspects of space technology could
eventually have commercial applications, for example, the
development of materials with new physical characteristics.
Development This is the use of existing scientific and technical knowledge
to produce new (or substantially improved) products or
processes, with the intention of progressing them to
commercial production or commercial operation.
R&D is particularly important in industries where commercial success depends

heavily on an ability to bring a succession of innovative products to market, and
market them successfully. The pharmaceutical industry, where leading companies
rely on success in developing new drugs and medicines, is an obvious example.
Organisations may employ specialist R&D staff to conduct research and
development work. They may be organised in a separate functional department of
their own.
A different approach is for a company to provide finance to support a research
project by a university research department or a private research organisation. In
return, the company will be given exclusive rights to the commercial exploitation
of any new invention or intellectual property that emerges from the research.
They may be organised in a separate functional department of their own. In an
organisation run on a product division basis, R&D staff may be employed by each
division.
7.1 Product research: new product development

The new product development process must be carefully managed and controlled.
New products are a major source of competitive advantage but can cost a great
deal of money to bring to market. A screening process is necessary to ensure that
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resources are concentrated on projects with a high probability of success and not
wasted on those that have poor prospects.
A screening process should also help management to carry out a regular review of
the progress of development work on a new product. In many ways, development
of a new product is a form of project, and principles of project management should
apply.
In project management, three critical issues are:
• Achieving the project objectives
• Completing the project on time
• Keeping spending on the project within budget
If it seems unlikely that a project will achieve its objectives, it may be abandoned
without completing it. In the same way, it may be decided that a new product
development project will not achieve its intended objectives – providing value to
the customer and profits for the company. If so, development work should be
ended, to save further wasted spending.
7.2 Stages in development: management control

New product development projects should be reviewed at specific stages in the
development work. For example, screening may take place when the product
design idea is first submitted for approval, when the final design is submitted for
approval, when a prototype of the new product has been developed and tested,
and after initial market research on the new product has been carried out.
At each stage, the option to halt the development work may be taken, in order to
save costs, if the product now seems to be high risk and unlikely to achieve
commercial success.
7.3 Problems with R&D

There are several potential problems with management of R&D within an
organisation.
Problems with R&D

Organisation and When R&D is a separate department, there may be
management problems with co-ordinating R&D activity with
production (for the manufacture of prototypes and
then for commercial production) and sales and
marketing (for market research and managing a new
product launch).
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Problems with R&D

Financial R&D is by nature not easily planned in advance, and
financial performance targets are not easily set.
Budgeting for long-term, complex development
projects with uncertain returns can be very difficult
for management accountants. When projects take too
long to complete, costs can get out of control.
Evaluation and control Pure research or even applied research may not have
an obvious pay-off in the short term. This makes it
difficult to assess the value of the work to the
company.
Cultural issues Unless the organisation has a culture that favours
innovation, there may be problems with different
cultures. The R&D department may have an
'academic' or university atmosphere, as opposed to a
commercial one. The rest of the organisation may be
bureaucratic and conservative, and hostile to
experimentation and the risk of occasional failures.
8 Managing innovation
The pace of technological change is fast. All companies are affected by change, to a
greater or lesser extent. To remain competitive, companies should respond to
change and, where appropriate, innovate. However, the importance of innovation
differs between different industries and markets, because the pace and nature of
technological change affects different markets in different ways. Everett Rogers
popularised a theory on the diffusion of innovations, and how innovations are
adopted.
The strategic importance of innovation depends on:

• How much value the innovation will create
• Whether innovating first will give the company a competitive advantage
over rivals
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The importance of
innovation
Will it add value? Deciding whether an innovative product or service,
or an innovative process, will add value requires a
commercial assessment.
Experienced managers may be able to assess the
value of an innovation from knowledge and
experience. A role of the accountant should also be to
provide financial information that will help managers
to assess expected value and profitability.
Will it provide a Being the first into the market with an innovation
competitive advantage? may provide a company with a competitive
advantage, but only if the innovation is commercially
successful and if competitors will not be able to copy
the innovation quickly and bring their rival
innovative products to the market.
The answers to these questions will differ according to circumstances. Innovation

may give a company a competitive advantage by giving it a unique resource or
core competence, but on the other hand, it may not.
There are many examples of companies that ignored innovations and
opportunities for growth, and as a result allowed other companies to gain
competitive advantage. In high-technology industries, examples of major
companies that may have been slow to respond to technology changes have
included IBM, Microsoft, AOL and Nike.
Companies should remain alert to change in their industry. Even if they do not
seek to innovate themselves, they should watch the market carefully for
innovations by competitors.
8.1 Innovation diffusion model

The theory of diffusion of innovations is concerned with the way in which new
ideas and innovations are spread and adopted by users. The theory of diffusion
was popularised by Everett Rogers (1995). Diffusion can be defined as 'the
process by which an innovation is communicated through certain channels over
time among members of a social system'.
Innovations must be adopted by a sufficient number of people to become
sustainable, and there is a point where diffusion reaches a 'critical mass'.
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Rogers argued that there are four factors that influence the diffusion of an
innovation:
• The nature of the innovation itself
• The channels of communication that are used to spread information about
(and knowledge of) the innovation within the social system
• The time for the innovation to spread through the social system
• The social system: the group of individuals who share a common 'culture'
and are potential adopters of the innovation
Rogers also suggested that there are five stages in the acceptance of an innovation.
Stage of adoption
1 Awareness Individuals are exposed to the innovation, but do not have
complete information about it.
2 Interest Individuals become interested in the innovation and seek
more information about it.
3 Evaluation Individuals think about the innovation and apply it to their
own personal circumstances. Evaluation leads on to a
decision to try the innovation.
4 Trial Individuals make full use of the innovation, to test it.
5 Adoption Individuals are satisfied with the innovation and decide to
continue to use it.
Rogers also suggested that there is a 'life cycle' to the adoption of an innovation:
• Innovators. There is an initial small group who are the first people to test the
new product
• Early adopters or trendsetters. A larger group (although still small) adopt
the product next
• Early majority
• Late majority
• Laggards
After the early adopters, larger numbers of people in the social system adopt the
innovation. The critical mass is reached at some stage during the early majority or
later majority stage of adoption.
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The implications of the innovation diffusion model for management are that
when planning to introduce a new product to the market, management need to
understand the:
• Adoption life cycle
• The factors that influence the adoption of an innovation
Management should want their new products to be adopted as quickly as possible
by their target customers. The adoption process may be sped up by:
• Providing easily-accessible information about the new product, through
advertising and on the organisation's website
• Emphasising in this information the potential benefits for users of the new
product
• Distributing the product in a way that makes it easy for early adopters to buy
the product for testing
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CHAPTER ROUNDUP
 The pace of technological change has been rapid, particularly in the areas of
computerisation and communications technology. However, there are also major
developments in microbiology, medicine, space technology, food technology and
other areas in which business is closely involved.
 In many different ways, technology contributes significantly to value creation.
 Information technology systems for many companies are a threshold resource,
which is used to establish a threshold competence. Without IT systems, they could
not compete successfully. IT systems may possibly become a unique resource for
some companies, and may be used to create a core competence and competitive
advantage.
 Companies may use different types of information technology infrastructure in
different functional areas of the business.
 Electronic business, or e-business, is the automation of business processes of all
types through electronic means. This may be restricted to email or may extend to
a fully-featured website or an e-marketplace. E-business that includes a financial
transaction is known as e-commerce.
 E-business has been defined by IBM as 'the transformation of key business
processes through the use of internet technologies'.
 E-commerce business models take different forms. Businesses that consider
moving into e-commerce need to consider the model that they will use, the market
that they will target, the potential for profit, and whether they have any
competitive advantage that will enable them to succeed.
 Companies also use the internet to communicate with other businesses. Some B2B
business takes the form of e-commerce, but there is also extensive sharing of
information, for example using electronic data interchange (EDI)or through
extranet connections.
 E-procurement is a term for purchasing goods by businesses by electronic means,
for example by means of electronic data interchange with major suppliers or by
purchasing through the internet.
 Research and development (R&D) can be an important source of innovation for
companies. Successful innovation – in products or processes – can create a
competitive advantage and create value for the company.
 However, many research projects take a long time to complete, and are expensive.
Many new product developments fail to reach the stage of market launch. Some
new products launched on to the market are commercial failures.
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 R&D must therefore be managed carefully, to ensure that the additional profits
obtained from selling new products do not exceed their R&D costs.
 The pace of technological change is fast. All companies are affected by change, to a
greater or lesser extent. To remain competitive, companies should respond to
change and, where appropriate, innovate. However, the importance of innovation
differs between different industries and markets, because the pace and nature of
technological change affects different markets in different ways.
 Everett Rogers popularised a theory on the diffusion of innovations, and how
innovations are adopted.
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PROGRESS TEST
1 Which element in the value chain is enhanced by the use of an intranet or

extranet?
A Firm infrastructure
B Marketing and sales
C Procurement
D Technology development
2 The transformation of key business processes through the use of internet

technologies is known as _______________________ .
3 A company that does not have a physical existence, but consists of a small group of
individuals linked to each other, suppliers and customers through the internet, is
known as a ______________ ______________________ .
4 Which aspect of research and development is most likely to be funded by the state
(government)?
A Applied research
B Development
C Pure research
5 E-procurement arrangements may be established between two companies, in

which their two separate computer systems are able to exchange information and
documentation using a common language. This is made possible by:
A EDI
B E-procurement website
C Extranet
D Intranet
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1 The answer is A. Firm infrastructure
2 E-business
3 Virtual company
4 The answer is A. Applied research. This is research at an early stage, and it is least
likely to provide commercial returns for companies.
5 The answer is A. Electronic data interchange
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KB5 | Part G: Strategy for Value Creation
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CHAPTER
INTRODUCTION
The previous chapters have been concerned largely with the value chain and
how each part of the value chain may be managed to create value.
This chapter begins to look at how a business organisation may set about
formulating business strategy. The focus is mainly on strategy formulation at
divisional level – the level of the strategic business unit – and a formal or
rational approach to strategy formulation.
Knowledge Component
7 Strategy for value creation
7.1 Levels and types of strategy 7.1.1 Discuss different levels and types of strategy
7.2 Strategic planning within 7.2.1 Discuss the key steps involved in the strategic planning process within
strategic business units a strategic business unit (SBU)
7.3 Strategic purpose of 7.3.1 Prepare a suitable enterprise vision, mission, goals and objectives for a
organisation SBU
7.3.2 Analyse critical success factors (CSFs) and their implications for key
performance indicators (KPIs)
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KB5 | Chapter 9: Strategy and Value Creation
LEARNING
1 Levels of strategy 7.1.1
2 Strategic planning for SBUs 7.2.1
3 Vision, mission and values 7.3.1
4 Goals objectives and targets 7.3.1
5 Environmental scanning 7.3.1
6 SWOT analysis 7.3.1
7 Critical success factors (CSFs) 7.3.2
8 Key performance indicators (KPIs) 7.3.2
1 Levels of strategy
Business strategy is concerned with deciding the broad objectives for the
business, and setting specific targets or objectives for achievement within a
planning period. Strategic planning occurs at different levels within a business
organisation: at the overall corporate level, at divisional level within the
organisation as a whole, and at functional or operational level for each business
division.
Very large business organisations are usually divided into a number of separate
major operating divisions. These may be called strategic business units or SBUs,
because there is a separate business strategy for each SBU.
Strategic management occurs at three levels in large organisations.
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Strategy at strategic
levels
Corporate strategy This is the most general level of strategy, identifying
the strategy for the organisation as a whole. It includes
goal setting for the group as a whole, such as a strategy
of increasing the share price over time.
Decisions relating to the structure of the group as a
whole are also taken at the corporate level, such as
decisions about major takeovers or mergers of
business units, major disposals of business units or
decisions about major new financing for the group as a
whole.
Business strategy This is concerned with strategy formulation at the
divisional or SBU level within the group. Each division
has its own product range and its own markets.
Business strategy is the strategy for this product range
and the markets for the product range.
Operational or Within each business (SBU), strategic plans or long-
functional strategies term plans are prepared for each operation or function
(department). For example, there may be strategies for
manufacturing operations, sales and marketing, R&D
IT, warehousing and so on.
A strategic plan for a business unit is only likely to be
successful if strategies are effective at the operational
level.
1.1 Corporate strategy and business strategy

As stated above, many large businesses consist of a corporate parent and a
number of SBUs. The defining characteristic of the corporate parent is that it has
no direct contact with buyers or competitors in any of its market. The role of the
corporate parent role is to manage the scope of the business activities of the
organisation, in terms of diversity of products, markets and international
operations.
Strategic business units (SBUs) are business divisions within the organisation,
each with its own products and its own market sector. The senior management of
each SBU are responsible for managing business strategy at their divisional level.
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1.2 What is strategy?

Business strategy is concerned with the direction and scope of a business over the
long term. Strategic objectives vary between organisations, but in general terms
the objectives of business strategy should be to fulfil stakeholder expectations.
Successful strategy is strategy that achieves the objectives that are set. To do this,
the organisation should seek to achieve competitive advantage in its markets
through its use of resources and exploiting its competences.
Strategic decisions are made under conditions of complexity and uncertainty.
There may be continual change in the business environment and the
organisation’s markets for its products. Strategic decisions therefore often involve
reacting to changes in the environment and markets, to deal with threats to the
business or to exploit new opportunities that arise. Strategic decisions may have a
big impact on the organisation and often lead to major change.
Johnson, Scholes and Whittington suggest that there are six general areas for
decision making that are normally regarded as 'strategic'.
Areas of strategic decision

making
Long-term direction Strategic decision making is for the long-term
future, although this includes the short term too.
There is no specific timescale to define 'long
term', but strategic planning often covers the next
five or ten years.
Scope of activities This strategic decision is made at corporate level
rather than business level. It is concerned with
the areas of business and the scope of products
and markets for the organisation as a whole.
Competitive advantage For commercial organisations (and for many not-
for-profit organisations too) strategy involves
trying to gain some kind of advantage in
competition over rival organisations.
Adapting to changes in the Strategic management in some organisations will
business environment take the form of adapting their activities to fit the
business environment. In its simplest form, this
will involve adapting products and services to
changing customer needs.
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Areas of strategic decision

making
Exploiting unique A different approach to strategy is to exploit
resources and core unique resources and the organisation's special
competences competences. Instead of responding to changes in
the environment and customer needs, the
organisation seeks to change the business
environment through its own positive actions.
Recognising the values and Stakeholders are people who have a legitimate
expectations of major interest in what the organisation does. Strategic
stakeholders decisions are affected by the values and
expectations of all of the organisation's
stakeholders.
‘Strategy is the direction and scope of an organisation over the long term, which
achieves advantage in a changing environment through its configuration of
resources and competences with the aim of fulfilling stakeholder expectations’
(Johnson, Scholes and Whittington).
1.3 Characteristics of strategic decisions
Characteristics of strategic decisions

Complexity Decisions about strategy are complex. They involve a
number of inter-related factors that must be considered,
and there will often be a variety of different possible
outcomes from any strategic decision.
Uncertainty There is likely to be a high degree of uncertainty
surrounding a strategic decision, both about the precise
nature of current circumstances and about the likely
consequences of any course of action.
Effect on business Strategic decisions have extensive impact on
operations operational decision making (decisions at lower levels
in the organisation).
They affect the entire Strategic decisions affect the organisation as a whole
organisation or and require processes that cross operational and
business functional boundaries within. An integrated approach is
therefore required.
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Characteristics of strategic decisions

Change Strategic decisions are likely to lead to change within
the organisation as resource capacity is adjusted to
permit new courses of action. Changes with implications
for organisational culture are particularly complex and
difficult to manage.
2 Strategic planning for SBUs

Business strategy is formulated at the divisional level or SBU level within large
organisations. There is a rational process of business strategy formulation. This
begins with a review of the organisation's strategic position: Where is it now?
Where does it want to be in the future? Where will it get to if it makes no strategic
initiatives? What is the gap between where it expects to be and where it wants to be?
The next stage is to consider a range of different strategies for filling this 'strategic
gap'. Different strategic choices should be considered, and a choice of preferred
strategies should be made. Choices should be made at the business level first, and
then at the operational or functional level.
When strategies choices have been made, the next step is to put them into action.
In simple terms, strategy formulation at the SBU level can be illustrated as follows.
Strategic Strategic Strategic
position choices action
Strategies may have to be changed when unexpected developments occur in the
business environment and the organisation's markets. Companies cannot
therefore rely on a long-term formal business plan. Strategic decisions may
therefore be taken at fairly short notice.
However, large organisations should also prepare long-term formal business
plans, and review these regularly (for example, every year). The process of
preparing a long-term (five-year or ten-year) business plan should take into
consideration the following issues:
• The organisation's vision and mission
• Its values
• Its goals
• Objectives for achievement
• Position analysis
• Strategic choices
• Identifying critical success factors (CSFs)
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• Specifying key performance indications and targets

• Putting chosen strategies into action
3 Vision, mission and values

Vision and mission give an organisation the reason for its existence, and should
guide the strategic decisions that are taken by management.
An organisation should also have core values, embedded in its corporate culture,
about what it considers important and how it should behave in pursuing its
mission.
Business organisations exist for a purpose. You might think that the reason a
company exists is to create wealth for its shareholders. However, this does not
explain the reasons for a company's choices of products and markets, or what it is
trying to accomplish with its business activities.
For example, a bus company may see the reason for its existence as providing
transport services that are reliable and economical, to enable people to travel with
speed and in comfort to any chosen destination within the country.
The basic reason for a company's existence, and what it seeks to provide, can be
expressed in a vision statement, a mission statement, or a combination of the two.
For many companies, 'vision' and 'mission' mean the same thing, but a distinction
can be made between them.
Vision and mission

Vision The 'big picture' of how the company sees the future. For
example, the vision of a company that produces medicines
may be 'a world that is free from life-threatening diseases'.
Similarly, the vision of a media company may be for people
to have access to any form of media of their choice, at any
time and in any place.
Mission Mission can be an explanation of how the organisation
intends to work towards the vision.
Alternatively, a mission statement without a vision
statement could be an expression of the organisation's
reason for existence.
However, the terms 'vision' and 'mission' may be used differently by

organisations. The important point to note is that taken together, vision and
mission explain what the organisation is in existence to do.
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CASE STUDY
Mission statements
Here are mission statements of a few major global companies.
Mission statements
McDonald's 'To be the world's best quick service restaurant
experience. Being the best means providing outstanding
quality, service, cleanliness, and value, so that we make
every customer in every restaurant smile.'
Google 'To organize the world's information and make it
universally accessible and useful.'
Coca-Cola's website has set out its mission and vision in some detail:
'Our Roadmap starts with our mission, which is enduring. It declares our purpose
as a company and sets the standard against which we weigh our actions and
decisions.
• To refresh the world …
• To inspire moments of optimism and happiness …
• To create value and make a difference …
'Our vision serves as the framework for our Roadmap and guides every aspect of
our business by describing what we need to accomplish in order to continue
achieving sustainable, quality growth.
• People: Be a great place to work where people are inspired to be the best
they can be
• Portfolio: Bring to the world a portfolio of quality beverage brands that
anticipate and satisfy people's desires and needs
• Partners: Nurture a winning network of customers and suppliers; together
we create mutual, enduring value
• Planet: Be a responsible citizen that makes a difference by helping build and
support sustainable communities
• Profit: Maximise long-term return to shareholders while being mindful of
our overall responsibilities
• Productivity: Be a highly effective, lean and fast-moving organization.'
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3.1 Values
Values are the beliefs and moral principles that underlie the organisation's
culture.
Whereas vision and mission statements express why an organisation is in

existence, values are about the way that the organisation behaves in pursuit of its
mission and goals.
Continuing the previous example, Coca-Cola defines its values in a value
statement as follows.
'Our values serve as a compass for our actions and describe how we behave in the
world.
• Leadership. The courage to shape a better future
• Collaboration. Leverage collective genius
• Integrity. Be real
• Accountability. If it is to be, it's up to me
• Passion. Committed in heart and mind
• Diversity. As inclusive as our brands
• Quality. What we do, we do well.'
Other companies may express their values differently, and values may be
expressed in terms of integrity, professionalism or concern for customer value.
3.2 The importance of mission and values for strategy

formulation and implementation
There are several reasons why a business should give serious consideration to
establishing a clear concept of its mission and values.
Buying decisions by consumers may be influenced by their perception of the
values of an organisation. Customers ask not only 'What do you sell?' but 'What do
you stand for?'
However, people may be suspicious of formal mission statements, for the
following reasons.
(a) They can sometimes be a public relations exercise rather than an accurate
portrayal of the firm's actual mission and values.
(b) They may be full of generalisations that are impossible to tie down to
specific strategic implications.
(c) They may be ignored by the people responsible for formulating or
implementing strategy.
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However, a mission statement, or a keen awareness of mission and values by top

management, can play an important role in the strategic planning process.
Mission statements and strategic planning

Inspires and informs Strategic plans should further the organisation's
planning goals and be consistent with its mission and core
values.
Screening Mission acts as a benchmark by which strategic
plans are judged. Strategic options that are
inconsistent with a company's mission should not
be considered.
4 Goals, objectives and targets

Companies may or may not have a formal mission statement or vision statement.
Even so, senior management should understand the purpose of the organisation
and what it is trying to achieve.
Business strategy planning involves setting more specific goals or objectives that
the organisation should achieve. For each identified objective, a strategy should
also specify a specific target for achievement.
Vision, mission and values provide a framework for making business strategy
decisions. Within this framework, management should decide specific strategies
and make more specific plans. Goals and objectives are an expression of how the
organisation will fulfil its mission.
The term 'goal' and 'objective' can mean the same thing. In business strategy
planning, they are something that the organisation wants to achieve.
Goals, objectives and targets

Goals A goal may be described as a long-term objective or
aspiration. Since a goal is long term, it will probably not be
fully achieved within the period of the business plan.
Mintzberg defined goals as 'the intentions behind decisions
or actions, the states of mind that drive individuals or
collectives of individuals called organisations to do what
they do'. Goals may be difficult to quantify and it may not be
very helpful to attempt to do so.
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Goals, objectives and targets

Objectives An objective may be short term or long term. To the extent
that the terms 'goal' and 'objective' differ in meaning, an
objective could be described as something that the
organisation wants to achieve within the period of the
business plan. Objectives can be fairly specific.
For each objective, a specific target can be set.
Targets A target is the measurement of an objective. Targets are
normally expressed in specific numerical terms and are
therefore easily used to measure progress and performance.
4.1 Examples: goals, objectives and targets

Here are some examples of goals, objectives and targets.
At a business level
Goal To be the leading shipping company in the region, and to maximise
shareholder wealth.
Objective Within the period of the business plan, to grow the volume of
shipping handled by the company and to increase profits and the
share price each year.
Target To increase shipping traffic by 10% in the first year of the plan and
by 7% in each subsequent year. To increase the share price by a
certain amount per year each year over the planning period.
At a functional level
Goal To reduce manufacturing costs to a point where the company is the
least-cost manufacturer of product X.
Objective To raise productivity in the manufacturing department that
produces product X.
Target To reduce the average time to make each unit of product X from 20
minutes to 19 minutes within the next year, and to 18 minutes
within two years.
Points to note about goals, objectives and targets are as follows.

(a) They are formulated at the overall business level, and also at operational and
functional level for each operation or function in the SBU.
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(b) They should be consistent with each other. In other words, there should be
'goal congruence'.
4.2 Purpose of setting objectives

There are several reasons for setting objectives in strategic planning.
Purposes of objectives
Planning Objectives define what the plan is about and what it is
trying to achieve.
Responsibility Objectives, particularly for functional strategies, define
the responsibilities of managers and departments.
Integration Consistent objectives that integrate the efforts of
different departments.
Motivation In order to motivate people, they need to know what is
expected. Objectives and target provide this
information.
Evaluation Performance is assessed by comparison with the
targets for objectives. Performance measurement
provides a basis for strategic control.
4.3 Objectives: SMART

Objectives should have certain qualities or characteristics, which can be
remembered by the word SMART.
Characteristics of an objective
S Specific An objective must be a clear and specific statement about
what should be achieved.
M Measurable Objectives must be measurable so that actual performance
or progress can be measured against the target for the
objective.
A Achievable Objectives should be realistically achievable. If the
objectives set are not achievable, people will not bother
trying to achieve them, so there is little point setting them.
R Relevant An objective is relevant if it is consistent with the
organisation's mission, and will help it fulfil that mission.
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Characteristics of an objective
T Time-related An organisation needs to define a specific time period in
which objectives should be achieved. Again, this is very
important for enabling management to judge whether or
not the objective has been achieved. For example, if an
organisation has an objective 'To increase sales revenue
by 5%', how will managers know the time period over
which this sales increase is expected? However, if the
objective is 'To increase sales revenue by 5% per year',
the time frame is clearly identified.
4.4 Primary and secondary objectives

Some objectives are more important than others. In the hierarchy of objectives,
there is a primary objective and other secondary objectives, which should
combine to ensure the achievement of the overall corporate objective.
For example, if a company sets itself an objective of growth in profits as its
primary aim, it will then have to develop strategies by which this primary
objective can be achieved. An objective must then be set for each individual
strategy. Secondary objectives might then be concerned with sales growth,
continual technological innovation, customer service, product quality, efficient
resource management or reducing the company's reliance on debt capital.
Whatever primary objective or objectives are set, subsidiary objectives will then
be developed beneath them.
Levels of objectives
Establish
objectives
(a) SBU level Outline corporate

strategy/plans
(b) Department level Manufacturing Marketing

objectives objectives
Develop departmental
strategies/plans
(c ) Efficient economic operation level Scheduling programmes/

action plans
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4.5 Time horizons: long-term objectives and short-term

objectives
Objectives may be long term and short term. A company that is suffering from a
recession in its core industries and making losses in the short term might continue
to have a long-term primary objective of achieving a growth in profits, but in the
short term, its primary objective might be survival.
4.6 Financial objectives

For commercial companies, the primary objective is usually concerned with
providing a return to shareholders or increasing shareholder wealth.
(a) A satisfactory return for a company must be sufficient to reward
shareholders adequately in the long run for the risks they take. The
reward will take the form of profits, which can lead to dividends or to
increases in the market value of the shares.
(b) The size of return that is adequate for ordinary shareholders will vary
according to the risk involved.
There are different ways of expressing a financial objective in quantitative terms.
Financial objectives would include the following:
• Profitability
• Return on investment (ROI) or return on capital employed (ROCE)
• Share price, earnings per share, dividends
• Growth in any of these
QUESTION Objectives
Identify possible objectives for a marketing department within a strategic plan.
ANSWER
Goals for markets will involve the following type of decisions.
(a) Market leadership. Whether the organisation wants to be the market
leader, or number two in the market, what rate of growth it desires and so
on
(b) Coverage. Whether the product range needs to be expanded
(c) Market positioning. Whether there should be an objective to shift position
in the market – for example, from producing low-cost for the mass market to
higher-cost specialist products
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(d) Product/market expansion. Whether there should be an objective of

broadening the product range or extending the organisation's markets
4.7 Ranking objectives and trade-offs

Where there are multiple objectives, a problem of ranking can arise.
(a) There is never enough time or resources to achieve all of the desired
objectives.
(b) There are degrees of accomplishment. For example, if there is an objective
to achieve a 10% annual growth in earnings per share, an achievement of 9%
could be described as a near-success. When it comes to ranking objectives, a
target ROI of, say, 25% might be given greater priority than an EPS growth of
10%, but a lower priority than an EPS growth of, say, 15%.
When there are several key objectives, some might be achieved only at the
expense of others. For example, attempts to achieve a good cash flow or good
product quality, or to improve market share, might call for some sacrifice of
short-term profits.
4.8 Example: trade-off between objectives

A company has to make a choice between the following two mutually-exclusive
options.
Option A 15% sales growth, 10% profit growth, a Rs. 20 million negative cash
flow and reduced product quality and customer satisfaction.
Option B 8% sales growth, 5% profit growth, a Rs. 5 million surplus cash flow,
and maintenance of high product quality/customer satisfaction.
If the company chooses option B in preference to option A, it would be trading off
sales growth and profit growth for better cash flow, product quality and customer
satisfaction. It may feel that the long-term effect of reduced quality would negate
the benefits under option A.
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5 Environmental scanning
In order to identify the strategic choices available, an organisation should begin by
studying the environment in which it operates. There are two aspects to
environmental scanning: looking at the general business environment and looking
at the specific industry or market environment in which the organisation operates.
Scanning the broad business environment can be done using PESTEL analysis
(also known as PEST analysis). The organisation's industry and markets can be
studied using techniques such as competitor analysis or Porter's five forces model.
5.1 PESTEL analysis: studying the broad business environment

An organisation should carry out a thorough review of its environment when
formulating its business strategy. The environment is changing continually, and
management should try to understand what is happening, and what the
consequences might be for their organisation.
Changes in the environment will create both threats to the organisation and also
opportunities for pursuing its goals more successfully.
Without environmental analysis, management may not identify important changes
that are happening, before it is too late to react to them successfully.
This chapter does not go into detail about analysing the business environment,
because you should be familiar with this topic from your previous studies of KE5:
Commercial Insight for Management.
PESTEL: a framework for scanning the broad business environment, using six
categories of environmental influence – political, economic, social and cultural,
technological, ecological and legal.
A brief summary of the PESTEL approach to environmental analysis is given

below.
PESTEL analysis
Purpose: A structured approach to environmental analysis.
Method: The general business environment of the organisation is analysed using
six categories of environmental change and influence, represented by the letters
PESTEL. Management consider the major factors and the changes that are
occurring in each of these six categories:
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Category
P: Political What, if anything, are the significant factors in the political
environment? Does the company operate in a politically
stable country? Are there any threats to political stability?
Does the government seek to influence business? If so,
how? Is political change a possibility? If so, what might be
the consequences for the organisation?
E: Economic What is the current state of the economy? How are
economic conditions expected to change in the future?
What economic factors are particularly important for the
organisation – interest rates, a key exchange rate, the rate
of inflation the level of consumer spending, unemployment
rates?
S: Social and Are there any significant social and cultural influences that
cultural affect the organisation? Are any changes expected in the
future? Social and cultural changes can be triggered by a
change in the demographics of the population (a change in
the age structure of the population). They can affect the
way that people think and behave, and this in turn can
affect what they want to buy.
T: Technological What are the important technological influences on the
organisation and how are these likely to change? Changes
in information technology, the media and communications
are having profound effects globally. Companies in
different industries may be affected by changing
technology in different ways.
E: Environmental Over time, companies are likely to be affected increasingly
or ecological by concerns about the environment, particularly climate
change, and the implications of polluted air, land and
water; rising sea levels; water shortages and so on.
L: Legal What are the significant laws and regulation affecting the
organisation? Are any major changes expected or possible
in the next few years? If so, how might they affect the
organisation?
If you are asked in your examination to examine and comment on the business
environment of a company, you may find it very useful to plan your answer in
terms of a PESTEL analysis.
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5.2 Competitor and industry analysis

In addition to studying the broad business environment, management should
include an analysis of their industry, markets and competitors as part of their
environment screening and position analysis. A variety of techniques can be used
to do this.
Methods of analysis
Competitor analysis Competitor analysis, as the term indicates, is analysis of
major competitors, and considering how the strategies
and activities of competitors are affecting the
organisation. This type of analysis should include a
comparison of the resources and competences of
competitors. Do competitors have any unique resource
or core competence that gives them a competitive
advantage? Do we have any competitive advantage over
competitors? What strategies might our main
competitors follow in the next few years?
Life cycle analysis This method looks at the life cycle of a product or an
industry as a whole, to establish which stage in its life it
has reached, and how long its life might continue before
it goes into decline and ends. Can anything be done to
prolong the life of a product or industry? The most
serious environmental change probably occurs when
the industry as a whole is going into decline.
Product portfolio A company could use the Boston Consulting Group
analysis (BCG) matrix to analyse the competitive positioning of
its product portfolio.
Porter's five forces You should be familiar with this model from your
model previous studies.
5.2.1 Porter's five forces model

Porter suggested that there are five different forces that can affect the
competitiveness of a market. When a market is very competitive, the
opportunities for making profits are limited. In strategic terms, a highly
competitive market is a bad market for a company to be in. A market with only
weak competition on the other hand, provides opportunities for high profits – but
only as long as the competition remains weak.
Five forces model: a model for analysing the strength of competition and
prospects for profitability in an industry.
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The five forces in Porter's model are as follows:
Five forces affecting market competition

1 Threat of new Competition in a market is strong and/or profitability
entrants is low when barriers to entry to the market are low,
and new competitors could enter the market easily if
profitability in the industry were to rise.
2 Bargaining power Competition in a market is strong and/or profitability
of suppliers is low when the major suppliers have strong influence
over the industry supply chain, and dictate terms of
business.
3 Bargaining power Competition in a market is strong and/or profitability
of customers is low when the major customers have strong
influence over the industry supply chain, and dictate
terms of business.
4 Substitutes Competition in a market is strong and profitability is
low when there are readily-available substitutes for
the product. The existence of substitutes means, for
example, that if companies tried to raise their selling
prices, customers would switch to buying the
substitute product.
5 Industry This refers to the strength of the rivalry and
competitors competition between existing companies in the
market.
6 SWOT analysis
In addition to carrying out a study of the broad industry environment and the
industry and competition in the markets where the organisation operates, the
next stage in strategic position analysis is to assess the strengths and weaknesses
of the organisation's resources and competences, and the threats and
opportunities that exist in the organisation's environment. This approach to
position analysis is called SWOT analysis.
SWOT analysis is simply an analysis of the results of environmental scanning, and

the review of resources and competences, to identify:
• In what areas is the organisation strong, and where is it weak?
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• What are the main threats to the organisation and its business, and what
business opportunities might exist?
SWOT analysis is the analysis of the strengths and weaknesses of an organisation,
and also the threats and opportunities it faces in its environment.
In its simplest form, SWOT analysis can be carried out by listing important
strengths, weaknesses, opportunities and threats in a 2×2 matrix, as follows.
SWOT analysis
Resources and competences STRENGTHS WEAKNESSES
Environmental factors OPPORTUNITIES THREATS
Having identified strengths weaknesses, opportunities and threats, the

organisation can take strategic planning to the next stage:
• What strategic options are available to exploit the strengths of the
organisation in order to achieve its objectives?
• What strategic options should be considered to remedy the major
weaknesses of the organisation in order to improve its chances of achieving
its objectives?
• What strategic options are available to exploit opportunities in the market
place?
• What strategic options should be considered to protect the organisation
against the major threats it faces?
Strategic choices are discussed in more detail in the next chapter.
QUESTION Strategic gaps

Strategic opportunities may take the form of strategic gaps. These are potentially
profitable aspects of the competitive environment that are not currently being
exploited by rivals. State three examples of how strategic opportunities may arise.
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ANSWER
Here are four suggestions.
(a) Potential substitutes for existing products might be created. This is largely a
technology-based opportunity.
(b) It may be possible to target different strategic customers. In the case of
consumer goods, for example, the growth in online selling via the internet
means that producers are able to target a different types of customer – the
end consumer, rather than retailers or other distributors of their products.
(c) There may be potential to market complementary products. For example,
capital goods suppliers (such as car sales firms) routinely offer credit
services to assist the customer to buy. Some sellers of domestic equipment
such as washing machines and cookers may offer after-sales maintenance
services for the capital goods item.
(d) New market segments may be identified that have commercial potential,
though there may be a need to adapt the product to meet the needs of
customers in the new targeted segment.
7 Critical success factors (CSFs)

A formal strategic planning process involves setting objectives at SBU level and
subsidiary objectives at operational or functional level. To achieve a strategic
objective, there will be one or two factors critical to the success of the strategy.
These are known as critical success factors or CSFs.
Critical success factors (CSFs) are those actions that must be performed well in
order for the goals and objectives established by an organisation to be met
successfully.
7.1 Definitions of CSFs

There are many definitions of CSFs. One is given above, another is provided below.
Johnson, Scholes and Whittington (JS&W) define CSFs as: 'those components of
strategy where the organisation must excel to outperform competition. These are
underpinned by competences which ensure this success'.
The consistent factor across these and other definitions is that to 'qualify' as a CSF
the item must be essential to an organisation achieving success. Common
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examples of CSFs include product quality, brand awareness, customer satisfaction

and employee satisfaction.
Remember though that the environment, and an organisation's goals, change over
time. Therefore, an organisation's critical success factors are also likely to change
over time.
7.2 Using CSFs

JS&W describe a six stage process for using CSFs for operational or functional
strategies.
Using CSFs
Identify the CSFs Identify the CSFs for the process under review.
Try to restrict the number of CSFs to six or less. If
there are too many success factors, it is unlikely
that they will all be 'critical'.
Identify the underlying Identify the underlying competences required to
competences gain a competitive advantage in each of the CSFs.
Check for competitive Ensure the competences of the organisation are
advantage sufficient to generate the required competitive
advantage.
Develop performance Key performance indicators (KPIs) are described
standards for each CSF later.
Review competitors Ensure these standards cannot be matched by
competitors. (If they can be matched by
competitors they will not form the basis of
competitive advantage.)
Monitor competitors when Assess the impact on the CSFs of any response
the chosen strategy is competitors may make.
implemented
7.3 Example: CSFs

For example, the objective of a SBU may be to increase sales of its products over
the next five years. Factors that are critical to achieving this objective may be
identified as:
• Effective selling by the company's sales team
• Improving the quality of products
• Producing a regular stream of innovative new products
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Unless each of these critical requirements is achieved, the objective of increasing

sales might fail.
Consequently, it is critically important that targets for each of these critical factors
should be met.
7.4 Identifying CSFs

The critical success factors for an organisation's strategy will depend on:
• The nature of the organisation and its markets
• The objectives that it has identified at SBU or operational/functional level
• Its strengths, weaknesses, opportunities and threats
CSFs therefore vary between organisations and situations.
8 Key performance indicators

The importance of this definition is that it links to the idea of performance. If an
organisation has identified the components of its strategy where it needs to
outperform the competition, it also needs some way of being able to measure its
performance in those areas.
These key performance measures, known as key performance indicators (KPIs),
are a key part of the control system for reviewing how successfully a strategy has
been implemented and how well an organisation is performing.
There should be a key performance indicator (or a small number of KPIs) for
every CSF.
Key performance indicator (KPI): an important measure of a critically

important aspect performance, for which a target is set and actual performance is
measured.
Having identified which areas an organisation needs to perform well in, its
performance in those areas also needs to be measured. Therefore, one or more
key performance indicators (KPIs) have to be established for each CSF. The
purpose of KPIs is to enable management to measure and control progress in each
of the CSFs.
Critical success factors are not limited to financial factors. Organisations have to
perform well across a range of activities to succeed strategically. Therefore CSFs
and KPIs should focus on key value chain processes and supply chain processes, as
well as on financial performance.
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Some possible KPIs are outlined below.
Sphere of activity Critical success factor Key performance

indicators
Marketing and Sales growth Sales volume
sales Market share
Sales per sales representative
Number of new accounts
Production Reduce production costs Capacity utilisation
Level of defects
Logistics Reliable delivery service % of deliveries on time
It is important to appreciate the relationship between, and the difference between,

objectives, CSFs and KPIs.
Objectives, CSFs and KPIs and targets

Objective An aim that the organisation wants to achieve within the
strategic planning period.
CSF A factor that will be critical to success in achieving that
objective.
KPI A measure for the CSF and comparing actual results against
the strategic requirement and target. KPIs give a measurable
quantity to a CSF.
Target A measure for a KPI that is set as a target for achievement
within the strategic business plan.
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CHAPTER ROUNDUP
 Business strategy is concerned with deciding the broad objectives for the
business, and setting specific targets or objectives for achievement within a
planning period. Strategic planning occurs at different levels within a business
organisation: at the overall corporate level, at divisional level within the
organisation as a whole, and at functional or operational level for each business
division.
 Business strategy is formulated at the divisional level or SBU level within large
organisations. There is a rational process of business strategy formulation. This
begins with a review of the organisation's strategic position: Where is it now?
Where does it want to be in the future? Where will it get to if it makes no strategic
initiatives? What is the gap between where it expects to be and where it wants to
be?
 The next stage is to consider a range of different strategies for filling this 'strategic
gap'. Different strategic choices should be considered, and a choice of preferred
strategies should be made. Choices should be made at the business level first, and
then at the operational or functional level.
 When strategic choices have been made, the next step is to put them into action.
 Vision and mission give an organisation the reason for its existence, and should
guide the strategic decisions that are taken by management.
 An organisation should also have core values, embedded in its corporate culture,
about what it considers important and how it should behave in pursuing its
mission.
 Companies may or may not have a formal mission statement or vision statement.
Even so, senior management should understand the purpose of the organisation
and what it is trying to achieve.
 Business strategy planning involves setting more specific goals or objectives that
the organisation should achieve. For each identified objective, a strategy should
also specify a specific target for achievement.
 In order to identify the strategic choices available, an organisation should begin by
studying the environment in which it operates. There are two aspects to
environmental scanning: looking at the general business environment and looking
at the specific industry or market environment in which the organisation operates.
 Scanning the broad business environment can be done using PESTEL analysis
(also known as PEST analysis). The organisation's industry and markets can be
studied using techniques such as competitor analysis or Porter's five forces model.
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 In addition to carrying out a study of the broad industry environment and the
industry and competition in the markets where the organisation operates, the
next stage in strategic position analysis is to assess the strengths and weaknesses
of the organisation's resources and competences, and the threats and
opportunities that exist in the organisation's environment. This approach to
position analysis is called SWOT analysis.
 A formal strategic planning process involves setting objectives at SBU level and
subsidiary objectives at operational or functional level. To achieve a strategic
objective, there will be one or two factors critical to the success of the strategy.
These are known as critical success factors or CSFs.
 Critical success factors (CSFs) are those actions that must be performed well in
order for the goals and objectives established by an organisation to be met
successfully.
 The importance of the definition of KPI is that it links to the idea of performance. If
an organisation has identified the components of its strategy where it needs to
outperform the competition, it also needs some way of being able to measure its
performance in those areas.
 These key performance measures, known as key performance indicators (KPIs),
are a key part of the control system for reviewing how successfully a strategy has
been implemented and how well an organisation is performing.
 There should be a key performance indicator (or a small number of KPIs) for
every CSF.
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PROGRESS TEST
1 A company has announced its intention of becoming one of the country's leading
producers of tea for export. This announcement is a statement of the company's:
A Vision
B Mission
C Goal
D Objective
2 Fill in the blanks.

An objective should be:
S _____________________________
M _____________________________
A _____________________________
R _____________________________
T _____________________________
3 Components of strategy where an organisation must excel in order to outperform

its competitors are known as ___________________ __________________ _______________ .
4 There may be more than one key performance indicator for a critical success
factor.
True or false?
5 Which of the following procedures is used by an organisation to assess what

resources it has and what competences it possesses?
A Five forces analysis
B Resource analysis
C SWOT analysis
D PESTEL analysis
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1 The answer is C. Goal. The aim does not have a time frame for achievement, and it
is not specific enough to be expressed as a target. It is therefore a goal rather than
an objective.
2
S Specific
M Measurable
A Achievable
R Relevant
T Time-related
3 Critical success factors
4 True. Every CSF should have at least one KPI.
5 The answer is B. Resource analysis. PESTEL and five forces analysis are methods
of environmental analysis. SWOT analysis is an analysis of strengths and
weaknesses that are evident from a resource analysis and opportunities and
threats that are identified from environmental analysis.
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CHAPTER
INTRODUCTION
The previous chapter described the strategic planning process, mainly at the level of the strategic business unit
(SBU – business strategy level and operational or functional level). Operational or functional strategies must be
consistent with each other, and are secondary to the overall business strategy for the SBU.
This chapter covers the broad areas of identifying alternative strategies and making strategic choices, and the
implementation and evaluation of strategies. It also introduces the topic of game theory as a possible approach
to strategy selection taking competitive strategy into consideration.
Knowledge Component
7 Strategy for value creation
7.4 Formulation of business 7.4.1 Compare and contrast alternative business level strategies for each SBU
level strategy (including generic strategies, strategic clock, blue ocean and red ocean and
competitive strategies based on market position)
7.5 Strategic behaviour under 7.5.1 Assess the strategic behaviour in interacting with others (modelled as games)
competitive markets (game and strategic interactions among businesses, in order to maximise their own
theory) profit (Nash equilibrium, dominant and dominated strategies)
7.6 Evaluation and 7.6.1 Evaluate different strategies for SBUs
implementation of 7.6.2 Recommend appropriate strategies using frameworks such as ‘suitability,
business level strategy acceptability, feasibility’ (SAF) and McKinsey's 7S
7.7 Monitoring and control 7.7.1 Evaluate the success of an implemented strategy, via a mix of financial and
non-financial measures
7.7.2 Advise on the changes to strategy with reference to respective KPIs and NFPIs
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KB5 | Chapter 10: Formulating, Implementing and Evaluating Strategy
LEARNING
1 Formulating strategy at the business level 7.4.1
2 Generic competitive strategies 7.4.1
3 The strategy clock 7.4.1
4 Blue ocean and red ocean strategies 7.4.1
5 Competitive strategies based on market position 7.4.1
6 Strategic behaviour and competitive markets: game theory 7.5.1
7 Evaluation and recommendation of strategies for SBUs 7.6.1, 7.6.2
8 Suitability, acceptability, feasibility (SAF) 7.6.2
9 Monitoring strategic performance 7.7.1
10 Strategic control 7.7.2
1 Formulating strategy at the business level

Once an organisation has identified the opportunities and threats in its external
environment and its internal strengths and weaknesses, it must make choices
about what strategies to pursue in order to achieve its targets and objectives.
Strategy formulation at the level of the SBU (the business level) is concerned
mainly with decisions about products and markets, such as what products the
division should be producing and selling and what market segments they should
be targeting.
In this chapter, the main focus is therefore on issues relating to products and
markets. It is not concerned with corporate level decisions (takeovers, mergers,
choice of industry to operate in, financing decisions and so on). It is concerned
with operational and functional strategies only to the extent that these support
business level strategy.
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1.1 Strategic choices

It is possible to analyse strategic choice into three categories.
Category of strategic choice

Competitive strategies Competitive strategies are the strategies an
organisation will pursue for competitive
advantage. They determine how you compete.
Product-market strategies Product-market strategies determine where you
compete and the direction of growth.
Institutional strategies Institutional strategies determine the method of
growth – for example, by organic growth or
through mergers and acquisitions. These
strategies are decided at the corporate level and
are not considered in this chapter.
There are different ways of thinking about strategic choices, and some of these are
described in this chapter.
1.2 Strategic choices, the value chain and the supply chain
Strategic options that an organisation may choose will affect the value chain or
the supply chain. Successful strategies will add value for the organisation,
through increasing revenues and profits, or reducing costs.
Value may be increased by:
(a) Improving the efficiency and effectiveness of activities in the value chain
(b) Product innovation
(c) Changing the focus of marketing on to different segments and using
differentiation strategies in each segment
(d) Re-structuring the supply chain; for example, using online selling to sell
direct to the consumer and relying less on selling through retailers and other
distributors
1.3 Economies of scale

You should be familiar from your previous studies with the concept of economies
of scale.
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This is the economic concept that by producing at a higher level of output capacity,
an organisation should be able to reduce average unit costs. Economies of scale
can be achieved by means of:
(a) More efficient operating practices; for example, using larger and more
efficient machines and equipment
(b) Greater use of specialised labour and specialised equipment, which are more
productive and efficient
(c) Spreading fixed costs over a larger volume of output
An important factor in business strategy is the capacity of output that the
organisation should seek to create, and the level of output and sales at which it
should seek to operate.
In other words, organisations should decide on the level of unit costs that it wants
to achieve. As a general rule, because of economies of scale, it may be possible to
reduce unit costs, and so compete in the market on cost and selling price, by
becoming a large-scale producer.
1.4 Products and strategy

The choice of business strategy will depend to some extent on the type of product
(or service) that the company produces.
Types and categories of product for strategic analysis

Types of product
Search products These are products whose attributes the consumer can
discern, evaluate and compare fairly easily, for example
by comparing look, colour, size and so on. Clothing
products are an example.
Experience products These are products whose attributes cannot be
understood by the consumer until they have had
experience of using the product – for example, taste in
the case of food products.
Credence products These are products whose important attributes cannot
be evaluated by the consumer either because the
product's attributes might vary the next time (for
example, the quality of service in a restaurant or hotel)
or because the product's attributes cannot easily be
evaluated (for example, food purchased for pet
animals).
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Categories of product
Breakthrough These are innovative products that offer a radical
products performance advantage over rival products; a
drastically lower price; or (ideally) both better
performance and lower price.
Improved products These products are not radically different from
products of competitors, but they offer superior
performance at a competitive price.
Competitive products These products have no obvious advantage over rival
products of competitors, but derive their appeal from a
particular compromise or balance between price and
performance/quality. Many consumer products are
competitive products.
1.5 Strategic marketing issues

The choice of business strategy is also affected by strategic marketing issues.
These have been explained in previous chapters. Briefly, it may be important to
consider the following marketing issues.
Strategic marketing issues

Market segmentation and A standard product might satisfy the needs of all
targeting customers in the market. On the other hand,
variations in product design might appeal more
strongly to some prospective customers than
others.
Customers differ in various respects – according
to age, sex, income, geographical area, buying
attitudes, buying habits and so on. Each of these
differences can be used to segment a market.
Extending a product's life The expected product life cycle can affect strategic
cycle choice. A life cycle may be extended through
further segmentation.
Market share Market share may be a strategic objective. A
company may want to select a suitable strategy
that will improve its share of the total market, or
its share of a market segment.
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Strategic marketing issues

Survival Marketing strategies may be needed to protect a
company from the threat of collapse in the face of
intense competition.
2 Generic competitive strategies

Porter has suggested there are three generic business strategies: cost leadership,
differentiation and focus. A company should select one of these three strategies
as a way of competing in its markets.
Generic strategy: a strategy for achieving competitive advantage.
Porter argued that a firm should adopt a competitive strategy that is intended to
achieve some form of competitive advantage. A firm that has a competitive
advantage over its rivals is able to make high profits. In terms of economic theory,
this is 'excess profit'.
The existence of excess profit tends to be temporary because high profits in an
industry or market will attract new competitors. However, as long as a company
continues to earn excess profit in spite of the competition, it has a sustainable
Competitive strategy means 'taking offensive or defensive actions to create a
dependable position in an industry, to cope successfully with ... competitive forces
and thereby yield a superior return on investment for the firm. Firms have
discovered many different approaches to this end, and the best strategy for a given
firm is ultimately a unique construction reflecting its particular circumstances'
(Porter).
2.1 The choice of competitive strategy

Porter suggested that there are three generic strategies for competitive
advantage, and to be successful, a company must choose only one of the strategies.
If they try to combine more than one, they risk losing their competitive advantage
and becoming 'stuck in the middle'.
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Generic competitive strategy
Cost leadership This means being the lowest cost producer in

the industry as a whole.
Differentiation This is the creation of factors that make a
product different and so more attractive than
rival products. The industry as a whole
believes the product to be unique.
Focus Focus involves a restriction of activities to only
part of the market (a segment) through:
 Providing goods and/or services at lower
cost to that segment (cost-focus)
 Providing a differentiated product or service
to that segment (differentiation-focus)
A cost leadership strategy and a differentiation strategy are strategies aimed at

the total market for a product. A focus strategy concentrates on one or more
market segments, and pursues a cost leadership or differentiation strategy within
the chosen segment(s).
2.2 Cost leadership strategy

A cost leadership strategy seeks to achieve the position of lowest-cost producer
in the industry as a whole.
By producing at the lowest cost, the manufacturer can either:

(a) Charge the same price as its competitors knowing that this would enable it to
generate a bigger profit per unit
(b) Charge a lower price than competitors. This could be particularly beneficial
if the goods or services that the organisation sells are price-sensitive,
because it would help the manufacturer to win a large market share.
Ways of reducing costs to achieve cost leadership

Economies of scale This is a critical factor in achieving cost
leadership within the industry.
Use the latest technology Technology such as computer aided
design and computer aided manufacture
(CAD/CAM) can help to reduce unit costs
of production.
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Improve productivity
Minimise overhead costs Eliminate unnecessary spending. Large
volumes of output will reduce the
average fixed overhead cost per unit.
Favourable access to sources of Get favourable access to sources of
supply supply, and buy in bulk, in order to
obtain discounts for bulk purchases.
Relocate operations to a cheaper Possibly relocate operations to a country
area where costs, including labour costs, are
cheaper.
Use of IT Using IT systems can reduce operating
costs and improve management
information.
2.3 Differentiation strategy

A differentiation strategy assumes that competitive advantage can be gained
through particular characteristics of a firm's products or processes.
The aim of a differentiation strategy is to persuade customers in the market to buy

the company's product or service) because of its distinctive characteristics. The
distinctive features of the product add value for customers.
Differentiation is often used to justify charging a higher price for its products than
competitors charge for theirs. This can allow a company to earn higher margins
than its rivals.
Ways of differentiating a product or service

Product design Give the product special features to make it clearly different
(and more attractive) than rival products. Quality and style
can be important distinguishing features for a product.
Brand image Build a brand image, perhaps through marketing, so that
customers see the brand as something desirable.
It has been suggested, however, that the value of a brand in
creating differentiation is not as effective now as in the past.
Advertising Advertising may be used to enhance customer perceptions of a
product or service.
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Ways of differentiating a product or service

Distribution It may be possible to differentiate a product in the way that it
is made available and delivered to the customer. The great
success of Amazon, for example, began with its unique
strategy of online selling and rapid delivery to the customer's
address.
2.4 Focus strategy (niche strategy)

With a focus strategy, a firm concentrates its attention on one or more particular
segments or niches within the total market, and does not try to serve the entire
market with a single product. Market segmentation, targeting and positioning was
explained in a previous chapter.
Focus strategy: a generic strategy that focuses on being cost leader or achieving
product differentiation in a particular targeted segment or niche of the market.
Within a segment or niche of the market, a company can either seek to be the
least-cost producer, or differentiate its product within the market segment.
Focus strategies
Cost-focus Aim to be the cost leader in a particular segment of the
strategy market. This type of strategy is often found in market
segments within the printing, clothes manufacture and car
repair industries.
Differentiation- Pursue a strategy of differentiation for a chosen segment.
focus strategy Luxury goods and high fashion markets are examples of such
a strategy.
Advantages and disadvantages of a focus strategy

Advantages Disadvantages
By specialising in a particular area of The company is unable to achieve the
expertise or a particular aspect of same economies of scale that might be
product design, the company can appeal possible if it tried to achieve cost
strongly to a particular segment of leadership in the entire market.
customers in the market.
It is easier to defend market share However, there may be a threat that a
against competitors. large competitor will enter the market
segment with more resources at its
disposal.
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Advantages and disadvantages of a focus strategy

Advantages Disadvantages
Because the segment is smaller than the The life cycle for a market segment may
entire market, marketing costs should be much shorter than for the market as
be lower with a focus strategy. a whole.
Customer needs within the market as a The chosen market segment may not be
whole can differ substantially, creating sufficiently large to create value and
opportunities for segmentation. returns to satisfy shareholders.
2.5 Which generic strategy to choose?

Although there is a strategic risk with any of the generic strategies, Porter argues
that a firm must pursue one of them. A stuck-in-the-middle strategy based on
two or more generic strategies is almost certain to result in only low profits.
A firm with a stuck-in-the-middle strategy: 'lacks the market share, capital
investment and resolve to play the low-cost game, the industry-wide
differentiation necessary to obviate the need for a low-cost position, or the focus
to create differentiation or a low-cost position in a more limited sphere' (Porter).
QUESTION Differentiation strategy

A parcels and packages delivery company is based in Colombo. It collects and
delivers packages for customers using in its own vehicles. There are several
competitors in the market.
Explain how the company might seek to differentiate its service from those of its
competitors.
ANSWER
Suggested bases for differentiation are:
• Speed of collection (from time of receiving customer order)
• Speed of delivery (from time of collection)
• Reliability of service
• Brand name recognition
• Geographical coverage (for example, specialist in deliveries to China)
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2.6 Limitations of Porter's model

Porter's generic strategies model is conceptually fairly simple and easy to
understand, but it has some limitations.
Problems with the concept of cost leadership strategy

It has an inward-looking and Cost refers to internal measures, rather than the
internal focus market demand. It can be used to gain market
share: but it is the market share that is
important, not cost leadership as such.
Economies of scale are an effective way to
achieve low costs, but they depend on high
volumes, which in turn depend on high sales
demand. High volumes may depend on low
prices, which, in turn, require low costs. So,
which comes first: lower costs and prices, or
higher sales demand?
Only one company can be the If cost leadership applies cross the whole
cost leader in the market industry, only one firm will pursue this strategy
successfully. However, more than one firm might
aspire to cost leadership, especially in dynamic
markets where new technologies are frequently
introduced.
Firms competing across the industry as a whole
might have different competence or advantages
that confer cost leadership in different segments.
Least-cost may not mean There is often confusion about what cost
lowest price leadership actually means. In particular, cost
leadership is often assumed to also mean low
price. However, 'cost leadership' and 'low
price' are not necessarily the same thing.
A cost leader can choose to 'invest higher
margins in R&D or marketing'. Being a cost
leader arguably gives producers more freedom
to choose other competitive strategies.
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Problems with the concept of differentiation strategy

Pricing a differentiated Porter assumes that a differentiated product
product will always be sold at a higher price. However, a
differentiated product may be sold at the same
price as competing products in order to increase
market share.
The nature of differentiation Differentiation includes all aspects of the firm's
offer, not only the product design. For example,
restaurants try to distinguish themselves from
their competitors through their ambience and
the quality of their service as well as by serving
high-quality food.
Segmentation Differentiation in the market as a whole will
often lead to market segmentation.
Segmentation means that a differentiation
strategy for the entire market is not possible.
Focus strategy probably has fewer conceptual difficulties, as it ties in very neatly
with ideas of market segmentation. In practice, most companies pursue this
strategy to some extent, by designing products/services to meet the needs of
particular target markets.
Companies may pursue a 'stuck-in-the-middle' strategy quite successfully. A
variety of strategies can be pursued, especially in a segmented market, with
different approaches to price and the perceived added value (the differentiation
factor) in the eyes of the customer.
For these reasons, Porter's model does not represent the full range of competitive
strategies that an organisation can choose from.
3 The strategy clock

Porter's ideas about generic competitive strategies, and the idea that firms can
successfully pursue a number of strategies based on price and perceived added
value, have been extended into the concept of the strategy clock.
Strategy clock: a model for analysing competitive strategies, according to

different combinations of price and value for the customer.
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The strategy clock is based on the view that in a competitive situation, rational
customers will seek value for money in their purchases, and value for money is
provided through the combination of price and perceived product/service
benefits.
The strategy clock (developed by Bowman) can be seen as a successor to Porter's
generic strategies. The strategy clock identifies eight different strategies a firm
can take in terms of price and adding value.
The eight strategies on the clock represent different approaches to creating value
for the customer. Each customer will buy from the provider whose offering most
closely matches their own view of the proper relationship between price and
perceived benefits.
Bowman's strategy clock
Each position on the clock has its own critical success factor, since each strategy
is defined in market terms.
(a) Strategic positions 1 and 2 will attract customers who are price conscious
above all, with position 2 giving a little more emphasis to serviceability.
These are typical approaches in commodity markets.
(b) In contrast, strategies 4 and 5 are relevant to consumers who require a
customised product; for example, professional service firms have often used
these strategies as a basis for competition.
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3.1 No frills strategy

A no frills strategy combines a low price with low perceived product/service
benefits.
A no frills strategy is appropriate for commodity-like products or for markets
where customers are very price conscious. It is also suitable in markets where
there is little opportunity for competition on product features. Car fuel may be an
example.
A no frills strategy may be used for market entry, to gain experience and build
volume. If the market leaders are competing on other bases, a no frills strategy
may give new entrants a way of establishing themselves in the market before
moving on to other strategies.
This was done successfully by Japanese car manufacturers in the 1960s. More
recently, it has been achieved successfully in the airline industry, by companies
such as Southwest Airlines in the US and the Irish-based airline Ryanair.
3.2 Low price strategy

A firm pursuing a low price strategy aims to offer better value than its
competitors. It seeks to do this by offering the same perceived product or service
benefits as its competitors, but at a lower price.
However, a potential drawback with such a strategy is that it could lead to a
price war, if competitors lower their prices as well. A price war would reduce
profit margins for all players in the market.
Porter's generic strategy of cost leadership is comparable with this strategy on
the strategic clock. However, the challenge that firms face is how to reduce their
costs to a level that competitors cannot match. If a firm can establish unique cost
competences, then a low price strategy could afford it a sustainable competitive
advantage.
3.3 Hybrid, differentiation and focused differentiation strategies

Strategies 3, 4 and 5 on the strategy clock are variations of differentiation strategy.
Each one represents a different trade-off between market share (with its cost
advantages) and margin (with its direct impact on profit).
3.3.1 Hybrid strategy

A firm pursuing a hybrid strategy seeks both differentiation and a lower price
than its competitors. The firm's cost base must be low enough to permit reduced
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prices and yet still retain high enough margins to be able to reinvest.
Reinvestment is necessary to maintain differentiation.
Nonetheless it could be argued that a firm that has a differentiated product should
not need to have a lower price than its competitors, because differentiation should
enable it to achieve prices that are equal to its competitors. Following this logic,
we might question whether a hybrid strategy can be a successful competitive
strategy or whether it will be an unsatisfactory compromise between
differentiation and low price.
3.3.2 Broad differentiation strategy

A broad differentiation strategy (strategy 4 on the strategy clock) seeks to provide
products or services that offer benefits that customers value and that are different
from competitors' offerings.
The basic differentiation strategy can be achieved in two ways:
(a) Offering better products or services than competitors at a higher price
(price premium), to enhance profit margins.
(b) Offering better products or services at the same price as competitors
(competitive price), in order to build market share.
The chosen basis for differentiation, which will probably need to be developed
over time, should be inherently difficult to imitate so that it gives the firm a basis
for a sustainable competitive advantage.
A differentiation strategy can be vulnerable to price-based competition. There
may be occasions when differentiation is not sufficient to affect customers'
purchasing decisions in the face of lower prices.
3.3.3 Focused differentiation strategy

A firm pursuing a strategy of focused differentiation seeks a high price premium
in return for a high degree of differentiation in a well-defined and probably quite
restricted market segment (niche). Focused differentiation strategies are often
used for premium products that are heavily branded.
However, focused differentiation raises some important issues:
(a) A firm may have to choose between focused differentiation (position 5 on
the clock) and broad differentiation (position 4). A firm looking at
international growth is likely to have to choose between building
competitive advantage at a global level and with a global product (broad), or
tailoring its products/services to specific markets (focus).
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(b) Focus is a common start-up strategy. Expansion of the business may require
a gradual move to a broader and less-focused differentiation. Moving from
focused to broad differentiation may require a reduction in price, and
therefore also in cost, while still maintaining the differentiating features of a
product or service.
(c) Customer needs change over time. A market niche may have only a limited
life, which means that a company may be unable to pursue focused
differentiation successfully in the same market niche over a long time.
3.4 Failure strategies on the strategy clock

Combinations 6, 7 and 8 on the strategy clock are likely to result in failure. A
failure strategy is one that does not provide customers with perceived value for
money – either with respect to product features, or price, or both.
Failure strategies
Strategy 6 High The strategy is to increase profit margins by
price/standard charging a high price while keeping costs (and by
value inference, value) constant. However, unless the
firm pursuing this strategy is a monopoly or is
somehow protected by legislation or high barriers
to entry, it is likely that such a strategy will result in
lost market share. Customers will switch to a rival
product that offers the same value for a lower price.
Strategy 7 High price/low Position 7 on the clock is even more likely to result
value in failure than strategy option 6. A strategy that
sees a firm charging a high price for low value does
not deserve to retain any customers. Position 7 on
the clock is only likely to be feasible when the
company has a monopoly control over the market.
Strategy 8 Low The logic of this strategy is to achieve a high profit
value/standard margin by keeping costs low, and in doing so
price offering low value, but charging a standard price.
This strategy is likely to result in a loss of market
share. Customers will become aware of the low
value, and switch their purchases to competitors
whose products or services cost the same but offer
more value.
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4 Blue ocean and red ocean strategies

A different approach to identifying competitive strategies was suggested by Kim
and Mauborgne in 2005. They made a distinction between two different types of
strategy, which they called red ocean and blue ocean strategies.
A blue ocean strategy involves finding innovative ways to create value for
customers while at the same time reducing costs for the organisation.
Red ocean strategy means competing in existing markets with existing products.
In a highly competitive market, little or no value is gained from this.
Blue ocean strategy is a strategy that involves finding innovative ways of

creating value for the organisation and its customers by finding undiscovered
industries or markets.
Red ocean strategy is a strategy of competing in known and existing markets.
Kim and Mauborgne argued that companies need a combination of red ocean and
blue ocean strategies. However, strategies that seek to identify entirely new
markets (blue ocean strategies) offer much greater potential for value creation.
The main distinguishing features of red ocean and blue ocean strategies are as
follows.
Red ocean and blue ocean strategies

Red ocean strategies Blue ocean strategies
Broad The red ocean refers to all The blue ocean represents all
definition industries and markets the industries and markets that
that are in existence today. are not in existence today, and
have not yet been developed.
Competition The competition is known. There is no competition.
The market boundaries are
known. There are
established competitive
'rules of the game'.
Creating value Markets have little Markets have large potential for
potential for growth; growth and value creation.
therefore companies Blue ocean strategies can create
compete with each other value for both the company and
for market share and a its customers, through radical
share of the value/profits innovation.
available from the market.
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Red ocean and blue ocean strategies

Red ocean strategies Blue ocean strategies
Nature of Highly competitive. There is no competition but the
business Companies use generic challenge is to create demand
strategy strategies to compete for for the innovative product.
market share. However,
since the market is fairly
static, gains by one
competitor are matched by
losses for other
competitors. Competition
is a 'zero sum game'.
It is important to understand that Kim and Mauborgne did not suggest that
companies should pursue blue ocean strategies and abandon red ocean strategies.
They argued instead that companies should compete in existing markets (red
oceans) but the opportunities for value creation are limited. Companies have
become knowledgeable about strategies for competing and are very capable at
this. However, companies should develop ways of searching for and developing
blue ocean strategies, because these offer much better opportunities for value
creation. Not many companies have the experience or skills in identifying and
developing blue ocean strategies.
CASE STUDY
Examples of blue ocean strategies
When they first wrote their book in 2005, Kim and Mauborgne identified a
number of companies that, in their view, had developed successful blue ocean
strategies. They included:
(a) Southwest Airlines in the US. This airline company created a market for
low-cost air travel, and broke the trade-off between the speed of travel
(attractive to travellers) and the low cost and convenience of travel by car.
By offering frequent, reliable and low-cost air travel direct to destinations,
the company created new demand from people who had not used or
considered using air transport before.
(b) Dyson cleaners. This was originally a UK-based company that created new
demand through innovation and the development of cyclonic vacuum
cleaners.
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Since 2005, further examples of blue ocean strategies may be:

(a) The digital book and e-publishing, which has replaced much paper-based
printing and at the same time has created a market for new readers who did
not previously purchase books or magazines.
(b) Apple's innovative products such as the iPod, iPad and smartphone, which
have created new demand for digital media products.
(c) Companies providing social media sites such as Facebook and Twitter.
4.1 Value innovation

Blue ocean strategies are a source of value innovation. This is simply a term for
providing cost benefits to the organisation and also adding value for customers.
Cost benefits are achieved through the increase in sales, and customers receive
value benefits in the form of innovative and superior products.
4.2 How are blue ocean strategies developed?

Kim and Mauborgne recommended a 'four actions framework' for identifying an
approach to developing blue ocean strategies and reducing reliance on red ocean
strategies.
Four actions framework for implementing a blue ocean strategy

Reduce Which factors should be reduced below the industry standard?
Which factors yield little or no competitive advantage?
Reduce activity in this red ocean strategy area.
Create Which factors should be created that the industry has not offered
before?
Look for value innovation.
Raise Which factors should be raised above the industry standard? Put
greater value on factors that will provide more competitive
advantage.
Eliminate Which factors that are taken for granted should be eliminated
because they have little or no value?
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QUESTION Blue and red ocean strategies

Explain why companies find it more difficult to develop blue ocean strategies than
red ocean strategies.
ANSWER
(a) Markets for red ocean strategies are established, known and understood.
Blue ocean markets/industries need to be identified because they do not
exist.
(b) Radical innovation may be difficult.
(c) Management have experience in developing competitive strategies for red
oceans, but do not have skills or experience with methods for developing
blue ocean strategies and creating demand where customers do not yet exist.
5 Competitive strategies based on market position

An alternative method of selecting a business strategy entails deciding on strategic
alternatives based on the organization’s competitive position in the market place,
ranging from market leader to market nicher. As the nature and intensity of
competition mainly depends on market position, different businesses may need
separate competitive strategies to maintain their market positions.
In developing alternative strategies for separate businesses (or product

categories) within the organization, the strategist needs to pay explicit attention
to a variety of factors, including:
• the organization’s objectives and resources
• managerial attitudes to risk
• the structure of the market
• competitors’ strategies and, very importantly,
• the position of each business or product category within its market.
Accordingly, organisations attempt to develop separate competitive strategies
based on the market positions of each of its respective businesses. These
businesses can be categorised in four ways with respect to their market positions:
• Market leader
In the majority of industries there is one firm that is generally recognized to
be the leader. It typically has the largest market share and, by virtue of its
pricing, advertising intensity, distribution coverage, technological advance
and rate of new product introductions, it determines the nature, pace and
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bases of competition. Its dominance typically provides the benchmark for

other companies in the industry.
• Market challenger
A market challenger is a current non-market leader which is actively trying
to move up within its industry. Market challengers therefore hold smaller
market share than the market leader, and develop competitive strategies to
attract more customers. They may choose to adopt an aggressive stance and
attack other firms, including the market leader, in an attempt to gain market
share and perhaps dominance.
• Market followers
Market followers are smaller firms which are maintaining lower levels of
market share than the leader or its challengers. They may adopt a less
aggressive stance in order to maintain the status quo. Market followers are
not strong enough to attack the market leader directly, so most of them are
just following the strategies of the market leader.
• Market nichers
Virtually every industry has a series of small firms that survive, and indeed
often prosper, by choosing to specialize in the parts of the market that are
too limited in size and potential to be of real interest to larger firms. They are
effectively invisible and take no aggressive action against the larger
businesses in the wider market.
Accordingly Wilson and Gilligan suggested some strategic alternatives for market
leaders, market challengers and market followers separately.
5.1 Defensive strategies for market leaders

Generally market leaders maintain a higher return on investment and obtain the
advantages of economies of scale. Even though the market leadership position is
attractive, leaders have proved in the past to be vulnerable in the face of an attack
from a challenger or when faced with the need for a major technological change.
Therefore market leader objectives are:
• To expand the total market for their product by binding new users, creating
new uses, and encouraging more usage
• To protect its current market share by adopting defensive strategies
• To increase its market share and profitability
In order to achieve these objectives, market leaders adopt defensive strategies which,
according to Wilson and Gilligan, are based on military analogies.
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5.2 Offensive strategies for market challengers

The market challenger’s strategic objective is to gain market share and eventually
to become the leader, based on the following options:
• Attack the market leader
• Attack other firms of the same size
• Attack smaller firms
As for market leaders, Wilson and Gilligan suggest strategic options for market
challengers that are based on military analogies. These strategies are known as
offensive strategies.
Strategic options for market leaders and market challengers, based on military
analogies, are given in the following figure.
Encirclement Attack
Flanking Defence
Preemptive
Attacker Defence Contraction
(smaller) Defender Defence
Frontal (bigger)
Attack Position
Counteroffensive Defence
Guerilla Attack
Mobile Defence
Flank Attack
Bypass
5.3 Strategies for market followers

As an alternative to challenging leadership, many companies adopt a far less
proactive posture simply by following what others do. Therefore, most of market
followers attempt to imitate other than to be innovative. Theodore Levitt in his
article, Innovative Imitation, argues that a product imitation strategy might be just
as profitable as a product innovation strategy, and be more suitable to market
followers. Accordingly four broad follower strategies are recommended:
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• Counterfeiter (which is illegal) – the counterfeiter duplicates the leader’s

product and packaging and sells it on the black market or through
disreputable dealers.
• Cloner – the cloner imitates leaders’ products, name and packaging, with
slight variations.
• Imitator – the imitator copies some attributes of the leader’s offering to the
market, but maintains differentiation in terms of packaging, advertising,
pricing, or location. The leader does not mind the imitator as long as the
imitator does not aggressively attack the leader.
• Adapter – the adapter takes the leader’s products and adapts or improves
them. The adapter may choose to sell in different markets, but often the
adapter grows into being the future challenger, as many Japanese firms have
done after adapting and improving products developed elsewhere by market
leaders.
6 Strategic behaviour and competitive markets: game

theory
A problem with selecting business strategies is that the reaction of competitors is
either assumed or ignored. In reality, depending on which strategy a company
selects, its competitors adopt a different strategy of their own in response.
Game theory can be used when making a choice between alternative strategies, to
try to establish what competitor responses might be, and to decide whether one of
the strategies is preferable to the others.
Game theory is quite complex, and only the broad principles are described here.
Game theory: a term for an approach to the study of optimal decisions, taking
into account the decisions of competitors, who are other 'players in the game'.
6.1 Dominant and dominated strategies

A dominant strategy is a strategy that is better for an organisation than any other
alternative strategy, no matter how competitors respond.
A dominated strategy is an alternative strategy that should not be selected,
because there is a better, dominant strategy that can be chosen.
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'Intransitivity' occurs when one strategy may be better or worse for an

organisation, depending on the strategies selected by the organisation's
competitors.
6.2 Two competitors and two strategic choices

Game theory can be applied to situations where there are several different
strategy choices ('game options') and more than one competitor in the 'game'.
However, the basic principles are best explained with a situation where a
company has just two strategy alternatives, A or B, and it has just one competitor.
By analysing the strategy options and considering how the competitor may
respond, the outcome of the analysis may be any of the following.
Outcome of analysis
Strategy B dominates Choosing Strategy B will always give an outcome
Strategy A that is as good as or better than choosing Strategy
A.
Strategy B strictly Choosing Strategy B will always give a better
dominates Strategy A outcome than choosing Strategy A, no matter
what the competitor does.
Strategy B weakly Choosing Strategy B will sometimes give a better
dominates Strategy A outcome than choosing Strategy A, and will
sometimes give an outcome that is no worse –
depending on what the competitor does. Strategy
B will never give a worse outcome than Strategy
A.
Strategy A and Strategy B Strategy B neither dominates, nor is dominated
are intransitive by, Strategy A. Choosing Strategy A will be better
in some cases, and choosing Strategy B will be
better in other cases. It depends on the strategy
chosen by the competitor.
Strategy B is dominated by Choosing Strategy B never gives a better outcome
Strategy A than choosing Strategy A, no matter what the
competitor does.
6.3 Nash equilibrium

The Nash equilibrium is another concept in game theory. The basic idea is that the
outcome from a strategic choice cannot be predicted if it is considered in isolation.
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It is necessary to ask what each competitor would do, taking into account the
strategic choices of all the other competitors.
An equilibrium strategy is one where none of the competitors can benefit by
changing their strategy as long as the other competitors keep their strategies
unchanged. It therefore represents the strategy that will be selected by each
competitor.
For example, Player A and Player B are in Nash equilibrium if Player A is making
the best decision they can, taking into account the decision by Player B, and Player
B is making the best decision they can, taking into account the decision of Player A.
Likewise, a group of several players are in Nash equilibrium if each one is making
the best decision that they can, taking into account the decisions of all the others.
Nash equilibrium: a situation identified in game theory where no player in the
game has an incentive to deviate from their chosen strategy, after considering the
opponent's choice.
When a Nash equilibrium exists, each player would receive no incremental benefit
from changing their actions or strategy, assuming other players remain constant
in their strategies. A game may have one or several Nash equilibria, or none at all.
6.4 Example: the prisoner's dilemma

As stated before, game theory is very complex, but a simple example is the so-
called prisoner's dilemma. In this situation, two prisoners are accused of
committing a crime together. They are kept separate, and cannot communicate
with each other. Each prisoner has a choice between agreeing to admit guilt in
court and not admitting guilt. The outcome of their choice will depend on what the
other prisoner decides to do.
For each combination of choices, there is a 'payoff' for each prisoner, which is
stated as a numerical value. Here the numerical values represent a value given to
the treatment the prisoner will receive (release, length of prison sentence). In the
table below, the payoff for Prisoner A is stated first and the payoff for Prisoner B is
stated second.
Prisoner A
Confess Do not confess
Prisoner B Confess Payoff (0, 0) Payoff (3, -1)
Do not confess Payoff (-1, 3) Payoff (2, 2)
In this example, a Nash equilibrium exists when both prisoners confess. Each
prisoner should confess, and neither of them will benefit by changing their
strategy on the assumption that the other keeps their strategy unchanged.
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6.5 Applying game theory to business strategy

In principle, game theory can be applied to business strategy selection. Game
theory is valid in theory because strategy selections should not be made without
thinking about what competitors might do.
In practice, it is extremely complex, given the number of different strategies that
can be selected; the number of different competitors and their possible policy
selections; and problems with measuring 'payoff' for each combination of strategy
choices.
7 Evaluation and recommendation of strategies for SBUs

When strategic choices have been identified and considered, a choice is made
about which strategy or strategies to select. The strategic alternatives should be
evaluated and the preferred choice recommended for implementation.
Strategy evaluation should take into consideration objectives and risk.
Strategy evaluation: issues to consider

Objectives The purpose of a business strategy should be to achieve the
organisation's objectives. For each strategic option, management
should assess the purpose of the strategy and how it will contribute
towards the achievement of objectives.
Strategic objectives will be both non-financial and financial in
nature. To the extent that objectives are financial, strategies should
be assessed for their contribution to profitability and shareholder
value over the planning period.
Accountants will be closely involved in this aspect of strategic
planning.
Risk All business strategies involve risk. Some strategies are more risky
than others.
Each strategy should be assessed to determine how it would affect
the risk of the organisation as a whole, if it were to be
implemented.
Strategies that will increase risk above an acceptable limit (and
exceed the 'risk appetite' of senior management) should be
rejected.
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Two approaches to evaluating (and implementing) business strategies are:

• McKinsey's 7S model
• Assessment of suitability, acceptability and feasibility (SAF)
7.1 McKinsey's 7S model

McKinsey's 7S model was designed to show how the various aspects of a business
relate to one another. The model represents the organisation as a set of
interconnected and interdependent sub-systems, some of which are seen as 'hard'
(quantifiable or easily defined) and some of which are 'soft' (more subjective and
less easily defined).
7S model: a model developed by McKinsey's, which identifies seven inter-related
elements that should all be considered when planning major changes.
There are seven inter-dependent sub-systems, each beginning with the letter S.
Elements in the 7S model

Hard
Structure Structure is the organisation structure: the
division of tasks in the organisation, and the
hierarchy of authority, responsibility and decision
making.
Strategy Strategy is the way in which the organisation
plans to outperform its competitors, or how it
intends to achieve its objectives.
Systems Systems are the procedures and processes for
getting things done. They include operational
systems, IT systems, accounting systems, HR
systems and so on.
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Soft
Staff These are the people in the organisation.
Skills These are the things that the organisation does
well.
Style Style includes ways of working and the attitudes
and style of management (especially senior
management).
Shared values This is similar to the 'paradigm' of an
organisation's culture. Shared values are the
guiding beliefs of people in the organisation about
why it exists.
McKinsey's 7S model components
STRUCTURE
'Hard'
STRATEGY SYSTEMS
SHARED
VALUES
'Soft'
SKILLS STYLE
STAFF
Although the model was designed to show how the various aspects of a business
relate to one another, it can also illustrate how change will affect both the
organisation as a whole, and individual people and functions within it.
7.2 The 7S model and strategy evaluation

The model is based on the view that, for an organisation to perform well, these
seven components or elements need to be consistent with each other.
Strategy is one of the 'hard' components of the model. A strategy will not succeed
unless it is consistent with:
(a) The other hard elements, structure and systems: a strategy cannot succeed if
the right organisation and decision-making structure is not in place, or there
are not systems and procedures to implement the strategy successfully.
(b) The soft elements. The organisation must have the staff and skills to
implement the strategy successfully and an appropriate style of
management. Most important, perhaps, any significant change required by
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the strategy needs to be consistent with the organisation's core culture

(shared values).
The 7S model can be used to assess strategic choices by considering whether all
seven elements in the model would be suitably aligned and consistent, or whether
there is anything in any of the elements that would threaten the successful
implementation of the strategy.
Strategy assessment: issues to consider

Strategy What is the strategy, and what is the organisation seeking to
achieve (objectives)?
Structure How are decisions made within the organisation? How is
information shared?
Is this structure consistent with the proposed strategy?
Systems How would the systems within the organisation deal with the
requirements of the strategy implementation?
What controls would be applied to ensure that the strategy is
implemented successfully?
Staff Does the organisation have the appropriate staff (numbers and
experience) to implement the strategy?
Skills Does the organisation have the competence that will be needed
to implement the strategy?
Style Is the management style within the organisation consistent
with how the strategy would be implemented?
Shared values What is the likely strength of the restraining forces against any
changes that the strategy might require?
Is the strategy consistent with the values of the mission and
values of the organisation?
Any inconsistencies or weaknesses should be identified. If the strategy is to be

implemented successfully, these problems will have to be resolved.
The 7S model is most commonly associated with the management of major
changes within an organisation. All seven elements need to be in alignment for
change to be implemented successfully.
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8 Suitability, acceptability, feasibility (SAF)

Proposed strategies can be assessed according to three factors: their suitability,
acceptability and feasibility. Suitability should be assessed first.
8.1 Suitability
Suitability should be assessed first, because a strategy that is considered
unsuitable should not be implemented. Suitability relates to the logic of the
strategy, and how it fits in with the organisation's objectives; resources and
competences; and strengths, weaknesses, opportunities and threats.
Suitability: issues to consider

Objectives Will it help to achieve the objectives of the
organisation? If so, by how much?
And, at a more general level, does it fit with the
company's mission and objectives?
Competences Will the strategy make use of the organisation's
core competences (strengths)?
Weaknesses Will it correct a significant strategic weakness?
Opportunities Will it exploit a significant opportunity that has
been identified in the market?
Competitive advantage Will it create a competitive advantage? If so,
will this advantage be short-lived or
sustainable?
Risk Is the strategic risk consistent with the attitude
to risk of senior management?
8.2 Acceptability (to stakeholders)

The acceptability of a strategy relates to the expectations of the organisation's
stakeholders. A strategy is not acceptable if it is opposed strongly by one or more
powerful or influential stakeholders.
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Stakeholders: factors that affect acceptability

Shareholders Shareholders will have expectations about the returns
they will receive on their investment, in terms of
profitability, dividends, share price growth and so on.
Taken as a whole, the business plan should provide an
overall return acceptable to shareholders. Each strategy
should contribute measurably to this return, in either the
short term or the longer term.
Customers How will the strategy affect the value that customers
receive? Customers may respond in a hostile way to a
strategy that reduces the product's value or increases its
price.
Management Will key management accept the proposed strategy and
try to implement it effectively? Or will they resist any
change?
Staff Employees may have to be committed to the strategy for
it to be successful. If employees are unhappy with the
strategy they may resign.
If the strategy will lead to large-scale redundancies, there
may be industrial unrest, and possibly strike action.
Government and Will the strategy result in a breach of law or regulations?
regulators
General public If a strategy would result in strong public hostility, it may
be considered unsuitable, and a threat to the
organisation's reputation.
8.3 Feasibility
A strategy must be feasible. In other words, it must be practicable and capable of
implementation.
Feasibility: issues to consider

Money Does the organisation have the cash/finance to
pay for the strategy?
Resources Does the organisation have the resources to
implement the strategy: technology and
equipment, skilled staff, materials and so on?
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Feasibility: issues to consider

Ability Does the organisation have the ability – skills,
experience, competence – to implement the
strategy successfully?
Strategies that do not use existing
competences, and therefore call for the
acquisition of new competences, may not be
feasible. Getting the new competences may
take a long time and cost too much money.
Competitor response Will the organisation be able to deal with any
response to the strategy by major competitors?
Time Will there be enough time to implement the
strategy?
8.4 Sustainability
Some organisations may feel it is appropriate to consider the longer term
prospects for a strategy under a separate heading of sustainability. This indicates
that a firm should aim to adopt strategies which will deliver a long-term
9 Monitoring strategic performance

When strategies have been selected and implemented, their progress and
performance should be monitored. Management should check whether the
organisation's strategies, taken both individually and collectively, are achieving
their intended objectives.
When strategic performance falls short of expectation, management should
consider control measures to rectify the situation. These could include amending a
strategy, or abandoning a strategy.
You are probably familiar with the basic concept of performance measurement as
a method of management control. Actual performance is compared with the
planned or targeted performance. Management should consider control measures
to rectify the situation when actual performance falls short of the planned targets.
Performance measurement has been defined as the 'process of assessing the
proficiency with which a reporting entity succeeds, by the economic acquisition of
resources and their efficient and effective development, in achieving its objectives.
364 CA Sri Lanka

Performance measures may be based on non-financial as well as on financial

information' (CIMA, Official Terminology).
9.1 Monitoring financial and non-financial performance

It perhaps stands to reason that the monitoring of strategic performance should
include a financial review, to establish whether the organisation is on course to
achieve its financial objectives.
In each year of the business plan, management can:
(a) Compare actual financial performance in the previous financial year (just
ended) with the targets for performance in the business plan
(b) Produce new forecasts for the remainder of the business plan period, and
assess whether the organisation still expects to achieve its financial
objectives by the end of this period
Non-financial performance should also be measured, as well as financial
performance.
Reasons for measuring non-financial performance

Historical non- When actual (historical) performance is measured:
financial performance Financial performance is a measure of what has
is often a guide to the happened in the past, but past financial performance is
future not necessarily a good guide to financial performance
in the future.
Non-financial performance, such as the achievement
of targets for customer satisfaction, quality, product
innovation and so on, are often a guide to the future.
Last year's non-financial performance may be a good
indicator of what is likely to happen in the future, and
how this will affect the organisation's long-term
objectives.
Non-financial aspects As explained in previous chapters, strategies may have
of strategy a non-financial objective. The objective of a strategy
may be to improve product quality or service
reliability; or increase customer numbers; or reduce
waste and pollution from manufacturing processes.
When strategic objectives are set as a non-financial
target, performance should be assessed with suitable
non-financial measurements.
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9.2 'Milestones' for performance

Strategic targets are mainly long term. For example, in a ten-year business plan,
there will be a detailed budget for the first of the ten years, but there will also be a
plan, with planning targets, for the remaining nine years of the planning period.
Strategic performance monitoring and control needs to monitor performance over
the longer term, not just in the current year.
Control will be ineffective if performance is not monitored until the end of the
business plan period. There has to be a system for monitoring progress towards
the strategic targets.
One way of doing this is to establish interim targets or 'milestones' for
achievement. (This is a commonly-used performance monitoring method in
project management, for example.)
(a) If a plan covers a five-year period, interim targets can be established for the
end of each of the four years, in addition to the strategic target for the overall
five-year period.
(b) Each year, actual performance can be compared with the interim target.
9.3 Preparing new forecasts

Another monitoring technique is to prepare a new forecast at the end of each year
for the remainder of the business plan period. This revised forecast can then be
compared with the targets in the strategic plan, and gaps between the forecast and
the plan can be measured.
Where significant gaps appear, management should consider control action to
close the gap, or should revise the strategic targets to something that is more
realistic and achievable.
9.4 CSFs and KPIs

Critical success factors and key performance indicators have been explained
previously in the context of setting strategic performance targets.
They should also be used for the purpose of monitoring and control.
• For each CSF there should be at least one measurable KPI.
• Actual performance can be compared against the target for the KPI.
• Management should be expected to act on any significant differences that
emerge between actual performance and the KPI target.
366 CA Sri Lanka

Since all KPIs should be measurable, as a quantifiable financial or non-financial

measurement, comparisons of actual results with the KPI should be a relatively
straightforward process.
10 Strategic control
Strategic control involves monitoring progress toward strategic objectives, and
taking control measures when actual performance indicates that strategic targets
will not be met.
Strategic control involves monitoring of both financial and non-financial
performance.
10.1 Connection between short-term and strategic monitoring

and control
Many organisations have systems for setting targets and monitoring performance
in the current year (current budget period). Typically, actual performance is
measured regularly, each month or possibly every three or six months (depending
on which aspect of performance is being measured).
Aspects of performance that are measured over the short term include non-
financial aspects of performance as well as financial performance. An example of a
system for monitoring a range of financial and non-financial aspects of
performance over the short term is the balanced scorecard.
The balanced scorecard is a name given to a system of performance targets and
measurement of actual results against the targets, where the aspects of
performance that are measured include:
• Financial aspects
• Customer value and satisfaction aspects
• Operational aspects
• Innovation and learning aspects
10.2 Control action: changing strategy

Strategic control action may take the form of control measures at an operational
level. For example, if a company's strategic targets for reducing waste or
improving productivity are not being met, operational managers may consider
actions to rectify the problem at an operational level.
At a business strategy level, however, an organisation may need to consider
changes to strategy.
CA Sri Lanka 367

Any change to existing strategies should be properly assessed. The new or

amended strategy should have a:
• Clear objective with quantified targets, possibly expressed as KPIs
• Timescale for achievement
• Strategic budget for the commitment of money and other resources
The strategy should also be assessed, perhaps using the 7S model or SAF criteria
as a basis for assessment.
368 CA Sri Lanka

CHAPTER ROUNDUP
 Once an organisation has identified the opportunities and threats in its external
environment and its internal strengths and weaknesses, it must make choices
about what strategies to pursue in order to achieve its targets and objectives.
 Strategy formulation at the level of the SBU (the business level) is concerned
mainly with decisions about products and markets, such as what products the
division should be producing and selling, and what market segments they should
be targeting.
 Porter has suggested there are three generic business strategies: cost leadership,
differentiation and focus. A company should select one of these three strategies
as a way of competing in its markets.
 Porter's ideas about generic competitive strategies, and the idea that firms can
successfully pursue a number of strategies based on price and perceived added
value, have been extended into the concept of the strategy clock.
 A different approach to identifying competitive strategies was suggested by Kim
and Mauborgne in 2005. They made a distinction between two different types of
strategy, which they called red ocean and blue ocean strategies.
 A blue ocean strategy involves finding innovative ways to create value for
customers while at the same time reducing costs for the organisation.
 A red ocean strategy means competing in existing markets with existing products.
In a highly competitive market, little or no value is gained from this.
 An alternative method of selecting a business strategy entails deciding on strategic
alternatives based on the organization’s competitive position in the market place,
ranging from market leader to market nicher. As the nature and intensity of
competition mainly depends on market position, different businesses may need
separate competitive strategies to maintain their market positions
 A problem with selecting business strategies is that the reaction of competitors is
either assumed or ignored. In reality, depending on which strategy a company
selects, its competitors adopt a different strategy of their own in response.
 Game theory can be used when making a choice between alternative strategies, to
try to establish what competitor responses might be, and so decide whether one of
the strategies is preferable to the others.
 When strategic choices have been identified and considered, a choice is made
about which strategy or strategies to select. The strategic alternatives should be
evaluated and the preferred choice recommended for implementation.
CA Sri Lanka 369

 Proposed strategies can be assessed according to three factors: their suitability,

acceptability and feasibility. Suitability should be assessed first.
 When strategies have been selected and implemented, their progress and
performance should be monitored. Management should check whether the
organisation's strategies, taken both individually and collectively, are achieving
their intended objectives.
 When strategic performance falls short of expectation, management should
consider control measures to rectify the situation. These could include amending a
strategy, or abandoning a strategy.
 Strategic control involves monitoring progress toward strategic objectives, and
taking control measures when actual performance indicates that strategic targets
will not be met.
 Strategic control involves monitoring of both financial and non-financial
performance.
370 CA Sri Lanka

PROGRESS TEST
1 ________________________ , when used for business applications, is a method of

selecting a business strategy, taking into consideration the strategy options that
might be selected by competitors.
2 A company specialises in the production of lighting equipment for use in

submarines and other under-sea vessels. It markets its product on the basis of
being the lowest-cost producer in the market.
According to Porter, the generic strategy of this company is a ___________________
strategy.
3 Which one of the following aspects of a proposed strategy should be evaluated

first?
A Suitability
B Acceptability
C Feasibility
D Any of them
4 Which elements in the 7S model are more difficult to manage and control?
Hard Soft
5 How many of the strategies in the strategy clock could be appropriate for a
company in a competitive market?
CA Sri Lanka 371


1 Game theory
2 Cost-focus
3 The answer is A. Suitability
4 Soft. (Especially shared values, which represent the 'paradigm' of the

organisation's culture.)
5 Five. These are strategies 1 to 5 on the clock.
372 CA Sri Lanka

Index
374 CA Sri Lanka

Index
4 Ps, 126 Data warehouse, 240

5S, 85 Data workers and knowledge
7S model, 359 workers, 235
Datamining, 240
A Decline, 158
Acceptability, 362 Differentiation strategy, 340, 346
Advertising, 145 Direct mail, 147
Direct marketing, 146
Disintermediation, 287
B Dogs, 162
B2B (business-to-business), 283 Dominant strategy, 355
B2C (business-to-consumer), 283
BCG matrix, 161
E
Blue ocean strategy, 349
Breakthrough products, 337 E-commerce, 283
Broad differentiation strategy, 347 EDI, 55
Budget, 90 Electronic business, 282
Business-to-business markets, 113 Electronic fund transfers (EFT), 283
Electronic mail, 281
E-mail, 147
C Employee development, 231
Call centres, 147 E-procurement, 56, 289
Cash cows, 161 Expert system, 240
Catalogue marketing, 147 Explicit knowledge, 236
Channel management, 282 Extended marketing mix (7Ps),
Channel structures, 287 163
Communication, 92 Extranet, 280, 281
Competences, 23
Competitive advantage, 24, 286
F
Competitive environment, 286
Competitive products, 337 Failure strategies, 348
Competitive strategy, 277, 352 Financial objectives, 318
Complementary products, 325 Five forces model, 322
Consumer goods, 113 Focus strategy, 341
Convenience goods, 113 Focused differentiation, 347
Core competences, 23
Cost leadership, 346 G
Cost leadership strategy, 339 Game theory, 355
Critical path method (CPM), 96 Gantt chart, 97, 98
Critical success factors, 345 Generic strategy, 338
Cultural web, 244 Goals, 314
Customer profiling strategy, 144 Graphical user interface (GUI), 280
Customer relationship marketing, Group incentive schemes, 213
167
H
D Hierarchy of objectives, 317
Data mining software, 240 HR planning, 184
CA Sri Lanka 375

Index
Human resource management, 9 Marketing mix, 126

Hybrid strategy, 346 Maturity, 158
McKinsey's 7-S model, 359
I Mendelow's matrix, 18
Mintzberg, 314
Improved products, 337
Motivation, 202
Inbound logistics, 7
Industrial market, 113, 116
Internet, 279, 280 N
Intranet, 280 Nash equilibrium, 357
IT infrastructure, 278 Network diagram, 98
New product development, 292
J No frills strategy, 346
Johnson and Scholes: the cultural
web, 244 O
Just-in-time production, 49 Operations, 8
Just-in-time purchasing, 49 Operations management, 70
Outbound logistics, 8
K Outward logistics, 51
Kaizen, 84
Key performance indicator (KPI), P
327 Participation, 208
Knowledge management, 235 Patterns in information, 235
People, 164
L Performance management, 214
Performance related pay (PRP),
Lean manufacturing, 79
211
Lean production, 79
Personal selling, 147
Learning organisation, 235, 241
PESTEL, 320
Lifestyle segmentation, 116
Physical distribution, 51
Logistics systems, 51
Physical evidence, 165
Long-term objectives, 318
Porter, 338
Low price strategy, 346
Portfolio planning, 161
Price, 135
M Primary activities, 7
Mail order, 147 Process, 165
Management, 139 Process improvement and process
Management of stakeholders, 20 design, 87
Market, 112 Product, 127, 336
Market opportunity, 285 Product development, 42
Market position, 124 Product life cycle, 154, 159
Market segment, 115 Product positioning, 124
Market segmentation, 115 Product research, 292
Market strategy, 286 Profit-sharing schemes, 214
Marketing, 111, 126, 282 Project Evaluation and Review
Marketing and sales, 8 Technique (PERT), 97
376 CA Sri Lanka

Index
Promotional mix, 142 Strategy, 309

Public relations (PR), 146 Strategy clock, 344
Pull system, 50 Subsidiary objectives, 317
Push system, 50 Substitutes, 325
Suitability, 362
Q Supply chain, 13
Supply Chain Operations
Quality, 90
Reference (SCOR®) model, 58
Quality control, 92
Support activities, 8
Question marks, 162
Sustainability, 364
SWOT analysis, 324
R
Ranking objectives, 319 T
Rayport and Jaworski, 288
Tacit knowledge, 236
Recruitment, 187
Talent management, 185
Red ocean strategy, 349
Target markets, 122
Reintermediation, 287
Teambuilding, 92
Resource, 236
Technology development, 8
Resource histogram, 94
Tele-marketing, 147
RFID, 55
Text messaging (SMS), 147
ROI, 232
The value chain, 11
Threshold competences, 23
S Threshold resources, 22
Sales promotion, 145 Total quality management (TQM),
Schein: three levels of culture, 246 82
Segment validity, 121 Trade-offs, 319
Segmentation bases, 116, 118 Transformational leaders, 260
Selection, 187 Types of strategy, 306
Service, 336
Service level agreement, 61 U
Shareholders, 318
Unique resources, 22
Shopping goods, 113
Short-term objectives, 318
Six Sigma, 86 V
Speciality goods, 113 Value network, 12, 13
Stakeholder conflicts, 20 Value proposition, 285
Stakeholder mapping, 18, 19 Value system, 14
Stakeholders' objectives, 16 Values, 313
Stars, 161
STP, 125 W
Strategic business units, 307
Wireless Fidelity (WiFi), 281
Strategic customer, 325
World Wide Web, 279
Strategic gaps, 324
Strategic planning process, 314
CA Sri Lanka 377

Index
378 CA Sri Lanka

Notes
CA Sri Lanka
Notes
CA Sri Lanka

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ISBN 9781 4727 1049 9

British Library Cataloguing-in-Publication Data

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We are grateful to CA Sri Lanka for permission to reproduce

KB5 Business Value Creation

Part B Role of supply chain in value creation

Part C Creating value through operations

Part D Marketing and value creation

Part E People and value creation

Part F Value creation through technology and innovation

Part G Strategy for value creation

KB5 Business Value Creation

Main syllabus areas Weightings

iv KB5 Business Value Creation

FA&R MA&F T&L A&E M&C

KC1 KC2 KC3 KC4 KC5

Corporate Corporate Corporate Corporate

KB1 KB2 KB3 KB4 KB5

Business Business Business Business Business

Financial Management Taxation Assurance, Value

KE1 KE2 KE3 KE4 KE5

Financial Management Fundamentals Processes, Commercial

Accounting Accounting of Assurance & Insight for

Examples These are illustrations of particular techniques or concepts with a worked

vi KB5 Business Value Creation

1. Introduction to Business Value Creation

Learning outcomes vii

Knowledge Component Knowledge Knowledge Learning Outcome Chapter

viii KB5 Business Value Creation

Knowledge Component Knowledge Knowledge Learning Outcome Chapter

Knowledge Component Knowledge Knowledge Learning Outcome Chapter

x KB5 Business Value Creation

Knowledge Component Knowledge Knowledge Learning Outcome Chapter

Knowledge Component Knowledge Knowledge Learning Outcome Chapter

xii KB5 Business Value Creation

Knowledge Component Knowledge Knowledge Learning Outcome Chapter

Learning outcomes xiii

Knowledge Component Knowledge Knowledge Learning Outcome Chapter

xiv KB5 Business Value Creation

Knowledge Component Knowledge Knowledge Learning Outcome Chapter

Knowledge Component Knowledge Knowledge Learning Outcome Chapter

xvi KB5 Business Value Creation

Knowledge Process Verb List Verb Definitions

Identify Recognise, establish or select after

Relate To establish logical or causal connections

State Express something definitely or clearly

Tier - 2 Comprehension Calculate/ Make a mathematical computation

Recognise To show validity or otherwise, using knowledge

Summarise Give a brief statement of the main points (in

Action verbs checklist xvii

Prepare Make ready for a particular purpose

Prioritise Arrange or do in order of importance

Reconcile Make consistent with another

Solve To find a solution through calculations and/or

xviii KB5 Business Value Creation

Evaluate To determine the significance by careful

Tier - 6 Synthesis Compile Produce by assembling information collected

Action verbs checklist xix

2 Value = minus _______ .