ACCA 2016 BPP PASSCARD p3

2: Environmental issuesTopic List The organisation in its environment The macro environment The competitive advantage of nations The environment in the future Competitive forces Understa

Professional Paper P3 Business Analysis

First edition 2007, Ninth edition April 2015

ISBN 9781 4727 2707 7

e ISBN 9781 4727 2772 5

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Preface

Welcome to BPP Learning Media’s ACCA Passcards for Professional Paper 3 Business Analysis.

 They focus on your exam and save you time.

 They incorporate diagrams to kick start your memory.

 They follow the overall structure of BPP Learning Media’s Study Texts, but BPP Learning Media’s ACCA Passcards are not just a condensed book Each card has been separately designed for clear presentation.

Topics are self contained and can be g rasped visually

 ACCA Passcards are still just the right size for pockets, briefcases and bags.

Run through the Passcards as often as you can during your final revision period The day before the exam, try

to go through the Passcards again! You will then be well on your way to passing your exams.

Good luck!

1: Business strategy

Topic List

What is strategy?

Levels of strategy in an organisation

Elements of strategic management

The importance of context

The strategy lenses

This chapter gives you an overview of the fundamentals

of strategy and strategy formulation, and how they relate

to business analysis

Elements of strategic management

What is strategy? Levels of strategyin an organisation The importanceof context The strategylenses

STRATEGY: a course of action over the long term, including identifying the competences and resources

required, to achieve a specific objective and fulfil stakeholder expectations.

Four elements of mission

 Purpose and planning

 Values

 Strategy

 Policies and standards

OBJECTIVES: SMART and PRIME

Areas for decision making

Long term direction

Elements of strategic management

What is strategy? Levels of strategy in an organisation The importanceof context The strategylenses

Corporate Overall purpose and scope, and how value will be added Prioritisation and management

of stakeholder expectations Allocation of corporate resources

Business How to compete successfully in par ticular markets Combines with corporate strategy in

a small organisation In larger organisations, strategies for strategic business units must

be co-ordinated with corporate strategy, and with each other

Operational How the component parts of the organisation deliver the higher-level objectives Largely

created and delivered by business functions such as marketing, production, finance,

human resources management, and information systems

Three main levels of strategy in an organisation

1

2

3

Position Choice Action is not simply a linear model.

Need to recognise the interdependencies between position (analysis),

choice and action (implementation)

Elements of strategic management

What is strategy? in an organisationLevels of strategy The importanceof context The strategylenses

Johnson, Scholes and Whittington’s model of strategy

 Management of resourcesChange

 Change management

Strategy into action

Elements of strategic management

What is strategy? in an organisationLevels of strategy The importance of context The strategylenses

The organisational setting in which strategy is developed Possible contexts include:

Small business Limited product range, markets and resources (especially financial), but significant

pressure from competitors

Multinational Diverse products, processes and markets, with significant resources and multiple

operations

The public sector Constraints on funding, commitment to ser vice provision and the need to

demonstrate value

Not for profit organisation Diverse sources of funds, strong underlying values and purpose

Intangible products Product information, after-sales service, brand values, staff performance (for both

manufacturing and service companies)

The context of strategy

Exam focus

Context is very important in the P3 exam Question scenarios will provide context for the question requirements.You must always consider the context of the question and make your answer directly relevant to it

Elements of strategic management

What is strategy? in an organisationLevels of strategy The importanceof context The strategy lenses

Johnson, Scholes & Whittington suggest that strategy, and the development of strategic thinking, can beexamined through three lenses

Strategy as design A rational, top-down process – rational managers, clear objectives.

Strategy is exclusively management’s responsibility, and the organisation'srole is to implement management’s plans

Strategy as experience An adaptation of what has worked in the past – based on experience,

assumptions, and decisions to satisfice rather than optimise Strategies

develop in incremental and adaptive ways, and emerge from lower levels

of the organisation

Strategy as ideas Strategy based on innovation, diversity of ideas, informal interaction and

experimentation Managers create the context and conditions for new ideas

to emerge, but must prevent strategic drift Organisational culture mustsupport innovation

1

2

3

2: Environmental issues

Topic List

The organisation in its environment

The macro environment

The competitive advantage of nations

The environment in the future

Competitive forces

Understanding the changing environment is one of thekey elements in both defining and developing strategy.One possible definition of corporate strategy is 'seeking agood fit with the environment' To achieve that 'fit', anorganisation must have a thorough knowledge of itsenvironment

Competitive forces

The organisation

in its environment environmentThe macro advantage of nationsThe competitive The environmentin the future

All organisations are open systems – they have a variety of interchanges with the environment (inputs and

Market segmentsCritical success factors

Macro-environment Industry or sector

Competitors and markets

The organisation

The macro

The organisation

in its environment advantage of nationsThe competitive The environmentin the future

The PESTEL framework is based upon six segments: political, economic, socio-cultural, technological, environmental

protection and legal.

Political/legal factors

Governments oversee framework in which business

operates eg physical, social and market infrastructure

Many aspects of business activity are subject to legal

regulation:

 Health and safety  Tax

Other aspects are regulated by supervisory bodies The

EU is a significant influence

Economic factors

These operate in both a national and inter nationalcontext Relevant factors include:

 Inflation rates  Growth/fall of GDP

 Employment rates  Savings levels

 Interest rates  Exchange rates

 Tax levels  International trade

 The business cycle  Capital markets

 Fiscal policy (taxes, borrowing, spending)

 Monetary policy (interest rates, exchange rates)

 Size and scope of the public sector

Government policy

Political change and political

risks affects the planning

activities of many businesses

The macro

The organisation

in its environment advantage of nationsThe competitive The environmentin the future

Technological developments affect all aspects of business (especially IT developments)

Many strategies are based on exploiting technological change (eg Internet and e-commerce) Others are defences against such change (eg emphasising service or quality when a competitor introduces a major technical development).

Business must be particularly aware of cultural change.

 New products and services become available

 New methods of production and service provision

 New ways of selling (e-commerce)

 Improved handling of information in sales and finance

 New organisation structures to exploit technology

 New media for communication with customers and within the business (eg Internet and email); facilitates business becoming global

Demography is the study of human population and

population trends (eg birth rate, average age, ethnicity,

death rate, family structure, social structure and wealth).

Demographic changes have clear implications for patterns

of demand They also affect availability of labour Can also

affect recruitment policies.

Culture in society provides a framework for understanding

beliefs and values, and creates patterns of human activity.

It influences tastes and lifestyles.

Environmental protection

Pressure coming from many quarters:

 Corporate Social Responsibility

Possible green issues for businesses to consider:

 Consumer demand for environmentally friendly

Competitive forces

The organisation

in its environment environment The macro advantage of nationsThe competitive The environmentin the future

Four aspects of globalisation are key drivers of change in the macro environment:

Market globalisation

Cost globalisation

Government policy

Global competition

Converging tastes; improving communications

Economies of scale are a major source of cost adv antage; purchaserssearch globally for lowest-cost suppliers

Increasingly sympathetic to free trade

High levels of international trade encourage global competition Theexistence of global competitors and global customers in an industr yencourages firms which currently only trade in one country to expand

to be able to compete more effectively

2

3

4

Competitive forces

The organisation

in its environment environmentThe macro advantage of nations The competitive The environmentin the future

Porter identifies four determinants of national competitive advantage on an industry basis He refers to them as

Factor conditions

Endowments of inputs to production

Basic: natural resources, climate, labour

-unsustainable for competitive advantage

Advanced: infrastructure, technical education,

high-tech industries - promote competitive advantage

Related and supporting industries

Success in related industries gives mutual support Strong home suppliers make the industry more robust.Rivalry creates supplier specialisations.Clusters of related industries derive strength from their links.

Firm strategy, structure and rivalry

Cultural factors, management style, time horizons and capital markets all help determine orientation and

capability Domestic rivalry leads to competitive strength

5 4 3

The competitive advantage of nations Competitiveforces

The organisation

in its environment environmentThe macro The environment in the future

Forecasting

Sound knowledge of the environment requires some

element of forecasting The past is not necessarily

a good guide to the future, but in simple, static

conditions time series analysis and regression

analysis can be used.

Economic forecasting uses leading indicators to

assess future economic conditions

A scenario is a detailed and consistent view of how

the environment might develop in the future

Macro scenarios consider possible futures overall

Industry scenarios look in more detail at a single

industry

Scenario construction (Mercer)

Identify drivers of change

Arrange drivers in a viableframework

Produce 7-9 mini-scenariosGroup mini-scenarios into 2-3comprehensive scenariosWrite up the scenariosIdentify issues arising, and what theymean to the business

1 2

6

 Selling skills Threat from substitute products

A substitute is produced by a different industry but satisfies the same needs

Porter says that five forces together determine the long-term profit potential of an industry

in its environment environmentThe macro advantage of nationsThe competitive

Threat of new entrants

This is limited by barriers to entry

 Scale economies  Product differentiation

 Switching costs  Access to distribution

 Patent rights  Access to resources

Bargaining power of customersDepends on:

Suppliers seek higher prices

Rivalry among current competitors

Depends on:

 Market growth  Buyer's ease of switching

 Spare capacity  Exit barriers

 Uncertainty about competitor's strategy

Customers seek lower prices

4 2

3

Notes

3: Competitors and customers

Topic List

Competition dynamics

The marketing mix

Customers and segmentation

Understanding the customer

A detailed knowledge of both competitors and customers

is very important for strategy development In particular,the cycle of competition and critical success factors arevery examinable

Cycle of competition

Understanding the customer

Customers and segmentation

The marketing mix

Competition dynamics

Encirclement

Simultaneous flankattacksIncumbent

Head-on

Identicalmarketingmix

Flanking

Defendssecondarymarkets

Contraction

Concentrate on mostdesirable marketsIncumbent

Position Change nothing Pre-emtive Attack first

Mobile

Broaden anddiversity markets

Challenger

Bypass

Unrelated products,new areas, technicaladvancesChallenger

Defences

Industry life cycle

Exam focus point

For an organisation's strategy to be successful, it needs to be appropr iate to where its industry or productsare in their lifecycles

Product

characteristics Basic, no standardsestablished Improved design andquality, differentiated Standardised product withlittle differentiation Varied quality but fairlyundifferentiated

weaker players leave Few remain Competitionmay be on price

curious must be induced More customers attractedand aware Mass market, brandswitching common Enthusiasts, traditionalists,sophisticates

Profits Negative – high first mover

advantage Good, possibly starting todecline Eroding under pressure ofcompetition Variable

Technology No standards established Technologies become

more standardised Technology is understoodacross the industry Technology is understoodacross the industry

Long production runs.

Cost efficiency critical Overcapacity Production isreduced

Understanding the customer

Customers and segmentation

The marketing mix

Competition dynamics

Product

 Design

 Features

 Quality and reliability

 After sales service

Trade off between price and value

(intangibility)

 Design and specification

of service environment

Marketing mix

Customers and segmentation Understandingthe customer

The marketing mix

Competition dynamics

Buyer behaviour models aim to show how purchase decisions are made

We can distinguish CONSUMER markets and INDUSTRIAL markets Industrial buyers are more rationally

motivated than consumers in deciding what goods to b uy

Government, reseller and export markets may also be considered

The consumer market

 Socio economic

 Psychological

Influences

 Convenience (everyday) goods

 Shopping (higher value) goods

 Speciality (unique) goods

Products

Understanding the customer

Customers and segmentation

The Marketing mix

Competition dynamics

The industrial market

Decision Making Unit

 Quality and reliability

 Problems solved  Budgetary control

Influences

 Raw materials  Subcomponents

 Capital equipment  Supplies

Products

Market segmentation

Is the subdividing of a market into

increasingly homogeneous subgroups of

customers, where any subgroup can be

conceivably selected as a target market

to be met with a distinct marketing mix.

It is relevant to a focus strategy.

Target market

One or more segments selected for

special attention by a company

Policy options 

UNDIFFERENTIATED CONCENTRATED DIFFERENTIATED

Same product to whole marketOne segment only

Several versions for many segments

A firm should only develop a uniquemarketing mix for a valid segment

 Better satisfaction of customer needs

 Revenue/profit growth  Targeted communication

 Customer retention  Product positioning

Reasons for segmentation

 Measurable  Potentially profitable

 Accessible, and can  Susceptible to a distinct marketing mix

be accessed profitably Stable

Segments should be

Understanding the customer

Customers and segmentation Marketing

Competition dynamics

The customer lifecycle

 Promotional expense is front-loaded; sales grow with time

 Consumer incomes rise with time; early purchases are likely to be basic – may be more differentiated later

 Use it to identify your mostprofitable/expensive customers

 Compare cost of acquiring newcustomers vs retaining existing ones

 Details of costs could be obtained from

 How important are they?

 Attitudes and behaviour

 Financial performance

 Profitability of their orders

 Key customer analysis

This varies from customer to customerbecause of customer-specific costs such asdiscounts, distribution costs, complexity oforders and credit given

 Customer profitability analysis

Opportunities and threats

Information about the environment may be summarised as

opportunities and threats.

Opportunities

Opportunities often take the form of strategic gaps such as:

 Potential substitutes for existing products orcomplements to them

 Different strategic customers via new distributionmethods such as the Internet

 Potential new market segments

Threats

The most immediate threats probably emerge from theimmediate industry: the five forces are a good guide The

wider PESTEL environment must also be monitored, but

threats may be more difficult to recognise

Strategic customer

Critical success factors

are those product features that are particularly

valued by a group of customers and, therefore,

where the organisation must outperform

competitors

is the purchaser of the product offered This

may not be the end user The end user's

requirements are important, but those of any

intermediary purchaser are of primary strategic

importance

External forces

Understanding the customer

Customers and segmentation Marketing

Competition dynamics

 New entrants

 Substitute products

 Bargaining power of customers

 Bargaining power of consumers

 Rivalry amongst current competition

Firm strategy,structure, rivalry

Opportunities or Threats

The value chain

The product portfolio

Benchmarking

Managing strategic capability

SWOT and TOWS

A detailed knowledge of the frameworks and models inthis chapter is very important in beginning to understandhow strategic choices are made

Cost efficiency Knowledge The valuechain

The organisation's

Strategic capability: the adequacy and suitability of an organisation's resources and competences to achieve its strategy.

9 Ms Model (review of organisation's resources)

Position-based strategy aims to achieve competitive advantage by positioning a market offering to respond to

the opportunities and threats present in the environment

Resource-based strategy is based on the possession of distinctive resources, which may be physical resources or competences Competences are the activities and processes through which an organisation

deploys its resources effectively

Threshold competences and resources meet customer's minimum requirements and are needed for survival Unique resources and core competences underpin competitive advantage and are difficult for competitors to

imitate or obtain

Cost efficiency Knowledge The valuechain

The organisation's

Cost Efficiency is fundamental to strategic capability

for both public and private sector organisations It isregarded as a threshold competence (vital for mere

survival) and is achieved in four main ways:

If competitive advantage is to be based on core

competences and strategic capabilities, the

capabilities must have four key qualities:

Exploitation of scale economies – reducing costsper unit

Control of the cost of incoming supplies –transport costs; supplier relationshipsCareful design of products and processes –minimising direct and indirect costsExploitation of experience effects – learningcurve effects; outsourcing

Offer value to buyers – contribute to customer

needs

Rare – can create competitive advantage by

itself

Robust (difficult to imitate) – linking of

processes and activities in ways that cannot

be copied

Non substitutable – substitute products and

competences are a key threat

1 2 3 4

1

2

3

4

Cost efficiency Knowledge The valuechain

The organisation's

The progression from data to knowledge

The aim of knowledge management is to capture, organise and make widely available all the knowledge that

the organisation possesses (ie use knowledge as a resource to contribute to competitive advantage)

processed facts

Patterns discerned ininformation

GroupwareExpert systemsReport writing softwareIntranet

Data miningIntranetExpert systems

Learning based strategy incorporates knowledge management and innovation.

Innovation

Innovation is encouraged by topmanagement; organisationalpurposes are continually re-examined;

it is accepted that innovative solutionscan emerge at any level

Knowledge management

Records, organises, retrieves and

applies knowledge effectively IT

systems will probably be used Good

knowledge management avoids

constant re-invention of the wheel

A top-down, command and control approach will not promote lear ning based strategy The company must be

open to the environment and welcome new ideas and fresh insights However, management must guide the

learning process and take necessary decisions

Cost efficiency Knowledge The value chain

The organisation's

Porter grouped the various activities of an

organisation into a value chain.

& SALES SERVICE

The margin is the excess the customer is prepared

to pay over the cost to the firm of obtaining resource

inputs and providing value activities It represents the

value created by the value activities themselves

and by the management of the linkages between

them.Linkages connect the activities in the value

chain The activities affect one another and thereforemust be co-ordinated

Using the value chain A firm can secure competitive

advantage in several ways

 Invent new or better ways to do activities

 Combine activities in new or better ways

 Manage the linkages in its own value chain

 Manage the linkages in the value network

Organisation's value chain

Supplier

value

chains

Distributor/retailer value chains

Customer value chains

A firm's value chain is connected to the value network. The value created for a product's end user is often

the output of a complex system that includesseveral organisations' value chains The linksbetween these value chains representopportunities to create more value

The links also represent opportunities for individualorganisations to capture more of the value created

by the overall system by managing them to theiradvantage This can be done in a direct w ay byvertical integration or the use of bargining powerover suppliers and customers It can also beachieved more subtly by providing coordinationand by fostering relationships that promote

innovation

Cost efficiency Knowledge The valuechain

The organisation's

The company's offerings to the market are fundamental

to its success They must be kept under review so that

there is a suitable mix The product life cycle is an

important concept but it must be applied with care We

can distinguish three aspects of 'product'.

Product class (or generic product)

– a broad category

Brand

– The specific product

Product form

– type within the category

Product life cycle

£

+ _

Inception Growth Maturity Decline Senility

Sales Profits

Inception: development; marketing and production costs high;

sales volume low; profits low

Growth: sales volumes accelerate; unit costs fall; profits rise;

competitors enter the market

Maturity: longest period; profits good; reminder promotion Decline: many causes; sales fall; over capacity in industry; some

players leave market

Senility: profit negligible; product may be retained in niche

1

3

2

The development of new products is an important aspect of a firm's strategy New products can overcome entry barriers and help give a company a balanced portfolio Product innovation can also be a major source

of competitive advantage

 New to the world

 New product line

 Additions to product line

 Repositioning

 Improvements/revisions

 Cost reductions

How are they new?

 Leader strategy: high cost of

R&D, potential high reward, highrisk

 Follower strategy: lower cost, less

R&D expertise needed, lower risk,reduced reward

How is it approached?

The management accountantcan help by analysing thecost components of the newproduct This may lead to theremoval of superfluousfeatures

New product development should be controlled by subjecting projects to a

series of gates, or review meetings, to decide whether they have made the

required progress, and to determine what must be achieved to pass the next gate