THE STRATEGIC PLANNING PROCESS

The first of two articles that focus on applying your knowledge of management and
strategy to a scenario situation. Part 1 considers the complexities of strategic planning
and how they can be broken down into three main areas

One of the main problems faced by Paper P3 students is application of knowledge.

Early on in their preparation most students feel comfortable with all that is discussed
in Paper P3 and many develop a false sense of security preferring to concentrate on
what seems to be an overwhelming amount of information for Papers P2, P4 or P6. It is
only when students enter the revision phase do they realise that you need to do much
more than just learn the notes in order to pass the exam. The main skill that a student
needs to develop is an ability to apply the acquired knowledge in a scenario situation.
The following provides an insight into how to apply your knowledge effectively.

This first article deals with the strategic planning process. Many of the various texts on
the market comprehensively cover the key processes involved in strategic planning.
These often involve comprehensive flow charts with many subparts. Rather than
explain these in detail, let us first distil the process into three main areas:

1. Strategic analysis.

2. Strategic choice.

3. Strategic implementation.

Strategic analysis
Essentially a business will address the following questions:

Where do we want to go?

What constraints exist on our resources?

What are the key threats from the external environment?

Where do we want to go?

The answer to this question is influenced by many factors. Key influencers are often
the owners (for example, shareholders) who may have a particular expectation for the
organisation. However, one also needs to take into account other stakeholder
influences, which could include the government, employees and the general underlying
culture of the organisation. These views are very often consolidated into a corporate
vision or mission statement.

What constraints exist on our resources?

Resources needed would include finance, plant and machinery and human resources.
However, to make it easy, I would recommend that you simply think 6Ms. 6Ms is simply
a mnemonic used to save time when thinking about the various resource constraints. It
can be summarised as:

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 money

machinery

manpower

markets

materials

make-up.

The typical questions, which you would ask against each of these resource constraints,
would be as follows:

Money

How much do we have?

What is the current cost of our capital?

Is the company excessively geared or are there any opportunities for raising additional finance?

Machinery
This would refer to machinery in the broadest sense of the word, and typical questions
one might ask would include:

How technically up to date is the machinery?

Is there a danger of obsolescence?

Has it been poorly maintained over the years?

Manpower

How expensive is our workforce?

How efficient are our employees?

Is the business overstaffed?

Is it understaffed?

What is the labour turnover rate?

What is the absence rate?

Are there good structures to allow management succession?

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Markets
There is a danger of overlapping with the external environment here, so try to keep to
such questions as:

Are the markets declining/growing?

Where are new markets emerging?

How strong are our brands in the current market?

Materials

How expensive are our materials compared to our competitors?

Do our suppliers have excessive control of materials?

Do we have favourable access to materials?

Are our raw materials becoming exhausted?

Make-up

What type of structures do we have and are they likely to limit future growth?

What is the culture of the organisation and will it stifle or fuel future developments?

We will explain later how we can apply these concepts to a case scenario.

What are the key threats from the external environment?

Once we have established constraints on our internal resources we need to assess the
threat posed by the external environment. The easiest way to assess the external
environment is to use the following two frameworks:

1. Porters five forces.

2. PESTEL analysis.

Porters five forces

The American management writer Michael Porter describes the main external
competitive threats to be summarised by his five forces model. Essentially, this model
determines the level of competition an organisation is facing by assessing the extent to
which the five forces are relevant. The five forces are summarised as follows:

1. The threat from new entrants.

2. The bargaining power of buyers.

3. The bargaining power of suppliers.

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 4. The threat from substitute products.

5. The extent of competitive rivalry.

1. The threat from new entrants

This is a problem because if competitors can easily enter your business sector they
will be able to put a ceiling on your profits. Therefore, the greater the threat from new
entrants entering the sector, the higher the levels of competition. The ease which new
entrants can enter the business segment is largely determined by the extent of the
barriers to entry. You potentially could get a whole Section B question, which goes into
detail on barriers to entry.

The following summarises the main barriers to entry.

Capital cost of entry. The higher the capital cost, the greater the deterrent to someone entering
the business and, therefore, the likelihood of competition being less than in industries where it
is much cheaper to set up business.

Economies of scale. This will apply if a substantial investment is needed to allow a new entrant
to achieve cost parity. Therefore, anyone entering the segment that cannot match the
economies of scale will be at a substantial cost disadvantage from the start.

Differentiation. Differentiation is said to occur if consumers perceive a product or service to

have properties, which make it unique or distinct from its rivals. The differentiation can be in
the appearance of the product, its brand name or services attached to the product for
example, Concorde. Therefore, if new entrants are to be successful in entering the market they
will need to spend a lot of money on developing the image of the product hence, they are likely
to be put off.

Switching costs. This is the cost not incurred by a new company wishing to enter the market
but by the existing customers. If the buyer will incur expense by changing to a new supplier,
they may not wish to change. For example, when the compact disc was invented consumers had
to incur a cost of a CD player, as the new compact discs would not work on a conventional
record player.

Expected retaliation. If a competitor entering a market believes that the reaction of an existing
firm will be too great then they will not enter the market.

Legislation. There might be patent protection for a product or the government might only
license certain companies to operate in certain segments
for example, Nuclear Power.

Access to distribution channels . Existing relationships between manufacturers and the key
distributors of the products may make it difficult for anyone else to enter the market.

Therefore, in summary, when thinking about the barriers to entry go through the above
list in your planning to see which of them apply. Remember that it is unlikely that they
all will apply, but the checklist should ensure that all those that do apply would be
picked up.

2. The bargaining power of buyers

Do the buyers of the product have the power to depress the suppliers prices? If the
answer to this question is yes, it is likely that competition will increase. Buyers will
have power when:

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 they are concentrated and can exert pressure on the supplier

the buyer has a choice of alternative sources of supply.

3. The bargaining power of suppliers

The extent of supplier bargaining power is very closely linked in with the issues of
buyer power. The extent of the power of the suppliers will be affected by:

the concentration of suppliers: if only a few suppliers, the buyers will have less opportunity to
shop around

the degree to which products can be substituted by the various suppliers

the level of importance attached to the buyer by the supplier. The switching costs of moving to
another supplier.

4. The threat from substitute products

If there are similar products that can be used as substitute then the demand for the
product will increase or decrease as it moves upwards or downwards in price relative
to substitutes.

5. The extent of competitive rivalry

The most competitive markets will be affected by the previously discussed forces.
However they will also be affected by:

the number of competitors and the degree of concentration

the rate of growth of the industry

the cost structures if high fixed costs prices are often cut to generate volume

the exit costs. If they are high, firms may be willing to accept low margins so as to stay in the
industry.

PESTEL factors
The other framework, which should be applied when surveying the external
environment, is PESTEL factors:

Political

Economic

Social

Technological

Environmental

Legal.

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Again, all of these factors will not necessarily apply but provide a useful checklist
against which you can compare in an exam situation. They are explained more fully
below.

Political environment
The organisation must react to the attitude of the political party that is in power at the
time. The government is the nations largest supplier, employer, customer and investor
and any change in government spending priorities can have a significant impact on a
business for example, the defence industry.

Political influence will include legislation on trading, pricing, dividends, tax,

employment, as well as health and safety.

Economic environment
The current state of the economy can affect how a company performs. The rate of
growth in the economy is a measure of the overall change in demand for goods and
services. Other economic influences include the following:

1. Taxation levels.

2. Inflation rate.

3. The balance of trade and exchange rates.

4. The level of unemployment.

5. Interest rates and availability of credit.

6. Government subsidies.

One should also look at international economic issues, which could include the
following:

1. The extent of protectionist measures.

2. Comparative rates of growth, inflation, wages and taxation.

3. The freedom of capital movement.

4. Economic agreements.

5. Relative exchange rates.

The social environment

The organisation is also influenced by changes in the nature, habits and attitudes of
society.

Changing values and lifestyles.

Changing values and beliefs.

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 Changing patterns of work and leisure.

Demographic changes.

Changing mix in the ethnic and religious background of the population.

The technological influences

This is an area in which change takes place very rapidly and the organisations need to
be constantly aware of what is going on. Technological change can influence the
following:

Changes in production techniques.

The type of products that are made and sold.

How services are provided.

How we identify markets.

Environmental
This concerns issues regarding factors that could impact on the ecological balance of
the environment and could include such issues as climate change and pollution

Legal environment
How an organisation does business:

Law of contract, law on unfair selling practices, health and safety legislation.

How an organisation treats its employees, employment laws.

How an organisation gives information about its performance.

Legislation on competitive behaviour.

Environmental legislation.

Therefore, when surveying the external environment think through Porters five forces
and PESTEL factors and you will have a fully comprehensive framework with which you
can assess the case.

Past exam-related example

Championsoft is a specialist software house, which has developed and now markets a
modular suite of financial software packages under the product name of Champlan. In
addition, the company provides a systems design consultancy service to the financial
services industry. The company was established in 1988 and the three founding
shareholders are also the three full-time working directors. Extracts from the financial
results for the last three years are given below. These show declining profitability
although aggregate sales revenue has increased year on year.

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 System
s
Champla Champla Operatin
design
Year n units n sales g profits
service
sold
s sales

2010 2,050 922,500 650,000 162,000

2011 2,700 1,080,000 600,000 144,000
2012 3,600 1,260,000 550,000 107,500

Operating profit is before interest charges and taxation. The current interest rate on
the medium term loan is 10% per annum.

Share
Curre Mediu
Fixed Current capital
nt m
Year asset liabiliti and
assets term
s es reserv
loan
es

2010 950,000 425,000 260,000 200,000 915,000

1,000,00
2011 525,000 375,000 200,000 950,000
0
1,225,00
2012 650,000 475,000 400,000 1,000,000
0

The current liabilities figure includes an overdraft with the bank of 300,000. This is
also the agreed maximum. The company owns its own premises and these comprise
the majority of fixed assets. The premises have recently been expanded to cope with
the increased sales volume of the Champlan package. Although the consultancy
workload of the company has shown some decline in recent years, this has been due to
pressure on the software staff to develop more powerful versions of the Champlan
package rather than a shortage of potential work. Championsoft is well regarded in the
system design services field and attracts good profit margins on the work carried out.
It is estimated that the operating profit to sales ratio on system design services is in
the region of 15%.

Championsoft employs 18 people mainly as software specialists. There is little

subcontract software development undertaken. The managing director and majority
shareholder with 40% of the voting capital is Simon Champion. He was the prime mover
behind the creation of Championsoft and has substantial experience in the financial
services industry. He sees his main role as ensuring the efficient day-to-day
administration of the business. The software technical aspects of the business are
managed by the technical director, Dr John Chan, who holds 30% of the voting share
capital. He is responsible for research and development on the Champlan product
range, customer technical support on software products and systems design
consultancy projects.

Jill Mortimer, the third director, holds the final 30% of voting shares and is in charge of
sales and marketing of both software products and consultancy services. Her
background is in the marketing of fast moving consumer products.

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Championsoft see its Champlan product range as a market leader in terms of quality
and functionality, although this segment of the software market appears to be
increasingly driven by price and product awareness. There is also a recent marked
tendency for hardware suppliers to bundle in the Champlan product as part of the
hardware price of their product. The main competitor to Champlan is the Pennsoft
product range. Pennsoft is part of a large international organisation, and its product
range is very similar to Champlan if lacking in its level of functionality. Pennsoft
software is marketed at prices, which have always undercut Champlan. Jill Mortimer
believes that Pennsoft hold about two-thirds of the market, Champlan about one-
quarter and the rest is split among a few other software houses. There are few barriers
to other software houses entering this market. Almost any quality software house is
able to produce a similar product for this market providing that they are willing to
devote sufficient resources.

Jill Mortimer has a strong personality and her views have tended to dominate the
recent direction of the business. She believes that Championsoft must cut its prices
and put more effort into winning sales. Look at the way the software market is
developing. Every year there is a bigger market as new users get access to the
hardware. Our extra sales effort and a bigger sales force will easily be covered by
additional unit sales. We must tackle Pennsoft head on and capture some of their
market share. Last year Championsoft spent 100,000 on advertising while Pennsoft
spent in the region of 500,000.

Simon Champion is not fully convinced. Although our current advertising has
generated lots of enquiries, very few of these resulted in firm sales. In fact, the high
level of spending on promotion is straining our cash flow. He was thinking about the
letter recently received from the bank which, while professing continuing support,
pointed out that Championsofts overdraft was rising year on year and that this must
not be seen as a permanent source of finance. The bank had concluded that it would
like to see some medium-term projection about how the overdraft was to be brought
under control.

As usual John Chan took the opportunity to launch into his familiar attack on the
marketing strategy or lack of strategy as he was heard to remark to his software team:
We should move away from the package market and into consultancy activities. These
build on our reputation and software expertise.

The margins are good and we can sell on recommendation not expensive advertising
campaigns. As it stands, my team is being torn between development of Champlan and
working on software projects. We cannot do both well, we are in danger of losing
clients and at the same time failing to keep the edge over Pennsoft.

Simon Champion was at a loss how to respond. Something had to be done, but what?

Simon Champion has come to see you, as the companys auditor, and has asked for
your objective advice. He feels that Championsoft needs a strategy but is not sure
what it should be or how to go about preparing it. Events move so fast in our industry
that plans are out of date before they can be implemented was a comment made at
your meeting.

Requirements
(a) Identify any additional internal and external information, which you need before you

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could set about writing your report and indicate how you would gather such
information. (12 marks)

Suggested approach
As you can see, the question asked above in the case scenario clearly seeks for
information of both an internal and external nature together with how you would gather
such information.

All answers in the exam should be roughly planned out and all you need to remember to
score well in this part of the question are the mnemonics to help you break down the
internal and external factors.

So, to help get some structure for internal factors, think 6Ms and you think:

Money

Markets

Machinery

Materials

Manpower

Make-up

We then need to quickly think which of these 6Ms would be most relevant to the
answer. I would expect your thought process to go something like the following:

Machinery? Is machinery relevant to Championsofts business as a specialist software house?

How cost effective is the current use of the machinery? You may comment on the fact that in
order to remain competitive ongoing investment in the latest equipment is likely to be relevant.

Money? An analysis of profitability of individual products, how competitive is the interest on the
medium-term loan?

Manpower? Cost/productivity/staff turnover of the current employees compared to the industry

average.

Markets? The growth potential for financial software and the systems design consultancy
market.

Materials? In the case of Championsoft, materials do not seem to be so relevant so I would

suggest no comment is needed.

Makeup? We would need to look at the current culture of the staff and assess whether it would
be happy if one side of the business was run down for example, software development.

Therefore, we have shown how, by using the 6Ms approach in our plan, we can provide
ourselves with more than enough criteria on which to comment. We should now be
confident in applying five forces and PESTEL in much the same way for example,
questions regarding the five forces would include:

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 What are the main barriers to entry for new entrants entering the software and design
consultancy business and how much of a deterrent are they?

Do buyers have the power to ask Championsoft to reduce its prices? You may comment on the
fact that it has an alternative choice in Pennsoft and therefore may be able to get a more
competitive price than if Pennsoft was not there.

Are there any other packages out in the market that could be used as a substitute for
Championsofts products?

Questions of a PESTEL nature would be similar to those used above.

Armed with this information in your plan you should now be able to develop an answer
that should fulfil the 12 marks allocated. Do not forget to answer the entire question,
which required suggestions as to how you would gather such information suggested. It
must be stressed that all of the 6Ms, five forces and PESTEL need not necessarily be
used in your answer, but they should almost certainly be used in developing your
answer plan.

Past exam-related example

Bowland Carpets Ltd
An example of a question that concentrates on a specific part of the above
environmental analysis is given below.

Bowland Carpets Ltd is a major producer of carpets within the UK. The company was
taken over by its present parent company, Universal Carpet Inc, in 2012. Universal
Carpet is a giant, vertically integrated carpet manufacturing and retailing business,
based within the US but with interests all over the world.

Bowland Carpets operates within the UK in various market segments, including the
high value contract and industrial carpeting area hotels and office blocks, etc and in
the domestic (household) market. Within the latter the choice is reasonably wide,
ranging from luxury carpets down to the cheaper products. Industrial and contract
carpets contribute 25% of Bowland Carpets total annual turnover, which is currently
80m. During the late 1980s the turnover of the company was growing at 8% per
annum, but since 2011 sales have dropped by 5% per annum in real terms. Bowland
Carpets has traditionally been known as a producer of high quality carpets, but at
competitive prices. It has a powerful brand name, and it has been able to protect this
by producing the cheaper, lower quality products under a secondary brand name. It has
also maintained a good relationship with the many carpet distributors throughout the
UK, particularly the mainstream retail organisations.

The recent decline in carpet sales, partly recession-induced, has worried the US parent
company. It has recognised that the increasing concentration within the European
carpet-manufacturing sector has led to aggressive competition within a low growth
industry. It does not believe that overseas sales growth by Bowland Carpets is an
attractive proposition, as this would compete with other Universal Carpet companies. It
does, however, consider that vertical integration into retailing (as already practised
within the US) is a serious option. This would give the UK company increased control
over its sales and reduce its exposure to competition. The president of the parent
company has asked Jeremy Smiles, managing director of Bowland Carpets, to address
this issue and provide guidance to the US board of directors. Funding does not appear

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to be a major issue at this time as the parent company has large cash reserves on its
balance sheet.

Requirements
Acting in the capacity of Jeremy Smiles you are required to outline the various issues,
which might be of significance for the management of the parent company. Your
answer should cover the following:
(a) To what extent do the distinctive competencies of Bowland Carpets conform with
the key success factors required for the proposed strategy change? (10 marks)
(b) Suggest and discuss what might be the prime entry barriers prevalent in the carpet
retailing sector. (7 marks)
(c) In an external environmental analysis concerning the proposed strategy shift, what
are likely to be the key external influences that could impact upon the Bowland
Carpets decision? (8 marks)
(Total: 25 marks)

Suggested approach
If we are to concentrate on Part (b), you can see that it asks for the prime entry
barriers in the carpet retailing sector. All that you need to do here is undertake a quick
brainstorm of what we described earlier as barriers to entry and then see whether any
of them will apply to the carpet retailing sector.

So thinking back the main barriers to entry which we listed were:

Capital cost of entry

Economies of scale

Differentiation

Switching costs

Expected retaliation

Legislation

Access to distribution channels

Most of the above could be a potential barrier in the carpet retailing sector, but in order
to score high marks you need to apply them in the context of carpet retailing rather
than just list them.

Capital cost of entry. How much investment would be required in a lease and stock?

Economies of scale. Are there any current carpet retailers that have superior buying power and
economies of scale in distribution and marketing?

Differentiation. Are there any retailers that have high levels of customer loyalty to their shop,
which would prevent them from buying carpets from anyone else?

Switching costs. Switching costs are not relevant and one would become relevant if a
householder were to enter into a lifelong contractual agreement to buy all their carpets from
one particular retailer, which is clearly unlikely.

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 Expected retaliation. If a retailer existed in the carpet retailing sector that was very aggressive
to any potential new competitor this could prove to be a potential barrier.

Legislation. Are there any planning constraints or specific licences that are needed to operate
in the carpet retailing sector.

Access to distribution channels . How easy will it be for a new entrant in the carpet retailing
sector to find a prime retailing site that is appropriate for the sale of carpets.

Therefore, using the framework in an applied way, we have been able to construct an
answer that, if presented appropriately, will be worth almost maximum marks. If you
look at Part (c) you will see that the external analysis frameworks fit in perfectly again
see if you can do it.

Summary
Hopefully now when we think about the strategic planning process we think about:

1. Strategic Analysis.

2. Strategic Choice.

3. Strategic Implementation. This article has explained in detail the process of strategic analysis,
which we should all be able to break down into:
- Where do we want to go?
- What constraints exist on our resources? (6Ms)
- What are the key threats from the external environment? (five forces, PESTEL)

The next article will take a similar approach to the issues of strategic choice and
implementation.

Sean Purcell BA ACMA is a leading freelance lecturer for Paper P3 and lectures on the
ACCA Study School and Train the Trainer Programme for Paper P3

The second of two articles that focus on applying your knowledge of management and
strategy to a scenario situation. Part 1 considered the complexities of strategic
planning and how they can be broken down into three main areas. Part 2 adopts a
similar simplification approach to the issues of strategic choice and strategic
implementation

One of the main problems faced by students on Paper P3 is application of knowledge.

Early on in their preparation most students feel comfortable with all that is discussed
in Paper P3 and many develop a false sense of security preferring to concentrate on
what seems to be an overwhelming amount of information for Papers P2, P4 or P6. It is
only when students enter the revision phase do they realise that you need to do much
more than just learn the notes in order to pass the exam. The main skill that a student
needs to develop is an ability to apply the acquired knowledge in a scenario situation.
The following provides an insight into how to apply your knowledge effectively.

In the previous article we established how the complexities of strategic planning could
be broken down into three main areas:

1. Strategic analysis

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 2. Strategic choice

3. Strategic implementation

The previous article comprehensively explained strategic analysis by breaking it down

into three questions:

Where do we want to go? (Think stakeholder constraints)

What constraints exist on our resources? (Think 6Ms)

What are the key threats from the external environment? (Think PESTEL and five forces)

In this article we are going to try to adopt a similar simplification approach to the
issues of strategic choice and strategic implementation.

Strategic choice
Johnson and Scholes break down the issue of strategic choice into three distinct
subheadings, which are:

On what basis do we decide to compete?

Which direction should we choose?

How are we going to achieve the chosen direction?

On what basis do we decide to compete?

A useful framework to use here is Porters generic strategies. Michael Porter stated
that a firm that is wishing to obtain competitive advantage over its rivals is faced with
two choices:

Choice 1: Is the company seeking to compete by achieving lower costs than its rivals
achieve and by charging similar prices for the products and services that it offers,
thereby achieving advantage via superior profitability? Or

Is the company wishing to differentiate itself and the customer is prepared to pay a
premium price for the added value which the customer perceives in the product, and
thereby enjoys greater margin than the undifferentiated product.

Choice 2: What is the scope of the area in which the company wishes to obtain
competitive advantage? Is it industry-wide or is it restricted to a specific niche?

The answers to these two choices leave the organisation faced with three generic
strategies, which are defined as:

1. cost leadership

2. differentiation

3. focus.

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1. Cost leadership
Set out to be the lowest cost producer in an industry. By producing at the lowest
possible cost the manufacturer can compete on price with every other producer in the
industry and earn the highest unit profits.

In order to achieve cost leadership some of the following need to be in place:

Seek to set up production facilities for mass production as these will facilitate the economies of
scale advantages to be achieved.

Invest in the latest technology improved quality less labour needed.

Seek to obtain favourable access to sources of raw materials.

Look to develop product designs that facilitate automation.

Minimise overhead costs by exploiting bargaining power.

Concentrate on productivity objectives and constantly seek to improve efficiency and economy
for example, ZBB, value chain analysis.

One should also be aware of the drawbacks of such a strategy, such as the need to
continually keep up to date with potential changes in technology or consumer tastes.

2. Differentiation
A firm differentiates itself from its competitors when it provides something unique that
is valuable to buyers. Differentiation occurs when the differentiated product is able to
obtain a price premium in the market that is above the cost incurred to create the
differentiation.

As a consequence of differentiation being about uniqueness, it is not really possible to

give an exhaustive list detailing how a firm may differentiate itself. To truly
differentiate yourself we must understand the product or service offered and the
customer to whom you are selling it.

Ways of achieving differentiation

Image differentiation
Marketing is used to feign differentiation where it otherwise does not exist ie an
image is created for the product. This can also include cosmetic differences to a
product that does not enhance its performance in any serious way for example,
perfume colour, size, packaging.

Support differentiation
More substantial, but still has no effect on the product itself, is to differentiate on the
basis of something that goes alongside the product, some basis of support.

This may have to do with selling for example, 0% finance, 24-hour delivery.

Quality differentiation
This means the features of the product that make it better not fundamentally
different, but just better. The product will perform with:

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 greater initial reliability

greater long-term durability

superior performance.

Design differentiation
Differentiate on the basis of design and offer the customer something that is truly
different as it breaks away from the dominant design if there is one for example,
Apples iMac computer.

Reward of a differentiation strategy

Consumers are likely to pay a higher price for the goods because of the added value
created by the differentiation.

3. Focus
A focus strategy is based on fragmenting the market and focusing on particular market
niche. The firm will not market its products industry-wide but will concentrate on a
particular type of buyer or geographical area.

Cost focus: This involves selecting a particular niche in the market and focusing on
providing products for that niche. By concentrating on a limited range of products or a
small geographical area, the costs can be kept low.

Differentiation focus: Select a particular niche and concentrate on competing in that

niche on the basis of differentiation for example, luxury goods.

This can be summarised in the following diagram:

We stated that the alternative directions available to a business could be described in

general terms as follows:

1. Do nothing

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 2. Withdrawal

3. Market penetration

4. Product development

5. Market development

6. Diversification

Do nothing
This involves following the current strategy while events around change and can often
prove to be a successful short-term strategy. Basically, if an organisation is exposed to
some form of competitive threat, its short-term objective is to not react and, hence, get
involved in what could be an expensive decision.

Sell out/withdraw from the market

This may be followed so as to maximise the return on a business that may be at the top
of its cycle and, hence, will be in line with the goal of maximisation of cash flows.
Withdrawal from a business sector may be chosen to give the business more focus for
example, Richard Bransons decision to sell his original business Virgin Records to
concentrate on the airlines business.

Market penetration
This involves increasing the market share in the current market with the current
product. Market share can be enhanced by such techniques as improved quality,
productivity or increased marketing activity.

Product development
This involves introducing a new product into the current market. The product change is
often the result of changes and modifications to an existing successful product for
example, Mars ice cream. This is an alternative to the present product and builds on
present knowledge and skills.

Market development
In this case the organisation keeps its tried and tested products but aims to apply
them to different market segments. This strategy maintains the security of the present
product while enabling extra revenue to be generated from new segments for
example, McDonalds and its geographic market development.

Diversification
This is the most risky of the product market strategies as it involves the introduction of
a totally new product in a new market. Diversification can either be related or
unrelated.

Related diversification
This involves development of the product and market but still remaining within the
broad confines of the industry. There are three main types.

1. Backward. A development into the business that inputs into the present business for example,
move up the supply chain into raw material inputs.

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 2. Forward. A development into activities concerned with a companys outputs also called
downstream integration for example, move down the supply chain into distribution activities.

3. Horizontal. Movement into activities that are competitive with existing activities for example,
to benefit access to market or technology.

Unrelated diversification
This involves movement into industries that bear little relationship to the present one
and is often the result of a profit motive.

Ansoff represented the last four choices in his product/market matrix.

Ansoff's product market matrix

How?
The final problem that must be overcome is to decide how the chosen strategic option
should be undertaken.

The options available are:

internal development

external development/acquisition

joint development.

Internal development
Reasons
Often undertaken to maintain the present equilibrium within the company as it is much
less disruptive than an acquisition. Another reason may be that there is not sufficient

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finance available for an acquisition or that the government may prevent
acquisition/merger through legislation.

Acquisitions

If there is sufficient finance available an acquisition will provide a very quick way of providing
access to new product/market areas and the new organisation will have economies of scale
advantages.

Joint development
A formal agreement between two or more organisations to undertake a new venture
together for example, Airbus (spreading of cost).

Methods of joint development

Consortia. Two or more firms working together to share the costs and benefits of a business
opportunity.

Joint venture. A separate business entity whose shares are owned by two or more business
entities.

Strategic alliance. A long-term agreement to share knowledge, technology or business

opportunities.

Franchising. The purchase of the right to exploit a business brand in return for a capital sum and
a share of profits or turnover. The franchiser also usually provides marketing and technical
support to the purchaser of the franchise.

Licensing. The right to exploit an invention or resource in return for a share of proceeds. Differs
from franchise because there will be little central support.

To summarise, we can use Figure 1. Once all the alternative options have been
generated we need to evaluate their appropriateness before making a choice. A useful
framework to apply when considering the appropriateness of an option is:

suitability

feasibility

acceptability

Suitability
Suitability identifies the extent to which the proposed strategy enhances the situation
identified in the strategic analysis. The following questions need to be addressed about
the strategic options:

Does it close the planning gap?

Does it address threats and weaknesses?

Does it build on identified strengths and exploit opportunities?

Does it fit in with the organisations mission?

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 Will the portfolio remain balanced?

Feasibility
The issue of feasibility evaluates whether the chosen strategy can be implemented
successfully. The resources the organisation has at its disposal will obviously
determine this. To save time, simply think about the 6Ms.

Acceptability
The final issue to address is whether the selected strategy will meet the expectations
of the key stakeholders in the firm and typical issues to be looked at would include the
level of risk and return resulting from the option.

Remember that in the exam it is unlikely that you are going to get a question that asks
you to regurgitate the information on strategic choice in the way in which I have just
explained to you. Questions will normally touch on some part of the process we have
described and if you have an in-depth understanding of everything that we have
covered you will be able to construct much more comprehensive arguments in the
exam. We will show this in a previous exam question later.

Strategic implementation
The area of strategic implementation covers many areas from project management to
structure. However, as with strategic analysis and strategic choice, it is possible to
simplify the issues in to a number of key sub-headings:

Resource management.

Organisational structure.

Management of change.

Resource management
This will ensure that the 6Ms are working for you in the best way possible. Budgets and
other performance management tools are likely to be used here.

Organisational structure
This will deal with issues regarding the levels of centralisation and decentralisation,
together with structural form and style of management.

Management of change
The scope, speed and style of the changes need to be carefully reviewed in order to
obtain full commitment to them. A useful model of change to remember is Kurt Lewins
three-step model, which involved:

unfreeze

change

refreeze.

Unfreeze

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For the change to take place the existing equilibrium must be broken down before a
new one can be adopted.

Change
This is the second stage, mainly concerned with identifying what the new, desirable
behaviour or norm should be, communicating it and encouraging individuals and groups
to own the new attitude or behaviour. To be successful, one should consider the
adoption of the following management styles to improve the acceptance of the change:

Participation with employees affected by the change, so that they feel more of a sense of
ownership.

Education and communication of the new ways, so that they fully understand what is going on
and are not in a situation where they are afraid of the unknown and therefore show resistance.

Negotiation may also be appropriate if there are large group stakeholders such as a trade union.

Refreeze
This is the final stage, implying consolidation or reinforcement of the new behaviour.
Positive reinforcement (praise, reward, etc) or negative reinforcement (sanctions
applied to those who deviate from the new behaviour) may be used. You should also
look at the Change Kaleidoscope and Cultural Web

Therefore to summarise what we have just said:

Strategic choice
On what basis do we decide to compete? (Porters generic strategies.)
Which direction should we choose? (Ansoffs product market matrix, do nothing,
withdraw.)

How are we going to achieve the chosen direction? (Internal external joint venture.)

Strategic implementation
Resource management (6Ms)
Organisational structure (centralisation, decentralisation, specific structural form)
Management of change (unfreeze, change, refreeze)

Let us see how we can expect to get questioned in this area in the exam.

Question 1
Sample ACCA exam
Jerome Gulsand is the owner and chief executive of a chain of 20 sports equipment
shops, Sportak. These shops are clustered in the south of the country. The company is
privately owned by the family and the freeholds of these shops, which the company
owns and which are on prime retail sites, account for the majority of the assets of
Sportak. The company sells a wide range of sports equipment such as golf clubs,
tennis, skiing equipment, soccer and other sports equipment. Recently it has expanded
its range to include certain types of designer sports clothing.

The company was founded by Jeromes father a quarter of a century earlier when he
opened his first small shop. Over the next 25 years the company grew steadily. A major
reason for this successful development lay with the philosophy of Jeromes father who

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delegated much of the decision-making to the individual shop managers. He believed
that this gave the local managers a higher degree of motivation. It also allowed them to
respond to local demand conditions as stock ordering was carried out by each shop
and was not organised at the head office. The managers were also permitted to
develop local marketing activities, using sales promotions and publicity as they felt
appropriate.

These shop managers were remunerated partly by a basic salary and partly by a sales-
related performance bonus, which could be up to 40% of their basic salary. These
methods of operation were satisfactory while the company was operating in a steady
growth environment. However, by late 2007 there was evidence that Sportaks overall
position within the market was weakening. Sales had stabilised but, even more
importantly, competition was growing from a number of discount traders who were
prepared to operate on low profit margins but with larger volumes. It was at this time
that Jerome took over the company from his father.

Jerome was impatient with the lack of growth. By nature he was an entrepreneur who
sought growth. He was not sure that the steady organic growth was appropriate to
these conditions. His fathers policy had been to open a store each year, funding this
growth out of current earnings. Jerome saw that the market was becoming so
competitive that even small and specialist markets were proving to be vulnerable. He
believed that only the big, nationwide retail chains would survive and that the smaller
sized groups would be taken over by the larger chains of sports goods retailers who
were more profitable and had greater capability to raise finance.

He decided that a dash for growth was required if the company was to achieve the
critical size to survive in the market place. It had been suggested to him that the
franchising of the Sportak brand name would be a reasonable and relatively risk-free
method of expansion. Growth, using other peoples money, has its advantages, but it did
not appeal to Jerome. He wanted a more hands-on approach.

At about this time another chain of 15 sports shops became available for purchase.
This group was in a distinctly separate area of the country about 150 miles from
Sportaks current area of operations. As the overall sports equipment and sportswear
market was still growing, the price being asked for this acquisition was rather high.
However, Jerome was convinced that this was too good an opportunity to miss. He
believed that Sportak needed this expansion so as to take advantage of the profitable
sales still available in this sector. However, for an acquisition of this size, it was
obvious that the growth could not be funded internally. Jerome assumed that he might
use the freeholds of the properties Sportak owned as securities for the finance the
company needed to borrow. Before approaching the bank Jerome discussed this issue
with his accountant and offered the following ideas for his proposed expansion.

In anticipating this proposed expansion and the need to manage an enlarged group,
Jerome believes that it is time for a strong and centralising leader. Recognising that
the current system of product ordering is delegated to individual store managers, he
proposes to provide a centralised purchasing function based upon a warehouse owned
and controlled by Sportak. Individual shop managers will be permitted to decide upon
their stock range, but they will have to order from the central warehouse set up by
Sportak.

Jerome has also decided to tackle the problem of marketing and, in particular,
promotion. The decentralised approach adopted by his father has not brought about the

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development of a well-known image and, therefore, the brand of Sportak needs to be
strengthened. Under Jeromes plan it is proposed to allocate a substantial budget
15% of sales to spend on press advertising and on public relations, and this level of
commitment will continue for the foreseeable future. Sports personalities will be paid
to appear in all stores, which will have to be re-equipped. By a competent use of
merchandising it is hoped that these stores will increasingly be recognised as centres
for influencing the fashion of both sports equipment and clothing. The shop managers
will also be encouraged to stock more expensive lines of products where the margins
will be higher and, in addition, they will be expected to hold much more stock. A
criticism of the stores when Jeromes father was in charge was that they were often
short of stock. Most customers were unwilling to wait for the product to be ordered and
they therefore bought from competitors shops.

Jerome recognised that during this period of change Sportak might lose a number of its
key shop managers. These people have enjoyed substantial autonomy, and although
they will still have some freedom on the stock range that they offer, they might
increasingly see their freedom to act as managers being eroded. In appreciating that
these shop managers provide much goodwill and their loss would be damaging to the
company, Jerome is proposing to increase their sales-related bonuses as an
inducement to stay.

Jerome fully understands that the costs incurred in the proposed acquisition involve
more than the purchase of the new shops. Store modernisation programmes for all the
shops, as well as upgrading stock with a wider and more sophisticated range of
products, will also require funding. Forecasts of immediate future sales appear to be
attractive. Jerome anticipates that sales per store will rise by about 8% over the next
year. He believes that this growth in sales, accompanied by his more aggressive
approach to retailing, will enable his bold expansion plans for Sportak to be achieved.
Above all, Jerome wishes to see his company, Sportak, become a national company, no
longer having to operate as a regional retailer does.

In Table 1 is a summary of the figures that have been prepared by Jeromes accountant
for discussion. Part of the data has been obtained from trade association statistics as
well as government forecasts.

Requirements
(a) Jerome Gulsands father was a great believer in the decentralisation of both
operations and decision making. To what extent has this process harmed or benefited
Sportak? Provide examples to justify your arguments. (10 marks)
(b) Evaluate the key features that you consider to be important and would expect to
see in the business plan that Jerome Gulsand would have to present to his bank to
support his application for financial assistance. (15 marks)
(c) Acting in the position of Jerome Gulsands accountant, and using the financial data
provided and the intentions developed by Jerome, assess the viability of the strategy
that has been proposed by him. (15 marks)
(d) Discuss whether a franchise operation would have been a better option for
expansion than an acquisition. (10 marks)

Table 1

2007 2008 2009 2010

Actual Budget Forecast Foreca
m m m st

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 m
Sales of revenue 30.00 29.50 58.80 57.96
Costs of sales 15.00 14.75 25.28 24.92
Gross margin 15.00 14.75 33.52 33.04
Expenses 12.00 12.50 29.50 29.75
Operating profit 3.00 2.25 4.02 3.29
Interest paid 0.00 0.00 2.50 2.50
Proft after 3.00 2.25 1.52 0.79
interest
Fixed assets 15.00 15.00 34.00 34.00
Current assets 6.00 5.90 9.80 9.66
Current 3.75 3.69 7.35 7.25
liabilities
Equity 24.75 24.59 26.15 25.91
Debt 0.00 0.00 25.00 25.00
Gross margin 50% 50% 57% 57%
Return of sales 10% 7.62% 6.83% 5.67%
Activity ratio 1.21 1.20 1.15 1.14
Return on net 12.2 9.15 7.85 6.46
assets
ROE 12.2 9.15 5.80 3.04
Industry sales 125 135 140 138
(2000 100)

Part (a) examines your knowledge of the implementation stage by asking a specific
question on structure and whether you believe decentralisation has had any
detrimental effect on Sportak. If you were to brainstorm the main issues regarding
centralisation and decentralization, and then see which apply in the context of the
case, a comprehensive answer would be able to be obtained.

Part (b) would be best answered by mixing common sense with the key issues from
strategic analysis, strategic choice and strategic implementation. Common sense
would tell you that the business plan should include an overview of Sportaks business.
More detailed information should be provided on the organisations resources (6Ms),
together with an overview of the business environment in which it exists (use PESTEL
and five forces for inspiration). A clear description of the basis on which Sportak
intended to compete should also be included (use Porters generic strategies and
Ansoffs product market matrix for inspiration) together with the likely returns the
business is to make from the chosen strategy.

Part (c) requires you to apply the financial skills you have learned throughout your
ACCA studies to give an overview of how viable Jeromes plans are.

Part (d) again would have been easily answered if you had approached your studies in
the logical way suggested earlier and it specifically dealt with the how? Part of the
strategic choice stage. (Use the internal, external or joint venture model for
inspiration).

Summary
Hopefully you are now able to overview the strategic planning part of the syllabus in a
more systematic and logical way. All you need to remember is the key steps of
strategic analysis, choice and implementation. This should then set off another chain
of words in your head, such as:

strategic analysis (think 6Ms, think PESTEL and five forces and stakeholder constraints.)

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 strategic choice (on what basis do we decide to compete? Which direction should we choose?
How are we going to achieve the chosen direction?)

strategic implementation (resource management, organisational structure, management of

change.)

All that is necessary now is to use the framework in an applied way relevant to the
question asked.

Sean Purcell BA ACMA is a leading freelance lecturer for Paper P3 and lectures on the
ACCA Study School and Train the Trainer Programme for Paper P3

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