CIMA Official Learning System Managerial Level E2 — Enterprise Management Ann Norton Jenny Hughes CIMA Publishing is an imprint of Elsevier Linacre House, Jordan Hill, Oxford OX2 8DP, UK 30 Corporate Drive, Suite 400, Burlington, MA 01803, USA Copyright © 2009 Elsevier Ltd. All rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without the prior written permission of the publisher Permissions may be sought directly from Elsevier’s Science & Technology Rights Department in Oxford, UK: phone ((cid:2) 44) (0) 1865 843830; fax ( (cid:2) 44) (0) 1865 853333; email: [email protected]. Alternatively you can visit the Science and Technology Books website at www.elsevierdirect.com/right for further information. 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British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloguing in Publication Data A catalogue record for this book is available from the Library of Congress 978-1-85617-788-7 For information on all CIMA publications visit our website at www.elsevierdirect.com Typeset by Macmillan Publishing Solutions ( www.macmillansolutions.com) Printed and bound in Hungary 09 10 11 11 10 9 8 7 6 5 4 3 2 1 Working together to grow libraries in developing countries www.elsevier.com | www.bookaid.org | www.sabre.org Contents The CIMA Learning System xiii Acknowledgements xiii How to use your CIMA Learning System xiii Guide to the Icons used within this Text xiv Study technique xv Paper E2 — Enterprise Management xvii 1 The Nature of Strategic Management 1 Learning Outcomes 3 1.1 Introduction to the nature of strategic management 3 1.2 The concept of strategy 3 1.2.1 Common themes in strategy 4 1.3 Levels of strategy 4 1.4 A model of the rational strategy process 6 1.4.1 Mission, objectives and goals 7 1.4.2 The link between mission, goals and objectives 8 1.4.3 The goal structure 9 1.4.4 External environmental and competitive analysis 10 1.4.5 Internal analysis/position audit 12 1.4.6 Corporate appraisal (SWOT) 13 1.4.7 Strategic options and choice 14 1.4.8 Strategy implementation 16 1.4.9 Review and control 16 1.5 Criticisms of the rational model of strategy formulation 16 1.6 A formal top-down strategy process 18 1.6.1 Benefi ts of the formal top-down approach to strategy 19 1.6.2 Drawbacks of the formal top-down approach to strategy 20 1.7 Strategy and small businesses 21 1.8 Achieving competitive advantage – alternative perspectives: resource-based view versus the positioning view 23 1.8.1 Competitive advantage and economic theory 23 1.8.2 The positioning approach 23 1.8.3 Resource-based view 24 1.8.4 Principles of resource-based theory 24 1.8.5 The implications of the resource-based view for strategy development 27 1.9 Alternative approaches to formulating strategy 28 1.9.1 Emergent strategies 28 1.9.2 Logical incrementalism 29 iii iv ENTERPRISE MANAGEMENT E2 S 1.10 S takeholders 31 T N E 1.10.1 The infl uence of stakeholders 32 T N 1.10.2 The Mendelow matrix 32 O C 1.10.3 Assessing power of stakeholders 33 1.10.4 Assessing interest of stakeholders 33 1.10.5 Strategies to deal with stakeholders 34 1.10.6 Confl ict between stakeholders 35 1.11 Meeting the objectives of shareholders 35 1.11.1 Maximisation of shareholder wealth as an objective 36 1.11.2 Competing objectives 36 1.11.3 Resolving competing objectives 37 1.12 Summary 38 Section A type questions 55 Section B type questions 56 Section A solutions 59 Section B solutions 61 2 The Nature of the Competitive Environment 67 Learning Outcomes 69 2.1 Introduction 69 2.2 Environmental impact assessment 69 2.3 Different stages in environmental analysis 70 2.3.1 Analysing the macro-environment 71 2.3.2 Analysing the micro-environment/industry environment 73 2.3.3 Industry life cycle analysis 78 2.3.4 Illustration of external environmental analysis – Example of a car manufacturer 78 2.3.5 Evaluation of environmental models 80 2.3.6 Survival and success factors 81 2.4 Causes of environmental uncertainty 81 2.4.1 Impact of uncertainty 82 2.4.2 Has uncertainty really increased? 83 2.5 Competitor analysis 83 2.5.1 The importance of competitor analysis 83 2.5.2 Competitor analysis – key concepts 84 2.5.3 Levels of competitors 84 2.5.4 Gathering competitor intelligence 86 2.5.5 Forecasting competitors’ response profi les 88 2.6 Competitor accounting 89 2.6.1 Evaluation of barriers to entry 89 2.6.2 Estimate competitors’ costs 90 2.7 The global economic environment 90 2.7.1 The new global economy 91 2.8 National competitive advantages 93 2.8.1 Porter’s Diamond 93 2.8.2 Demand conditions 93 ENTERPRISE MANAGEMENT v 2.8.3 Related and supporting industries 94 C O 2.8.4 Factor conditions 94 N T 2.8.5 Firm structure, strategy and rivalry 94 EN T 2.8.6 Other events 94 S 2.8.7 National competitive advantage 94 2.8.8 Losing competitive advantage 95 2.8.9 Porter’s strategic prescriptions 95 2.8.10 Comment on Porter’s Diamond 95 2.9 Country analysis and political risk 96 2.9.1 Political risk 96 2.10 Sources of information for environmental analysis 97 2.10.1 Environmental scanning 97 2.10.2 Accessing environmental information 98 2.10.3 Detailed environmental analysis 98 2.10.4 Categorisation of information sources 99 2.11 Summary 99 Section A type question 101 Section B type questions 101 Section A solutions 103 Section B solutions 104 3 Contemporary Perspectives in Strategy Development 109 Learning Outcome 111 3.1 Introduction 111 3.2 Internationalisation and globalisation 112 3.3 Complex organisation forms 114 3.3.1 Strategic alliances 115 3.3.2 Illustrations of network organisations 115 3.4 Theoretical basis of network organisations – transactions cost theory 117 3.4.1 Assest specifi city – an illustration 118 3.4.2 A critique of transactions cost theory 120 3.5 Social responsibility and strategic decisions 122 3.5.1 Must social responsibility confl ict with benefi ting shareholders? 122 3.5.2 An ecological perspective and environmental responsibilities 124 3.5.3 Shareholder wealth and ethics 125 3.5.4 Implications of ethics for the chartered management accountant 127 3.6 Summary 128 Section A type questions 135 Section B type questions 136 Section A solutions 139 Section B solutions 142 vi ENTERPRISE MANAGEMENT E2 TS 4 Understanding Project Management 149 N TE Learning Outcomes 151 N O 4.1 Introduction 151 C 4.2 Projects and project management – defi nitions 152 4.3 Characteristics of a project 152 4.4 The project life cycle 153 4.4.1 The project life-cycle phases 153 4.4.2 An alternative project life cycle – an iterative process 155 4.4.3 Project approaches 155 4.4.4 Other project management frameworks: 4, 5, 7 or 9? 156 4.5 The project as a conversion process 158 4.5.1 Inputs 158 4.5.2 Constraints 158 4.5.3 Outputs 159 4.5.4 Mechanisms 159 4.6 Strategy and scope 159 4.7 Projects and the project manager 159 4.7.1 The roles of the project manager 160 4.7.2 The responsibilities of the project manager 160 4.7.3 Organisation 160 4.7.4 The project manager and project planning 161 4.7.5 The project manager and controlling 161 4.8 The skills of the project manager 162 4.8.1 Leadership skills 162 4.8.2 Communication skills 163 4.8.3 Negotiation skills 163 4.8.4 Delegation skills 165 4.8.5 Problem-solving skills 165 4.8.6 Change-management skills 165 4.9 Projects and people – project teams 166 4.9.1 Problems of project team-working 166 4.9.2 Unclear team goals and objectives 166 4.9.3 Lack of team structure 167 4.9.4 Lack of defi nition of roles 167 4.9.5 Poor leadership 167 4.9.6 Poor team communication 167 4.9.7 Lack of commitment 168 4.9.8 Project management and team-building 168 4.9.9 Project team meetings 168 4.10 Project stakeholders 169 4.10.1 Managing stakeholder expectations 170 4.10.2 Stakeholder confl ict 171 4.11 Projects and organisation structures and support 171 4.11.1 Matrix organisations 171 4.11.2 Project offi ce 173 4.12 Why some projects fail 173 ENTERPRISE MANAGEMENT vii 4.13 Examples of projects 174 C O 4.13.1 One successful project – ongoing 175 N T 4.13.2 One not so successful project 177 EN T 4.14 Summary 179 S Section A type questions 199 Section B type questions 200 Section A solutions 203 Section B solutions 205 5 The Process of Project Management 209 Learning Outcomes 211 5.1 Introduction 211 5.2 The project management process 212 5.3 Project initiation 212 5.3.1 Setting project objectives 212 5.3.2 Identifying project proposals 212 5.3.3 Formation of project proposals 213 5.3.4 Setting project requirements 213 5.3.5 Assessing project feasibility 214 5.3.6 Risk and uncertainty 218 5.3.7 Uncertainty 219 5.3.8 SWOT analysis 219 5.3.9 The project Initiation Document 221 5.4 Project planning 222 5.4.1 Detailed project planning 223 5.4.2 Project objective constraints 226 5.5 Tools and techniques to aid project planning 227 5.5.1 Work breakdown structure 227 5.5.2 Gantt charts 227 5.5.3 Network analysis 228 5.5.4 Slack or fl oat 231 5.5.5 An alternative method for constructing network diagrams: activity on node 231 5.5.6 Milestones and control gates 232 5.5.7 Project evaluation and review technique (PERT) 233 5.5.8 Coping with risk and uncertainty 233 5.6 Project management (PM) software 234 5.6.1 PM software functions 234 5.6.2 Advantages of using PM software 235 5.6.3 PM software pitfalls 235 5.7 Executing or performing the project 236 5.8 Monitoring and controlling the project 237 5.8.1 Making effective control decisions 238 5.8.2 Earned value management 239 5.8.3 PRINCE2 methodology 240 5.8.4 Other project management methodologies 241 viii ENTERPRISE MANAGEMENT E2 S 5.9 Project completion and closure 242 T N E 5.9.1 Organising project documentation 242 T N 5.9.2 Collection of receipts and making fi nal payments 242 O C 5.10 Post-completion review and audit 243 5.10.1 Post-project review meetings 243 5.10.2 Post-completion audit 243 5.10.3 Justifying the cost of post-completion audit 243 5.10.4 Continuous improvement 244 5.11 Summary 245 Section A type questions 265 Section B type questions 268 Section A solutions 273 Section B solutions 280 6 Management 289 Learning Outcomes 291 6.1 Introduction 291 6.2 Classical and contemporary theories of management 291 6.2.1 The Classical School 292 6.2.2 The human relations school 296 6.2.3 Systems theory 297 6.2.4 Contingency theory 298 6.2.5 Peter Drucker: management by objectives (MBO) 300 6.2.6 Contemporary perspectives on organisations 301 6.3 Power, authority, responsibility and delegation 302 6.3.1 Power and authority 302 6.3.2 Authority as legitimate power 302 6.3.3 Organisational power 303 6.3.4 Responsibility 304 6.3.5 Delegation 305 6.4 Management and the Role of Managers 306 6.4.1 Managers or Leaders 307 6.5 Different Perspectives of Leadership 308 6.5.1 Personality, trait or qualities theories of leadership 308 6.5.2 Management styles 309 6.5.3 One best style? 314 6.6 Contingency and Situational theories of leadership 314 6.6.1 John Adair action-centred leadership 315 6.6.2 Fiedler 315 6.6.3 Hersey and Blanchard 316 6.7 Transformational leaders 316 6.8 Entrepreneurs 317 6.9 Organisational culture 318 6.9.1 Different levels of culture 320 6.9.2 Models for categorising culture 321 6.9.3 Culture and organisational effectiveness 323 ENTERPRISE MANAGEMENT ix 6.9.4 Culture – The International Dimension 326 C O 6.9.5 Culture and control 326 N T 6.10 Managing in different cultures 327 EN T 6.10.1 National cultures 327 S 6.10.2 Other cultural characteristics 328 6.10.3 Changing behaviour 328 6.11 Mentoring 329 6.12 Summary 330 Section A type questions 331 Section B type questions 332 Section A solutions 335 Section B solutions 337 7 Management of Relationships in the Working Environment 343 Learning Outcomes 345 7.1 Introduction 345 7.2 The meaning of groups and teams 345 7.3 Types of groups 346 7.3.1 Formal groups 346 7.3.2 Informal groups 346 7.3.3 Reference groups 347 7.3.4 Self directed and autonomous groups 347 7.4 Effective group performance 347 7.4.1 Formation and development 348 7.4.2 Group cohesiveness 348 7.4.3 Team roles 349 7.5 Group dynamics and team performance 350 7.5.1 High-performance teams 351 7.6 Problems with groups 351 7.7 Communication 353 7.7.1 Oral and written communication 353 7.7.2 The communication process 354 7.8 Effective meetings 356 7.8.1 The roles of team members in meetings 357 7.8.2 Problems with meetings 358 7.9 Negotiation 359 7.9.1 The aim of negotiation 359 7.9.2 Phases involved in negotiation 359 7.9.3 Negotiation approaches 360 7.10 Management of the fi nance function 360 7.10.1 Business Process Outsourcing (BPO) 360 7.10.2 Outsourcing non-core activities 361 7.10.3 Benefi ts of outsourcing 361 7.10.4 Drawbacks of outsourcing 361 7.10.5 Shared service centres (SSC) 362 7.10.6 Benefi ts of shared services 362