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CIMA E3Course Notes

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CIMA E3 Course Notes

Chapter 4 Internal Analysis

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1.

Internal Analysis

Internal analysis is undertaken to understand the strengths and weaknesses of the organisation in comparison with its competitors. This enables the organisation to capitalise on its strengths and overcome its weaknesses.

2.

The Resource Audit - The Nine MS

This model is used much like the PESTEL analysis for external analysis. It is simply a reminder of the eight key areas to consider when examining the organisations strengths and weaknesses. The eight areas are:

Money
All matters connected with finance Profit Cashflow Financing

In the exam case study financial performance is usually analysed over a number of years. It is important to consider trends from year to year, in: Gross (sales - cost of sales) and net profits (sales - all costs) Gross and net profit margins (profit/sales) Costs in a number of different categories Sales

This will often highlight how effective the organisation has been overall and areas where specific improvement is required.

Men
All matters connected with human resources Skills Numbers Costs Training and recruitment processes Motivation

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Management
As men but focused on Directors/Senior managers, but also including the Governance of the business.

Materials
All matters connected with supply and purchasing. Suppliers - reliability, flexibility, exclusivity, cost Inventory

Markets
All matters connected with marketing and sales Market share Image, Brand, Reputation Sales outlets, sales teams

Machines
All matters connected with production. Productivity Flexibility Quality R&D

Make-Up
All matters connect with the organisational structure and organisational culture: Is the structure right for the business? Is there too much bureaucracy? Is enough power delegated? (Centralisation vs. Decentralisation) Are the values supporting the business? Is the attitude and approach of staff suitable?

Methods
All matters connected with business processes.
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Use of modern technology/approaches (e.g. internet, extranets, expert systems, workflow systems) Efficient processes (not bureaucratic)

Management Information
Strategic information - For directors to make strategic decisions and understand company performance Tactical information - For middle managers to understand the performance of their division/department and facilitate decision they make about them Operational information - For people doing the work of the business (be that production, finance, human resource, marketing etc.) to have the information necessary to be able to do their work efficiently an effectively.

3.

Porters Value Chain

Inputs are converted into outputs A company has a range of inputs into the business, staff, money, equipment, IT, materials, and so on. The business aims to add value to the inputs so that it can sell the outputs (its products or services) at than more than the sum of the input costs, hence creating a profit margin. Customers will only be willing to pay the profit margin if the organisation is providing some genuine value by meeting customer needs. A manufacturer might provide a product which is an excellent design, of high quality, is supported by a well known trusted brand, has a good warranty or any number of factors that are important to the customer.
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Organisations can add more value and increase profit margins by increasing the value added to customers. An alternative view is to retain the current level of value, but doing so at a lower cost by removing or simplifying processes (removing non-value adding activities). For example, automating a manual process can provide the same end value to customers in a cheaper way thus increasing profit margins for the firm. Most organisations engage in hundreds, even thousands, of activities in the process of converting inputs to outputs and creating value. These activities can be classified as either primary or support activities that all businesses must undertake in some form.

Firm Infrastructure Technology Development Human Resources Procurement Inbound Logistics Operations Outbound Logistics Marketing and Selling

M A R
After-sales Service

G I

Primary Activities
Inbound logistics The relationships with suppliers including all the activities required to receive, store, and disseminate inputs. Operations Activities which transform inputs into outputs (products and services).

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Outbound logistics Activities required to collect, store, and distribute the output. Marketing and sales Activities which inform buyers about products and services, induce buyers to purchase them, and facilitate their purchase. After sales service Activities required to keep the product or service working effectively for the buyer after it is sold and delivered.

Support Activities
Procurement The acquisition of inputs, or resources, for the firm. Human Resource management Consists of all activities involved in recruiting, hiring, training, developing, compensating and (if necessary) dismissing or laying off personnel. Technological Development Pertains to the equipment, hardware, software, procedures and technical knowledge brought to bear in the firm's transformation of inputs into outputs. Infrastructure Serves the company's needs and ties its various parts together, it consists of functions or departments such as accounting, legal, finance, planning, public affairs, government relations, quality assurance and general management.

Using The Value Chain

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The value chain can be used: To examine the firm in terms of the processes it uses to serve customers, and the value added, to add more value or remove nonvalue adding activities. As a basis to drive a competitive strategy of cost leadership or differentiation Understanding the linkages between processes (e.g. how technology supports each of the primary activities, or how production quality affects after-sales service) As a way to analyse competitors for their strengths and weaknesses.

4.

Supply Chain Management

What is supply chain management?


Supply chain management (SCM) is the management of a network of interconnected businesses involved in the provision of product and service packages required by the end customers in a supply chain. Supply chain management spans all movement and storage of raw materials, work-inprocess inventory, and finished goods from point of origin to point of consumption.

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The value system

Suppliers

Distributors

INPUTS

Company

OUTPUTS

Customers Suppliers

The firm's value chain links to the value chains of upstream suppliers and downstream buyers. The result is a larger stream of activities known as the value system. The development of a competitive advantage depends not only on the firm-specific value chain, but also on the value system of which the firm is a part. For example the firm competes on the basis of cost leadership with the aim of selling at the lowest prices, it is important that they source from low cost suppliers, and distribute through low cost distributors, so that the product the customer receives is at the minimum overall cost and thus can be priced competitively in the market.

Supply chain activities at different management levels


Strategic level - directors Strategic network optimisation: the number, location, and size of warehousing, distribution centres, and facilities. Strategic partnerships with suppliers, distributors, and customers, creating communication channels for critical logistical information. Product life cycle management, so that new and existing products can be optimally integrated into the supply chain and capacity management activities.

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Information technology in the supply chain. Where-to-make and make-buy decisions. Aligning overall organizational strategy with supply strategy. It is for long term and needs resource commitment.

A supply strategy which supports the over-riding business strategy is a key element of a strong business strategy as it can contribute to higher added value (e.g. quality or service) or lower costs. Tactical level divisional managers/purchasing department Contracting and other purchasing decisions Production decisions, including contracting, scheduling, and planning process definition Inventory decisions, including quantity, location, and quality of inventory Transportation strategy, including frequency, routes, and contracting Benchmarking of all operations against competitors and implementation of best practices throughout the enterprise Milestone payments Focus on customer demand and Habits

Operational level Purchasing, stores, and logistics staff Daily production and distribution planning, including all nodes in the supply chain Production scheduling for each manufacturing facility in the supply chain (minute by minute) Demand planning and forecasting, coordinating the demand forecast of all customers and sharing the forecast with all suppliers Sourcing planning, including current inventory and forecast demand, in collaboration with all suppliers Inbound operations, including transportation from suppliers and receiving inventory

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Production operations, including the consumption of materials and flow of finished goods Outbound operations, including all fulfilment activities, warehousing and transportation to customers Order promising, accounting for all constraints in the supply chain, including all suppliers, manufacturing facilities, distribution centres, and other customers From production level to supply level accounting all transit damage cases & arrange to settlement at customer level by maintaining company loss through insurance company Managing non-moving, short-dated inventory and avoiding more products to go short-dated.

5.

Product life cycle

What is the product life cycle?


Just as humans might go through different stages in their life (babies, children, teenagers, single, married and so on), as products are developed, taken to market and sold, they are seen to go through discreet stages too. Different strategies are appropriate in each of these stages.
Sales

Introduction Development

Growth

Maturity

Decline

Sales

Profits

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After a period of development a product is introduced into the market. If the product meets customer needs, consumers recognise this, new customers are gained and revenues grow. Eventually the market reaches saturation and the product becomes mature and revenues level off. After a period of time the product is overtaken by development and the introduction of superior products, so the sales of this product go into decline and it is eventually withdrawn.

Strategies for different stages of the product life cycle


Introduction Price skimming In the introduction stage significant costs are incurred in continued product development and marketing, and sales volumes are often low. As such a price skimming strategy is often followed, where a high price is charged to attract the early adopters who often purchase new products or people who have a highly specific need that they are willing to pay more for. Growth Market penetration As the products sales rise, competitors are attracted into the market with similar offerings. As a result the typical strategy followed here is market penetration, where prices are lowered and marketing increased. The aim is to win market share and become one of the leading players in the market. Often at the end of the growth stage there is the shake out. This is where the least successful entrants pull out of the market due to a lack of profitability or are purchased by the larger competitors in their aim to increase their market share. A market penetration policy throughout the growth stage helps to avoid the organisation being one of the losers during the shake out. Maturity Consolidation strategy With fewer competitors in the market after the shake out, the remaining competitors must continue to consolidate their position. They may do this through differentiate products so they occupy a unique position in the market, develop strong brands that are well known and trusted and continue to attract customers. Prices are set at levels which are competitive but profitable. The lower production costs at this stage, due to the economies of scale caused by high volumes, ensure the firm remains profitable in this stage.

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Decline Niche, Harvest or Divest As sales start to decline a range of possible strategies are possible: Divest Pull out of the market if it is not profitable, or sell out to someone willing to continue the business at lower margins Harvest Keep costs low, and continue to sell, making profits for as long as sales continue Niche Develop the product for a specific market segment who continue to have a need and sell at a higher price

Limitations of the product life cycle


In reality very few products follow such a prescriptive cycle. The length of each stage varies enormously and stages can be affected by decisions made so for example the maturity phase can be lengthened by price-cutting. In some cases product stages can be skipped. Many products fail in the introduction phase (e.g. mini disc players) so do not complete the full cycle, while others (e.g. fruit) may have very long maturity phases and never go into decline. Where there is a known immediate demand (e.g. iPad) the introduction stage is almost completely missed, and the product goes straight into the growth phase.

6.

Boston Consulting Group (BCG) Matrix

What is the BCG Matrix?


The BCG matrix is used to chart business units or products on the basis of their relative market shares and growth rates. The products can then be categorised into one of four different types, for which a different strategy is typically recommended. It is also used to see the overall product portfolio of all the products of the business to ensure it is well balanced.

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>10% % rate market growth

Star

Problem Child

Market penetration Consolidate

<10%
Cash Cow Dog

Cash? True?
Divest

+1

Relative Market Share

-1

Critieria for classifying products


The BCG matrix requires that each product is analysed according to two parameters: Market share the respective share of the companys products against the market leader. Products where the company is the market leader will have a relative market share greater than 1 and be classified on the left hand side of the matrix. A company that enjoys a bigger market share would enjoy lower cost due to economies of scale, would have a greater market presence and stronger brand than competitors, and would have more customers than competitors, which are arguably easier to retain than gain from competitors. High market share is therefore perceived as good. Market growth the annual sales growth in the industry of the respective products. Products of high market growth (of greater than 10% in the matrix) are seen as having high future potential and be the cash generators of the future.

Cash cows
Cash cows are products with high market share in a slow-growing industry. Being the industry leader in a mature market usually means they are highly profitable and as such generate significant returns. These returns can then be used to fund the developing products (Stars or Problem Children) as well as providing funds to pay interest on loans and dividends to shareholders.
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The typical strategy for a cash cow is to consolidate the position through continued advertising to support branding and retaining competitive (yet profitable) pricing. For many years Microsofts Operating system software, Windows was a very important cash cow for the company, generating significant cashflows to support investment in other areas of the firm and ensure profitability.

Problem Children
A problem child is a product with high growth of more than 10% per annum, but with a low market share. In the BCG matrix, a low market share is thought to be negative as the business will not have the economies of scale, brand recognition or numbers of existing customers as its more successful competitors. As such the aim here is to increase market share with a market penetration strategy where prices are reduced and marketing levels increased. The aim is to turn problem children into stars. In 2012 Samsung overtook Apple as the worldwide leader in the smartphone market, securing its position of strength in a highly profitable segment. This was achieved through continued innovation, a higher advertising budget than its main rival Apple, and a wider variety of phones for a wider range of customers than Apple whos focus was on the high quality, high price segment of the market.

Stars
Stars are growing products with a high market share. They are in a strong position as the high market share gives them brand recognition, economies of scale and a group of existing customer to continue to market to. The aim for star products is to retain market position through a consolidation strategy. In addition to pricing competitively and continued marketing, there may be opportunities to purchase failed problem children during the shakeout phase (see the product life cycle, to remain the market leader. Having secured its position as a Star product in 2012, Samsungs R&D budget continued to be high at $42bn in 2012. In a fast changing highly competitive market continued investment is needed even for the market leading product or market share will quickly be lost against continued threats from rivals.

Dogs
Dogs are low market share, low growth products that are not strong, and do not have much long term potential, and as such are not suitable for significant investment. A true dog will have low or negative profits and not
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generate a strong return. For these products the strategy should be divestment as there is little point retaining it in the product portfolio. Some true dogs may be retained for other reasons, for instance: Loss leaders that sell at a loss but are used to on sell other more profitable products To provide a full complete product range for customers, to ensure continued customer satisfaction and loyalty They are important to the brand.

Some dogs can be profitable, perhaps due to long term customer loyalty to a brand, or because the products continue to be sold along with other successful products. These cash dogs should be retained in the business but reviewed regularly to ensure they continue to be profitable.

Product portfolio
By plotting the all the products on the matrix the organisation can see the balance of its products as a whole, to help support strategic decisions. The diagram below shows four products plotted on the matrix the relative size of the circles represents the revenues of the products with product 1 having high sales and product 2 lower sales

>10% % rate market growth


2 1 4 3

<10%

+1

Relative Market Share

-1

In this case we can see that the organisation has a range of fast growing products, including a couple of stars, and so should have strong future potential. However its problem is likely to be a lack of funds as these growing products will need investment to support their growth and there are no cash cows to deliver this.

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It therefore needs to obtain significant long term funds to support growth. It would also make a good acquisition target for a business with a number of cash cows, but few growth products.

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Strategic Mock Exams E3, F3 and P3 Based around the latest Preseen 2 full mocks are available for each strategic subject Full marking and detailed feedback Full mock marking Detailed and personalised feedback to focus on helping to pass the exams Personal coaching on your mock exam 1hr personal coaching session with your marker Personalised feedback and guidance Exam technique and technical review Strategic and Financial analysis of the Pre-seen Strategic analysis - all key business strategy models in E3 Financial analysis based around the F3 syllabus Risk analysis based around the P3 syllabus 30 page strategic report Full video analysis of how all key models apply to the unseen Video introduction to all the key models Personal Coaching Courses Personal coaching to get you through the exam Tuition Course Personalised tuition to give you the required syllabus knowledge tailored to your needs Revision Course - Practise past exam questions with personal feedback on your technical weaknesses and exam approach and technique Resit Course Identifying weaknesses from past attempts and providing personalised guidance and study guides to get you through the exam

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