Strategic analysis - internal environmental analysis - Bridge CPE class

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Management

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Apr 3, 2024

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Introduction In this course we will look at how an organization examines its internal environment - the key issues within its own operations that it needs to consider as part of its overall strategic analysis. The process of internal analysis typically involves the following stages:

We will now look at these stages in more detail. Internal analysis is a crucial part of developing a strategy. It helps the organization to identify what it is capable of - what skills and assets it possesses. Understanding this will help the organization identify which strategies it is capable of implementing. 2. Resource audit The resources audit identifies the resources that are available to an organization and seeks to start the process of identifying competencies. It attempts to assess the relative strength of the resource base - the quantity of resources available, the nature of those resources and the extent to which those resources are unique and difficult to imitate. One model in particular may help managers undertaking a resource audit locate these key factors.

M's model This model suggests that the items in a position audit can be categorised into factors beginning with 'M':  Manpower (human resources): The human assets of the firm, their skills and morale.  Money: The organization's cash position, gearing, investment plans, short and long term finance, etc.  Management: The quality, expertise and experience of the top team. Is the firm well managed and does is have the skills and vision needed to progress?  Machinery: The physical assets of the business, their flexibility, relative costs and the quality of what they produce.  Markets: The products and the markets the organization currently operates in. The quality and position of the products.  Materials: The relationship between the organization and its suppliers. Cost, quality and future availability of materials.  Methods: The processes adopted by the business - outsourcing, JIT, etc.  Management information: Quality and timeliness of information provided to managers. Will impact on quality of decisions made.  Makeup: The culture and structure of the organization. Also, branding and other intangibles. This is not an exhaustive list to memorise. Instead it is a memory aid to help the resource auditor to identify all the key resources that are central to a business' success. Resources can alternatively be grouped under four headings:  physical or operational resources  human resources  financial resources  intangibles. The key is to know what you have available to you and how this will help you in any strategic initiative. At the same time the organization needs to know what it is lacking and how things may change in the future. Shortage of resources will often constrain strategic initiative. Note that the audit should also include resources that can be accessed by the organization, not just legally owned. Some strategically important resources may exist, such as a network of contacts or customers, or other resources may be gained via a strategic alliance or joint venture. Resources are needed to undertake a strategy. They will not ensure its ultimate success. For that, the resources will need to be combined together into competencies. The key is to know what you have available to you and how this will help you in any strategic initiative. At the same time the organization needs to know what it is lacking and how things may change in the future. Shortage of resources will often constrain strategic initiative.

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Note that the audit should also include resources that can be accessed by the organization, not just legally owned. Some strategically important resources may exist, such as a network of contacts or customers, or other resources may be gained via a strategic alliance or joint venture. Resources are needed to undertake a strategy. They will not ensure its ultimate success. For that, the resources will need to be combined together into competencies. Practice pointer - Coca-Cola The Coca-Cola Corporation has, for many years, maintained a very strong position in the soft drinks market. Consider its flagship product, Coca-Cola. This has largely survived competition from supermarkets' own-brand colas. There is no great secret in how to make a reasonable imitation (though purists would argue that the imitations are not as good) and the resources needed are not demanding. The own-label colas sell at much lower prices, so how has Coca-Cola managed to keep its dominant position? It has been argued that physical resources are often less important. These are likely to form the threshold competences . Coca-Cola has bottling plants, access to suitable water, and a formulation for its drink. However, its competitors also have these things. They do not give Coca-Cola a competitive edge. The reason Coca-Cola has managed to maintain its dominant position mainly lies in the non-physical or intangible resources, such as a very powerful brand. The core competences lie in managing the brand by producing memorable global advertising, global recognition, careful sponsorship and responding to customer requirements (diet/caffeine-free products). Over time the core competence will become threshold as:  cultures adjust and expectations develop  customers and consumers become more sophisticated in terms of their needs and expectations  competitors imitate market leader core competences Organizations need to ensure that they are continually monitoring their marketplace to ensure that their core competencies are still valid and that all thresholds are duly satisfied. Remember, what is good today is not necessarily good tomorrow! Practice pointer - Changing competences When Apple launched its iPhone in 2007, it had a number of features that gave it competitive advantage, including:  full colour touch-screen interface  use of premium materials  aesthetically pleasing design  user-friendly software interface  linked to the strong Apple brand Today, rival mobile phone manufacturers have made many of these features standard in their products, meaning that they would no longer be considered 'order winners'. For example, most modern smartphones include touch-screen interfaces, strong design standards and premium materials. These 'core' features have thus become 'threshold' over time.

Competence audit As well as the resource audit mentioned earlier in the course, the organization may well undertake a competence audit . This will typically involve:  analysis of what competences the organization has, as well as how well resources are being deployed to create them.  categorisation of competences as core or threshold. This will be done by looking at historical data, industry norms and benchmarking exercises (which will usually be undertaken by specialist teams). 4. Critical success factors Critical success factors (CSFs) are the limited number of areas in which results, if they are satisfactory, will ensure successful competitive performance for the business. They are the vital areas where 'things must go right' and where the business must outperform its competitors. It is important, therefore, that any assessment of resources, competences, strengths and weaknesses is done by reference to what we have to be good at. For example, having the highest quality in the industry may be admirable but it misses the point if the market is driven by price wars and customers are only willing to pay low prices. Critical success factors (continued) Examples of CSFs for major industries include:  in the automobile industry - styling, an efficient dealer network, vehicle performance and fuel efficiency  in the food manufacturing industry - new product development, good distribution channels, health aspects (e.g. low fat)  in the supermarket industry - having the right product mix, competitive pricing. The organization's critical success factors should tie into its corporate objectives. For example, if a supermarket's objective is to grow its market share, it will need to ensure that understands it what it must do in order to successfully implement this strategy (i.e. what its CSFs will be). The problem with CSFs is that they are often vague. As mentioned previously, a supermarket may have a CSF of having 'competitive pricing', but how would the organization know whether its pricing is 'competitive' or not? In order to deal with this, organizations will need to create ways of measuring whether their CSFs are being met. These measures are known as key performance indicators, or KPIs. Practice pointer - Mission, CSF and KPI A, a major supermarket chain in the country O, has a corporate mission to be 'the best value retailer in country O . ' One of A's critical success factors (CSFs) is that it needs to sell its goods for a lower price than its major rivals. This will attract customers in the fiercely competitive country O supermarket industry, where many customers choose their supermarket based on price.

In order to measure this CSF, A has set itself a key performance indicator (KPI) to keep its average selling price ten percent below that of its rivals . It monitors its rivals' selling prices and amends its own prices on a daily basis to ensure that it achieves this KPI. A can therefore be confident that if it meets its KPI, its major CSF will have been achieved. This will help it meet its overall mission. Practice pointer - Critical success factors The following is an example of CSFs developed for a shipping terminal. Your task: What might a parcel delivery service such as DHL identify as two of its main critical success factors (CSFs)? The two main critical success factors would probably be:  speedy collection from customers after their request for a parcel to be delivered  rapid and reliable delivery. Your task: Using the CSFs previously identified for a parcel delivery company such as DHL, explain how the company might measure their performance. Their performance can be measured by establishing key performance indicators for each CSF and measuring actual achievements against them. For example:  Collection from customers within three hours of receiving the order for orders received before 2.30p.m. on a working day.  Next-day delivery for 100% of parcels to destinations within the UK.  Delivery within two days for 100% of parcels to destinations within Europe.

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Sources of CSFs Rockart claims that there are four sources for CSFs: (1) The industry that the business is in - each has CSFs that are relevant to any organization within it. For example, the car industry must have as one of its CSFs 'compliance with pollution requirements regarding exhaust gases'. (2) The organization itself and its situation within the industry - e.g. its competitive strategy and its geographic location. For example, a firm that has decided to compete on the basis of quality could have CSFs relating to identifying and delivering key product features that are valued by customers. (3) The wider environment - e.g. the economy, the political factors and consumer trends in the country or countries that the organization operates in. For example, in a time of oil shortages 'energy supply availability' could be a critical success factor. (4) Temporal organizational factors - these are areas of organization activity that are unusually causing concern because they are unacceptable and need attention. For example, a company with liquidity problems may place "short term cash management" as a CSF to ensure survival. You have recently been provided with the following document giving you some background to GGG - a company that you have applied to work for as a strategic management accountant. Background document GGG Trains GGG operates trains across Country H. The train infrastructure (stations and tracks) are owned by the Government of Country H. GGG has a fifteen year franchising agreement with the Government which allows it to exclusively operate the trains across the entire national railway network. GGG is now seven years through its current franchise agreement. While the franchise agreement is for fifteen years, it is reviewed annually by the Government. The Government wishes to maximize the number of residents of Country H that use the trains (as opposed to motor vehicles), as this will help Country H meet its international environmental targets for carbon emission reductions. The road network in Country H is old and is often significantly congested. However, train passenger numbers are only growing slowly. A recent Government survey has suggested that this is because passengers still feel that GGG tickets are too expensive and that the services offered are usually overcrowded and often late. GGG's staff are felt to lack knowledge and are 'unhelpful' to customers. The Government of Country H is threatening to strip GGG of its franchise unless it shows substantial improvement. GGG's managers have several initiatives planned to improve the issues highlighted by the survey, and are currently considering how they can measure whether these initiatives are being successful. Your task: As part of your job application, you have been asked to suggest FOUR of the critical success factors that GGG's management might identify. For each critical success factor identify ONE key performance indicator that GGG could use to see if its initiatives are being effective. Justify your choices. Case study: apply your understanding - Answer There are a number of issues that the Government's survey has highlighted as areas of concern, which GGG should view as its critical success factors/objectives. Growth in use of the railways The Government wishes to maximize the use of the railways in Country H .

This would appear to be a key objective as it will help them to meet their international environmental targets and will reduce pressure on the road network. A key performance measure here could be the annual percentage growth in passenger numbers. This will be a simple thing for GGG to measure and an area they can agree targets on with the Government. Note that dealing with the other objectives (below) is likely to improve this area as well. Value for money The Government survey has indicated that the public views GGG's ticket prices as too high, which is putting them off travelling by train. GGG therefore needs to find a way of improving its perceived value for money if it wishes to grow passenger numbers. A key performance measure could be to ensure that the average ticket price is no more that the equivalent cost of travel by car or bus. This is likely to ensure that passengers see the train as a viable financial option. Reduce overcrowding The frequent overcrowding of the trains is a serious issue which causes discomfort for passengers and is limiting uptake of train travel. GGG needs to increase its capacity and reduce overcrowding if it wishes to attract customers . A key performance measure could be the average number of passengers having to stand per km of track. If GGG is able to put on more services (especially at peak times) this should fall, indicating reduced overcrowding. Improve punctuality Delays to the trains mean that passengers do not wish to travel as they cannot reliably guarantee that they will arrive at their destination on time. Again, in order to attract customers, GGG will need to improve the punctuality of its trains . The performance here could be measured by setting targets for the percentage of trains that arrive more than, say, five minutes after their stated arrival time. If this figure falls, GGG will be accomplishing its objective in this area. Unhelpful staff This is another area in which the Government survey has indicated problems - GGG needs to improve on the level of service provided by its staff. Again this seems to be putting off potential customers (or at least reducing the likelihood of repeat business) and needs to be dealt with. To measure whether this is being improved, GGG could set itself targets in areas such as a reduction in the number of complaints received about staff each year. Alternatively, it could set targets on the average number of days of staff training per year, as improvements in this area are likely to improve the problem of unhelpful staff with poor knowledge of GGG's operations. Note: The requirement only asks for FOUR critical success factors and ONE performance measure for each. Additional points have been added to this answer for completeness. The link between CSFs and competences Note that CSFs and competences are slightly different concepts.

 CSFs are what the organization needs to be good at in order to compete in the market.  Competences are what the organization is good at. It should, however, be clear that in order for an organization to be successful, its competences and CSFs should be as closely aligned as possible - which is why regular analysis of both is so important. The organization’s strategy must look at ways of maximizing the correlation between the two. Knowledge Check B Ltd has identified a critical success factor (CSF): Have the best complaints handling department in the industry. Which ONE of the following would be the most suitable key performance indicator for this CSF? A Increase customer happiness by 15% B Reduce the number of complaints received by 20% C Reduce prices by 5% D Reduce the average time taken to deal with complaints by 15% D is correct. It is measurable and, if achieved, would indicate that the CSF is being accomplished successfully. RCH, an international hotel group with a very strong brand image has recently taken over TDM, an educational institution based in Western Europe. RCH has a very good reputation for improving the profitability of its business units and prides itself on its customer focus. The CEO of RCH was recently quoted as saying 'Our success is built on happy customers: we give them what they want'. RCH continually conducts market and customer research and uses the results of these researches to inform both its operational and longer term strategies. TDM is well-established and has always traded profitably. It offers a variety of courses including degrees both at Bachelor and Masters levels and courses aimed at professional qualifications. TDM has always concentrated on the quality of its courses and learning materials. TDM has never seen the need for market and customer research as it has always achieved its sales targets. Its students consistently achieve passes on a par with the national average. TDM has always had the largest market share in its sector even though new entrants continually enter the market. TDM has a good reputation and has not felt the need to invest significantly in marketing activities. In recent years, TDM has experienced an increasing rate of employee turnover. RCH has developed a sophisticated set of Critical Success Factors which is integrated into its real time information system. RCH's rationale for the take over of TDM was the belief that it could export its customer focus and control system, based on Critical Success Factors, to TDM. RCH believed that this would transform TDM's performance and increase the wealth of RCH's shareholders. Your task: (i) Identify four Critical Success Factors which would be appropriate to use for TDM. (ii) Recommend, with reasons, two Key Performance Indicators to support each of the four Critical Success Factors you have identified.

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Case study: apply your understanding - Answer (i) Identification of four CSFs appropriate for TDM Critical success factors for TDM may include:  Employee satisfaction - given that TDM is in a service industry, staff are likely to be key to its products and high levels of staff turnover are a concern.  Course quality - given the competitive nature of the market, it is vital that TDM continues to offer appropriate courses that will attract students.  Student satisfaction - in order to be successful, TDM must ensure students are pleased with their courses. If not, they may move to alternative suppliers and may dissuade other students from using TDM.  Strong financial results - after the takeover, TDM will need to make sufficient profits to maximize the wealth of RCH shareholders. (ii) Recommended key performance indicators TDM's performance can be measured by establishing key performance indicators for each CSF and measuring actual achievements against them. Employee satisfaction Number of staff leaving each period This is the most direct measure of whether staff members are satisfied with their roles within the business. TDM is experiencing increasingly high staff turnover, which may mean they are losing valuable, skilled members of staff. Sickness/absence per staff member per month Demotivated or unhappy staff can tend to take more time off work due to sickness. TDM should monitor this as an indirect measure of staff satisfaction, especially as it is likely to cause disruption to courses. Course quality Pass rates compared to national average TDM currently achieve exam pass rates that are comparable to the national average. Given the competitive nature of the market they operate in, this is likely to be something prospective students use as a way of choosing a tuition provider. Number of students choosing not to complete the course compared to average If a course is of poor quality (either poor materials or tuition), students may choose not to complete the course - either ceasing to study with TDM or moving onto an alternative course. If the number of students doing this is above average, it should be investigated and targets put in place to bring it down to average. Student satisfaction Percentage student approval rating TDM could give students a questionnaire at the end of each course. This could ask them about how they rate the course, the tutor and the course material. This could be invaluable for identifying problem areas that the business needs to resolve. This would be likely to please RCH given their focus on customer research. Percentage of students going on to further studies with TDM

TDM offers a range of courses, including degrees at both Bachelor and Masters level. If students feel that TDM have provided a good service, they will be more likely to take their studies further with the organization. Strong financial results Market share While TDM currently has the largest market share in its segment, large numbers of competitors are continually entering the market. If market share begins to fall, it will have a damaging effect on the profitability of the business. Profit targets Given that RCH has purchased TDM with the specific intention of increasing profitability, it is likely that they will have specific targets in mind for the business that TDM will need to work to achieve. For example, TDM may need to measure profit margins to ensure they meet the targets set by RCH. 5. Value drivers Value drivers are activities or features that enhance the perceived value of a product or service by customers, and which therefore create value for the producer. Value drivers can be tangible or intangible. For example, a high-street electronics retailer could have several value drivers, including:  Product mix  Convenient store locations  Knowledgeable, friendly staff If these value drivers are present, it will attract customers to the retailer's stores and may help it achieve a competitive advantage over rivals. One of the main models that can be used to identify the value drivers of an organization is Porter's Value Chain. 6. Porter's value chain This is a means by which the activities within and around the organization are identified and then related to the assessment of competitive strength. Resources are of no value unless they are deployed into activities that are organised into routines and systems. These should then ensure that products are produced which are valued by customers and consumers. Porter argued that an understanding of strategic capability must start with an identification of the separate value-adding activities. Primary activities These activities are involved in the physical creation of the product, its transfer to the buyer and any aftersales service. Porter divided them into five categories:

1. Inbound logistics are activities concerned with receiving, storing, and distributing the inputs to the product. They include materials handling, stock control and transport. 2. Operations transform these various inputs into the final product - machining, packing, assembling, testing and control equipment. 3. Outbound logistics relate to collecting, storing, and distributing the product to buyers. 4. Marketing and sales provide the means whereby consumers and customers are made aware of the product and transfer is facilitated. This would include sales administration, advertising, selling and so on. 5. Service relates to those activities which enhance or maintain the value of a product such as installation, repair, training and aftersales service. Support activities Each of the primary activities are linked to support activities and these can be divided into four areas: 1. Procurement refers to the processes for acquiring the various resource inputs to the primary activities - not the resources themselves. As such it occurs throughout the organization. 2. Technology development - all value activities have a technological content, even if it is just 'know how'. IT can affect product design or process and the way that materials and labor are dealt with. 3. Human resource management, which involves all areas of the business and is involved in recruiting, managing, training, developing and rewarding people within the organization. 4. Infrastructure refers to the systems of planning, finance, quality control, information management, etc. All are crucially important to an organization’s performance in primary activities. It also consists of the structures and routines that sustain the culture of the organization. Generally The primary and secondary activities are designed to help create the organization’s margin by taking inputs and using them to produce outputs with greater value. The value chain can be used to:  give managers a deeper understanding of precisely what their organization does  identify the key processes within the business that add value to the end customer - strategies can then be created to enhance and protect these, and  identify the processes that do not add value to the customer. These could then be eliminated, saving the organization time and money. The value system Looks at linking the value chains of suppliers and customers to that of the organization. Can add value by:  Enhancing the supply - e.g. organic food for ready meals.

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 Controlling of the retail process - e.g. car dealerships.  Linking it all together to give advantage - Porter's diamond. Practice pointer - The Value Chain Marks and Spencer plc compete in, amongst other areas, the food and grocery market. They have configured their value chain in order to offer customers a differentiated service. Lidl also operates in the food and grocery market, but its value chain supports a cost-leadership approach. Knowledge Check H is an accountancy firm. It gathers data from its clients' systems and uses this to create a set of year end accounts. A recent internal analysis exercise has allowed H to create a list of its key internal activities. One of its key internal activities is the creation of clients' year end accounts. Which Porter's value chain activity would you classify this internal activity as? A Inbound logistics B Outbound logistics C Infrastructure D Operations D is correct. Remember that the value chain can be applied to service industries as well. In this case, the chain may show the acquisition and handling of data/information rather than raw materials. Case study: apply your understanding Background Reggs is a long established baker, based in country G. It specializes in selling pastries, cakes, sandwiches and basic tea and coffee, through a chain of high-street stores. It has grown rapidly over the last ten years and now operates more than 1,500 stores across the country. Reggs marketing strategy is to focus on the low prices of its food, with heavy advertising in the free press and tabloids. It sells the majority of its products for less than its competitors a strategy which has paid dividends as country G is suffering an extended period of poor economic growth. To achieve these low prices, Reggs uses its purchasing power to source large amounts of good quality raw materials at low prices. These goods are transferred to a central warehouse. Reggs uses a sophisticated stock management system to track all materials and ensure that they are used before they perish. The raw materials are then sent (using Reggs own fleet of delivery vans) to several regional bakeries, where G's products are part baked. The part baked products are then sent to the individual high-street stores, where they are completed. Much of this process is automated, enabling Reggs' to hire low skilled workers. This automation has meant that Reggs feel that quality control is no longer necessary. The company does not keep track of customer complaints as these are normally dealt with by the in-store staff. No formal policies have been produced to guide employees when dealing with complaints. The high-street stores are of a very basic design, with a large counter and racks of produce. There is no seating and, due to Reggs' popularity, there are often long queues filling the stores. Reggs' management is concerned that this may be putting off some potential customers from patronising the company. However, Reggs has not undertaken any significant customer research in some years as its managers have felt that its rapid growth indicates that there are no significant

problems. Reggs management is keen to expand the business further and is looking at their strategic options. One suggestion is to alter Reggs' traditional product range. Some lower priced items would be removed to make way for more expensive, luxury foods which will have a higher margin attached to them. These items would not travel well and would therefore need to be produced in the high-street stores. This would require moderately skilled workers. Reggs feels that this may help to attract customers away from its competitors - such as coffee shops. These are significantly more expensive than Reggs, but have a much higher perceived quality of food and drink. Typically these competitors have well-designed, comfortable seating areas, enabling them to charge higher prices. You are a management accountant working for Reggs. You report to the Operations Director, who has sent you the following email: To: L. Ray From: O. Flow Date: 12/05/XX Subject: Value chain Hi L, As you are aware, we have been considering making some changes to our operations (as we discussed the other day). I need you to undertake some analysis for me. Specifically, I would like you to analyze our primary activities of the value chain, identifying any weaknesses. Please identify how each activity enables our business to sell its goods at low prices. (I don't need a diagram of the value chain). Could you also discuss the drawbacks of the strategy we are currently considering relating to more expensive, luxury products? How far would the proposals impact on the existing value chain? I am attending a meeting about this in forty-five minutes, so please email back by then with your thoughts. Kind regards O.Flow Your task: Email the Operations Director as requested. Case study: apply your understanding - Answer Email To: O.Flow From: L. Ray Date: 12/05/XX Subject: Re: Value Chain Dear O, Porter's value chain helps to identify the activities within and around the organization. These can then be used to help assess the organization’s competitive strength. Primary activities Inbound logistics This relates to the receiving, storing, and distributing the inputs to the product. For Reggs, this involves the storage of raw materials in its central warehouse, followed by the transfer of these materials to the regional bakeries. This is particularly important for Reggs due to the perishable nature of its goods.

Reggs source "good quality" raw materials that are satisfying customer demand. It is vital that materials are used promptly to ensure wastage is minimized in order to keep costs low and a sophisticated IT system helps to ensure this. Operations This examines the transformation of raw materials into the final product. In Reggs, this occurs in two stages - firstly when the product is initially part baked in the regional bakeries and secondly (after transport) when the baking is completed in the high-street stores. In both cases, the company automates as much as possible to keep costs low. This also ensures that employees do not need any specialized skills, keeping wage costs low. A weakness here seems to be a lack of quality control. The assumption that automation means that there will not be any mistakes made seems worrying and there is a risk that problems may not be picked up, potentially damaging Reggs' reputation and overall brand. Outbound logistics This relates to the storing and distributing of products to customers. For Reggs, customers visit their 1,500 stores to buy food, meaning that outbound logistics is minimal. This stage of the value chain simply relates to making sales to customers in store. This appears to be a major weakness for Reggs, who appear to be overwhelmed by the numbers of customers demanding their products, leading to long queues. While the level of demand is encouraging, long queues may be losing custom for Reggs, who may wish to look at ways of improving the efficiency with which customers are dealt with - although some research should be undertaken first to see whether this is a sufficient problem to warrant investment. Marketing and sales Reggs appears to be targeting the lower end of the market by sourcing advertising in the free press and tabloids. This is consistent with its approach of stressing the low-cost aspect of its food. Given the economic conditions in country G, this appears to be a sensible approach. The basic store design also reinforces the image that Reggs is a low cost business, strengthening its market image. Service This looks at aftersales care for customers. At present, this does not appear to be a significant area of concern for Reggs. Complaints are not monitored by the company, instead being left to low skilled employees in store. Again, this is consistent with the low-cost approach of the business, but does risk damaging Reggs' reputation in the event of any serious problems occurring and does not enable Reggs to use customer feedback in an effective way. Overall Reggs has a well-designed supply chain that allows for minimal wastage and maximum efficiency. It allows the business to gain a competitive advantage by operating as a cost leader within its market. However, it lacks a positive approach to customer feedback. Proposed strategy If Reggs begins offering luxury items, it will have a significant impact on the value chain of the organization.

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 Reggs will need to procure higher quality materials - potentially requiring new suppliers. The luxury items will replace existing products, meaning that Reggs will be ordering less of its existing raw materials, which may undermine its economies of scale.  Materials will have to be transported directly from the warehouse to the stores, where the luxury items will be made. This will increase the complexity and cost of Reggs' internal transport system.  The manufacturing of the luxury goods will require moderately skilled workers. Reggs currently employs workers who have low levels of skills, as this keeps wages low. It will incur significant additional costs to hire new workers.  The new luxury items do not match the current brand image of the company. Reggs has basic stores, little service and advertising that focuses on the low cost of the items. Offering luxury, high priced items does not match this cost leadership strategy. It may fail to attract customers and lead to Reggs becoming "stuck in the middle".  Should the new luxury goods take off and allow Reggs to grow its customer base, it may cause additional pressure on the queuing systems of the stores. The staff already seem unable to cope with the volume of custom they have at peak periods. Reggs may wish to deal with this problem first, before trying to capture more customers. There are also a number of other reasons why the Reggs proposals may not be a success.  Reggs has failed to carry out any significant market research into either proposal. This means that the company risks proceeding with investments that may not be what customers want. At best this could waste money - at worst, Reggs could alienate its customer base.  Reggs is also eliminating existing, presumably profitable, products to make way for the new luxury items. If these are unsuccessful, it may fail to increase its profits overall. Higher priced items may struggle due to the weaker economy in the country.  It should also be noted that Reggs is assuming that they can compete with coffee shop chains by simply offering higher quality goods. In reality, there are likely to be other factors, such as the comfortable surroundings and atmosphere, as well as the coffee shop brand names, which may make it hard for Reggs to successfully attract their customers. Overall, the business needs to undertake significant additional research in order to ensure that the proposal is worth both the disruption to the value chain and the potential brand image confusion that it may cause. I hope this helps if you need any further information, please let me know. Kind regards L.Ray Benefits and criticisms of Porter's Value Chain Proponents suggest that the value chain model has many benefits, including:  It provides a generic framework to analyze both the behavior of costs as well as the existing and potential sources of differentiation.  Activities that are not adding value can be identified and addressed - for example, improved so they do add value or outsourced if this is not possible.  It emphasizes the importance of (re)grouping functions into activities to produce, market, deliver and support products, to think about relationships between activities and to link the value chain to the understanding of an organization’s competitive position.

 It makes it clear that an organization is multifaceted and that its underlying activities need to be analyzed to understand its overall competitive position.  It is an attempt to overcome the limitations of portfolio planning in multidivisional organizations. Rather than assuming that SBUs should act independently, Porter used his Value Chain analysis to identify synergies or shared activities between them and to provide a tool to focus on the whole rather than on the parts. The main criticisms of Porter's Value Chain model are as follows:  It is more suited to a manufacturing environment and can be difficult to apply to a service provider  The Value Chain model was intended as a quantitative analysis. However, this is time consuming since it often requires recalibrating the accounting system to allocate costs to individual activities. The value shop The value shop is an alternative representation of a value chain for a professional services firm which was developed in 1998 by Stabell and Fjelstad. A value shop is considered to be a workshop which mobilizes resources to solve specific problems. This may involve repeating a generic set of activities until a satisfactory solution is reached. The shop model applies to many organizations, particularly those whose main purpose is to identify and exploit specific opportunities like designing a bespoke product. The model has the same support activities as Porter's Value Chain but the primary activities are described differently. In the value shop they are:  problem finding and acquisition  problem solving  choosing among solutions  execution and control/evaluation. The management in the value shop organization therefore focuses on areas such as the assessment of problems and opportunities, the mobilization of resources, project management, the delivery of solutions, the measurement of outcomes and also learning. The value shop primary activities are arranged in a circle showing that they are cyclical, with an organization often moving back and forth to develop or reject theories before reaching a conclusion. Case study: apply your understanding 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 20X3. Universal Carpet is a giant, vertically integrated carpet manufacturing and retailing business, based within the USA 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 $80 million. Up until 15 years ago the turnover of the company was growing at 8% per annum, but since 20X2 sales revenue has 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 organizations. The recent decline in carpet sales revenue, partly recession induced, has worried the US parent company. It has recognized 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 practiced within the USA) 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 to be a major issue at this time as the parent company has large cash reserves on its balance sheet. You have been contacted by Jeremy Smiles, who has asked for briefing notes covering the following key issues: (a) To what extent do the distinctive competences of Bowland Carpets conform to the key success factors required for the proposed strategy change? (b) In an external environmental analysis concerning the proposed strategy shift what are likely to be the key external influences which could impact upon the Bowland Carpets decision? Your task: Draft the briefing notes as requested. Case study: apply your understanding - Answer Key answer tips Part (a) of the question can be split into three parts - what are Bowland's existing competencies, what are the key success factors needed in retailing, and do these two things match up. So a good approach would be to split your time evenly between all three elements For part (b) an external analysis is normally a combination of both the PESTEL and 5 Forces models, but with only 15 marks available (and working on the basis of two marks per well explained point) you do not have to cover every element. So if, for example, you can't determine any relevant 'Technical' issues then just leave this factor out. Briefing notes Bowland's competences An organization's distinctive competences are those things which an organization does particularly well. They include the organization's unique resources and capabilities as well as its strengths and its ability to overcome weaknesses. These competences can include aspects such as budgetary control, a strong technology base, a culture conducive to change and marketing skills. Key success factors are those requirements which it is essential to have if one is to survive and prosper in a chosen industry/environment. These can include areas such as good service networks, UpToDate marketing intelligence and tight cost controls where margins are small. It is not guaranteed that the distinctive competences and the key success factors are always in alignment. A company moving into the retail sector may have an excellent product research and development capability, but this alone will not help if it has no concept of service, or poorly sited retail outlets. It is critical to ensure that what the company excels at is what is needed to be successful in that particular area.

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The strengths of Bowland Carpets include strong brand names which maintain integrity within the different market segments where the company operates. The company has a balanced portfolio of customers and the range of products is equally balanced , ensuring that any sectoral decline can be compensated for by growth in other markets. Other strengths which the company currently has include a good relationship with distributors and strong support from a powerful parent company . Some of its distinctive competences, such as a strong brand and a reasonable range of products, are critical in the proposed new environment, as will be the financial support of the parent company. However, there are some aspects which are cause for concern in the proposed new business environment. The strength in the contract and industrial carpet segment will not be affected by the proposed vertical integration - sales tend to be through a direct sales force. The strong relationship with distributors will however be jeopardized by the opening up of retail outlets . Other retail chains will be unwilling to permit a rival to operate so freely, and therefore there will be a reluctance to stock Bowland's carpets. Unless Bowland Carpets can obtain wide retail market coverage to compensate for this potential problem, sales revenue will be adversely affected. The cost of developing extensive market coverage will be enormous and whether it is in high-street outlets or specialist out-of-town centres the investment may be greater than the parent company has budgeted for. The company also has no expertise in site appraisal and selection . Although the newly structured value chain will generate greater control there is an associated lack of flexibility along with an increase in the fixed cost base of the business. Another key success factor is the need for expertise in retailing . It may be that the UK company can import this from the USA but the culture of marketing household durables may not be transferable internationally. Bowland Carpets as the domestic company has no experience in this field. A critical factor in successful retailing is the ability to provide a comprehensive range of products . Does Bowland Carpets have one? It is unlikely that the competitive carpet manufacturers will provide such a supply to one of their rivals. It would, therefore, appear that there is no close conformity between the distinctive competences of Bowland Carpets and the key success factors required in the carpet retailing sector. External environment The external environment scan is an essential prerequisite prior to selecting a strategic option. It enables the company to identify and understand the key external and uncontrollable influences which will have an impact upon the company's strategy. The environment is increasingly turbulent and often hostile. Without this knowledge and appreciation, the strategist will be operating in a minefield. The acquisition of the external information is obtained by scanning the environment continuously and monitoring key indicators, which should enable the company to position itself appropriately with respect to the external environment and the competition. The external scan should be structured around a SLEPT framework covering the following environments - social, legal, economic, political and technological. In addition, it is also important to assess potential competitive reactions as part of the scanning process. The environmental scan will influence the decision as to whether Bowland Carpets should concentrate on the UK or seek diversification elsewhere, either in products or markets. Possible factors are as follows:  Social issues : Trends towards increasing car-centered shopping (superstores and out-of-town sites) or movements back to city-center shopping: trends in fashion and furnishing will carpets become a fashion item and result in greater replacement sales? Other factors of importance to Bowland include the rate of growth or decline in populations and changes in the age distribution of the population. In the UK there will be an increasing proportion of the national population over retirement age. In developing countries there are very large numbers of young people. Rising standards of living lead to increased demand for certain types of goods. This is why developing countries are attractive to markets.  Legal issues : Laws in the UK differ from the US. They come from common law, parliamentary legislation and government regulations derived from it, and obligations under EU membership and other treaties. Legal factors that can influence decisions include aspects of employment law, e.g. minimum wage, laws to protect consumers and tax legislation. The monopoly/competition issues in this case are likely to be insignificant.

 Economic issues : An increased concentration for Bowland Carpets within the UK economy will depend upon future economic prospects, taxation policy (sales tax) and interest rates, income distribution and unemployment (influencing site location), trade barriers (cheap imports from Third World suppliers, or even low-cost tufted carpets from countries such as Belgium).  Political issues : Government policy affects the whole economy and governments are responsible for enforcing and creating a stable framework in which business can be done. The quality of government policy is important in providing physical infrastructure, (e.g. transport), social infrastructure, (e.g. education) and market infrastructure, (e.g. planning and site development - town center or out-of-town developments).  Technological issues : Is retailing technology evolutionary or revolutionary? Will it be costly or labor saving? Will inventory control be facilitated - so saving costs? Technology contributes to overall economic growth. It can increase total output with gains in productivity, reduced costs and new types of products. It influences the way in which markets are identified database systems make it much easier to analyze the marketplace. Information technology encourages delayering of organizational hierarchies and better communications.  Competitive issues : It will be necessary to assess the likely responses of both carpet distributors and carpet manufacturers to the proposed incursion by Bowland Carpets. Will the reactions be benign, or will they be aggressive? Case study: apply your understanding A university which derives most of its funds from the government provides undergraduate courses (leading to bachelor's degrees) and post-graduate courses (leading to master's degrees). Some of its funds come from contributions from student fees, consultancy work and research. In recent years the university has placed emphasis on recruiting lecturers who have achieved success in delivering good academic research. This has led to the university improving its reputation within its national academic community, and applications from prospective students for its courses have increased. The university has good student support facilities in respect of a library which is well stocked with books and journals and up-to-date IT equipment. It also has a gymnasium and comprehensive sports facilities. Courses at the university are administered by well-qualified and trained non-teaching staff who provide non-academic (that is, not learning-related) support to the lecturers and students. The university has had no difficulty in filling its courses to the level permitted by the government, but has experienced an increase in the number of students who have withdrawn from the first year of their courses after only a few months. An increasing number of students are also transferring from their three-year undergraduate courses to other courses within the university but many have left and gone to different universities. This increasing trend of student withdrawal is having a detrimental effect on the university's income as the government pays only for students who complete a full year of study. You are the university's management accountant and have been asked by the Vice-Chancellor (who is the Chief Executive of the university) to review the withdrawal rate of students from the university's courses. Your task: Apply Value Chain analysis to the university's activities, and advise the Vice-Chancellor how this analysis will help to determine why the rate of student withdrawal is increasing. Case study: apply your understanding - Answer Application of the value chain to university process Approach A specialist value chain question that would warrant a brief introduction and possibly a diagram. Don't go mad with the diagrams that do not 'add value' that much. Value chain analysis (VCA) is a method of reviewing all the activities of an organisation and how they interact with each other. Key linkages are identified and areas that create value are focused upon. VCA is not restricted to just the organisation but

also the suppliers and customers. In this question we will have to address the issue of university suppliers of resources:  students  staff  premises  facilities And customers/consumers:  degree holders  employers  society. The starting point is to identify the objectives for the university in this context. There appear to be three particular issues.  Students dropping out in the first year.  Students transferring to another university or just leaving.  Students swapping courses within the university.

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The idea is to look at the primary and support activities to establish why these problems may be arising.

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Strategic analysis - internal environmental analysis - Bridge CPE class

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