Professional Documents
Culture Documents
SCPM Module Extract of Amendments For May 2024 by IIFAR
SCPM Module Extract of Amendments For May 2024 by IIFAR
ix
v
CONTENTS
Chapter-1 Introduction to Strategic Cost Management
Chapter-2 Modern Business Environment
Chapter-3 Lean System and Innovation
Chapter-4 Specialist Cost Management Techniques
Chapter-5 Management of Cost Strategically for Emerging Business Models
Chapter-6 Strategic Revenue Management
Chapter-7 Strategic Profit Management
Chapter-8 An Introduction to Strategic Performance Management
Chapter-9 Strategic Performance Measures in Private Sector
Chapter-10 Strategic Performance Measures in The Non-For-Profit Organisations
Chapter-11 Preparation of Performance Reports
Chapter-12 Divisional Transfer Pricing
Chapter-13 Standard Costing
Chapter-14 Case Study
Appendix
Skill Assessment
AN INTRODUCTION TO
STRATEGIC COST
MANAGEMENT
LEARNING OUTCOMES
After studying this chapter, you will be able to:
❑ UNDERSTAND the need of strategic cost management and ANALYSE its
distinction from traditional cost management.
❑ UNDERSTAND the source of Gaining Competitive Advantage, apart from
APPLYING Value Proposition Canvas and Osterwalder's Business Model
Canvas.
❑ ANALYSE the external environment to EVALUATE the Industry Profitability
& UNDERSTANDING Customers and Markets, Basis of Competition, and
Key Success Factors.
❑ EVALUATE the role of Information Technology in strategy making with
specific application in case of the Porter’s Five Forces and the Value Chain.
❑ EVALUATE the role of Management Accountant as a Leader and
UNDERSTANDING the Communication, Decision Making, and Business
Ethics aspect of Management Accountant role.
Chapter Overview
This chapter will start by highlighting the limitations of traditional cost management and showcasing
how Strategic Cost Management aligns costs with the business strategy while measuring and
managing costs. This chapter will provide an overview of the organizational and ex ternal
environment context of Strategic Cost Management, followed by a discussion of the role of
information technology and information systems in the strategic context, as well as shed light on the
role of the management accountant as a leader.
1 V. F. Ridgway published a paper in 1956 criticizing the measurement mantra. Simon Caulkin, a columnist, neatly
summarized Ridgway’s argument as:
“What gets measured gets managed — even when it’s pointless to measure and manage it, and even if it harms the
purpose of the organisation to do so”.
Here students are advised to take note that cost accounting deals with only the ascertaining and
recording of costs, not the control or management thereof; it is management accounting that
empowers the management of organisations with an information and support system to make efforts
and attempts to control and manage the costs.
The emphasis was only on cost containment under cost control (maintaining the status quo), but
with the changing business environment wherein every organization is witnessing cut -through
competition, the emphasis has been shifted (better to say widening) from cost containment to cost
reduction. Cost reduction is an emotive term; hence, it shall be better represented through the term
‘cost management’.
Traditionally, cost management focused only on cutting or reducing cost, whereas the focus is now
widening and aiming for either reducing cost while maintaining the same quality level (value) or
increasing value at the same or reduced cost level. In a contemporary set-up, Cost Management
is much more than just cost reduction; it has gained strategic importance in aligning the cost to
business strategies.
Strategic Cost
Cost Cost Control - Traditional Cost
Management -
Ascertainemnt - Containment of Management -
Alligning costs to
Recoding of Cost Cost Cost Reduction
strategies
When techniques of cost management are practiced as strategic driver in context of organisational
objectives and vision, this is termed as Strategic Cost Management. In other words, strategic cost
management deals with measuring and managing costs and aligning them to the business strategy.
Prior to discussing the underpinning aspects of Strategic Cost Management and highlighting its
differences from traditional cost management, let us consider the limitations of traditional cost
management, which warrant the evolution of Strategic Cost Management.
1. Traditional Cost Management & Its Limitations
Traditional Cost Management aims at cost reduction. It revolved around the central theme ‘that cost
cutting always results in enhanced profits’. But a question arises here: Does the theme of traditional
cost management always hold truth? The simplest answer to this question is no, not in every case.
The above specified limitations of traditional cost management, in themselves emphasise on the
need for Strategic Cost Management. The need for strategic cost management also observed due
to–
▪ The requirement for detailed cost analysis is essential to gain an in-depth understanding of
cost structure.
▪ Strategic use of cost data to gain and sustain a competitive advantage.
▪ To assimilate cost management into strategy and vice versa.
▪ To comprehend the big picture (a canvas that can showcase the business model), to have a
holistic analysis of cost relations among the different activities and empower the management
in managing those relations.
Cooper and Slagmulder2 rightly suggested ‘it is not sufficient to simply reduce costs; instead,
costs must be managed strategically’.
Note: Students are advised to read the need for strategic cost management in reference to the second
chapter, i.e., Modern Business Environment.
2. Strategic Cost Management (SCM)
Strategic cost management is the implementation of cost management techniques to sustain and
improve the organisation’s strategic position as well as reduce costs. It also deals with the collection,
processing, analysis and dissemination of cost data with a view to feed information to the system
for decision-making to support the organizational strategy as a whole.
Hence, Strategic Cost Management is the use of cost information in developing and deploying the
strategy to practice superior performance that leads to sustainable competitive advantage.
Strategic Cost Management can be applied in service and manufacturing settings , as well as in not-
for-profit environments. Strategic Cost Management deals with the assimilation of both quantitative
and qualitative information in decision making.
Strategic Cost Management is the application of cost management techniques so that they
simultaneously improve the strategic position of a firm and reduce costs.
2.1 Underneath Pillars of Strategic Cost Management
Strategic cost management has three important pillars: strategic positioning, cost driver analysis,
and value chain analysis.
2Cooper, R., & Slagmulder, R. R. A. (1998). Strategic cost management - What is strategic cost
management? Management Accounting, January, 14-16.
Value Strategic
Chain Positioning
Analysis Analysis
Cost Driver
Analysis
Strategic Cost Management is the managerial use of cost information explicitly directed at one or
more of the four stages (strategy formulation, communicating the strategy, implementing the
strategy, and controlling) of strategic management. Overall recognition of the cost relationships
among the activities in the value chain and the process of managing those cost relationships to
attain the firm's strategic objectives are the main focal points of Strategic Cost Management.
The relationship among pillars can be viewed as ‘understanding the value chain will help in defining
the optimal strategic position (positioning strategy), and eventually both will help in identifying
relevant cost drivers’.
2.1.1 Value Chain Analysis
Michael E. Porter3 in 1985 advocated using value chain analysis to gain a competitive advantage.
The Value Chain is the sequential chain of activities that leads to the delivery of the final product to
the customer; it also depicts how value (utility) accumulates for the customer.
Note – The use cases of the Value Chain as a model, discussed in detail under heading 2 in the chapter,
An Introduction to Strategic Performance Management.
3 Michael E Porter in year 1985 in his book Competitive Advantage: Creating and Sustaining Superior Performance ,
introduced generic value chain. This book answered the questions he posed; things remain undone in his earlier book,
‘Competitive Strategy - Techniques for Analysing Industries and Competitors’, written in 1980.
4 Figure 2-2 at p.37 of Competitive Advantage: Creating and Sustaining Superior Performance (1985) by Michael E Porter
5
Para 2.8 on page 21 of the NITI Aayog report titled “Report of the Task Force on Sugarcane and Sugar Industry”,
https://niti.gov.in/sites/default/files/2020-08/SugarReport.pdf)
6
https://www.cnbc.com/2018/12/13/inside-apple-iphone-where-parts-and-materials-come-from.html
III. Outbound logistics covers storing, distributing, and delivering finished goods to customers.
This includes how, when, and where for customer reference. Where to deliver, how to deliver,
and when to deliver.
Illustration – Many e-retail platforms, such as Amazon, Flipkart, etc., offer delivery at a
shipping address that may be different than the billing address; they also offer contactless
delivery, and the buyer is free to select the time frame within which delivery shall be attempted.
Practical Insight
The selection of place of business operation is critical to generate value from both inbound and
outbound logistics apart from core operation activities as well.
Tata Steels, a Tata Sons group company that is headquartered in Mumbai, had its early
operations in Jamshedpur and is still working there. Have you ever thought why J. Tata, in 1908
selected Jamshedpur for Tata Steel? It was close to the iron ore, coal, and manganese deposits
as well as to Kolkata, which provided a large market. Therefore, location became the source of
value for Tata Steels in both inbound and outbound logistics apart from making operations easy7.
IV. Marketing and sales activities comprise conducting market research to determine the marketing
mix8 that comprises product, price, place, and promotion. McCarthy’s concept was further
developed by Booms and Bitner9 into the 7Ps of the marketing mix by adding three more Ps, i.e.
People, Process, and Physical evidence (sometime referred to positioning). The newly added
3Ps have a relatively grater bearing on the provisioning and supply of services than goods. The
marketing and selling activities broadly comprise the aspects pertaining to these 7Ps.
It is worth noting that if we keep the customer at the focal point then 4Ps can be replaced by
the 4Cs, which are consumer wants and needs (for products); Cost to satisfy (for price);
convenience to buy (for place); and communication (for people).
Illustration – A fast-food restaurant chain (with presence in the western part of the globe), decided
to enter the Indian market; for that, it had to drastically modify its marketing mix for Indian operations
(to be the best fit in the Indian context). Considering this, rather than chicken patties, aloo tikkis
were used, prices were kept low, intensive promotional activities and campaigns were lunched, and
most of their franchises in India offer sitting arrangements as well.
Practical Insight
Marketing and sales effort are truly of significant importance to let the customer, perceive value
of the product. Brands often use taglines that create impact. A Noodles brand may choose any
of the following taglines or keep changing its tagline from time to time –
- 2 mins noodles … to focus on convenience.
- Taste Bhi Health Bhi … to emphasis at health.
- 2-minute mein Khushiyan (Happiness in 2 minutes) … to collaborate on fun and happiness.
7 https://www.tatasteel.com/corporate/our-organisation/heritage/
8 By E. Jerome McCarthy in 1960 in his book Basic Marketing
9 Booms, B. & Bitner, M. J. (1981). Marketing Strategies and Organizational Structures for Service Firms. Marketing of
Services, James H. Donnelly and William R. George, eds. Chicago: American Marketing Association, 47 -51
V. After sales service includes all those activities that occur after the point of sale, such as
installation, training, and repair. It is important to note that the importance of after sale services
is higher in the case of durable products in comparison to products falling into the FMCG
category. In the service industry after sale service depends on the nature of the service.
Illustration – Service station network, time taken to service the vehicle, and quality of service
(coverage of what is asked for to check or repair and manner to do so) are key aspects for
creating value for its customers in the automobile industry. Even service costs become part of
cost ownership and shall be a deciding factor for making purchases in the automobile sector.
Support activities also referred as to secondary activities; it comprises of:
I. Firm infrastructure deals with how the firm is organised. It basically describes the activities
pertaining to legal, general management, administrative, accounting, finance, public relations ,
and quality assurance in the organisation apart from who will perform these and how.
II. Technology development describes how the firm uses technology. Activities such as research
and development, IT management, and cybersecurity that build and maintain an organization's
use of technology.
III. Human resource management describes how people contribute to competitive advantage.
Basically, it deals with the management of human capital. Human resource functions such as
hiring, training, building and maintaining an organizational culture, and maintaining positive
employee relationships.
IV. Procurement signifies purchasing, but not just limited to materials. Finding new external
vendors, maintaining vendor relationships, negotiating prices, and other activities related to
bringing in the necessary materials and resources used to build a product or service.
Typically, increasing the performance of one of the four secondary activities can benefit at least one
of the primary activities.
Value Chain Analysis is a process of identifying Key Value Drivers (can be referred to as
equivalent to CSFs) that add substantial value and contribute most towards a firm’s competitive
advantage by categorising the activities into value-added and non-value-added activities, with the
objective of eliminating non-value-added activities to obtain cost leadership and focusing (by further
resource deployment) on value-added activities to improve product differentiation.
Hence, Value Chain Analysis is a means of evaluating each of the activities in a firm’s value
chain to understand where opportunities for improvement lie. Conducting a value chain analysis
prompts you to consider how each step adds or subtracts value from your final product or service.
Value chain analysis can help you realise some form of competitive advantage, such as cost
reduction (becoming cost leader) and product differentiation.
Value Chain Analysis requires a framework (strategic framework), which can collect a variety of
information strategically. Three essential analyses to collect such strategic information are–
❑ Industry Structure Analysis – to determine industry profitability and the basis of competition.
❑ Core Competencies Analysis – to determine whether organisation possess the desired key
success factors.
❑ Segmentation Analysis – to understand customers and markets.
Note - How to conduct a value chain analysis, the strategic framework thereof and strategies of cost
leadership and differentiation, as well as how to attain them, are discussed in detail in upcoming sections
of this chapter.
10 https://www.researchgate.net/figure/Diagram-of-a-Value-Shop-Stabel-Fjeldstad-1998_fig2_44709027)
Concept Insight
Value Shop Model (or Service Value Chain) can resolve the customer’s hardship for service
providers (Figure A.4).
Value Shop Model (VSM) conceptualised by Mr. James D. Thompson in 1967. It was named and
defined by Mr. Charles B. Stabell & Mr. Oystein D. Fjeldstad in 1998. Value Shop Model is
oriented to mobilises resources (man, machine, money, and knowledge) to solve the problem by
service sector firms. This is similar to the value chain, but with differences in two aspects–
▪ Rather than focusing on creating value, value shop model focuses on solving problems.
▪ Primary activities are described as Problem Finding and Acquisition, Problem Solving,
Choice, Execution, Control, and Evaluation.
Note- There is no fixed sequence for these activities or resources. Each problem is treated
uniquely, and activities and resources are allocated specifically to cater to the problem. These
activities are cyclic in nature, and the cycle will run until a solution reached.
Some of the classical examples of value shops include management consultancies such as
Boston Consulting Group, Deloitte, and McKinsey. The model can be applied to the BFSI sector,
apart from applications in the case of value-based consumption services such as telecom
services, services by internet service providers, subscriptions to some software or data
processing solutions, etc.
Value is created in the shop by several mechanisms that allow the organization to solve problems
better or faster than the client. These are variables such as:
▪ The organization is in possession of more information about the problem than the client .
▪ The organization is specialized to deal with the problem at hand with specific methods of
analysis.
▪ Strong expertise from expert professionals is available.
To cut a long story short, for a professional services firm, an alternate representative of a value
chain is the value shop, which is essentially a problem resolution model. The primary activities
are problem finding and acquisition, problem solving, choosing among solutions, execution,
control, and evaluation. Hence, the value shop principle is not concerned with value addition;
instead, it deals with the resolution of customer’s hardships.
2.1.2 Strategic Position and Strategic Positioning Analysis
Understanding the strategic position is concerned with the impact of the external environment,
internal resources and competences, and the expectations and influence of stakeholders on
strategy.11 Together, a consideration of the environment, strategic capability, expectations , and
purposes within the cultural and political framework of the organisation provides a basis for
understanding the strategic position of an organisation.
11Johnson, G., Scholes, K., Whittington, G. (2008), Exploring Corporate Strategy, 8th Edition: Financial Times Prentice
Hall (p. 13)
Strategic Positioning Analysis is the analysis of the company's relative position within that
strategic segment of industry that matters for the purpose of establishing performance targets
(while attaining competitive advantage) in addition to determining the means (strategies and plans)
of attaining the same and then the measurement of performance as well as the evaluation thereof.
Basically, the intent seen in where the firm is positioned in context to its true peer group (which can
be referred to competitor) or how it is performing in comparison to others who are operating in the same
segment.
To illustrate, Tata Motors’ performance or standing shall be analysed in the context of Maruti, Toyota,
Honda, and Hyundai, which offer the same products in the same price range with similar features.
Strategic positioning reflects choices a company makes about the kind of value it will create and
how that value will be created differently than rivals. Strategic positioning should translate into either
one of two things: a premium price (i.e., differentiation) or a lower cost (i.e., cost leadership)
Note- Driving up prices is one way to increase profitability. To command a premium price, a company
must deliver distinctive value to customers…. differentiation. Driving down costs is another way to
increase profitability. To compete on cost, companies must balance price with acceptable quality….
cost leadership.
Strategic
positioning
analysis includes
the study of
I. Culture, beliefs, and assumptions of the organisation help in appraising the vision and values.
Vision is aspiration statement, while values are the guiding principle that will be observed to attain
such an aspiration (vision). Culture is the beliefs, values, mindsets, and practices of a specific group
of people. It includes behaviour patterns and norms.
Illustration - Google's vision statement is “to provide access to the world's information in one
click12”. The nature of company's business is a direct manifestation of this vision statement. For
instance, Google's most popular product is its search engine service. Further, as part of their value
system, Google is committed to significantly improving the lives of as many people as possible.
Concept Insight
Denison Organizational Culture Survey (DOCS) 13- Culture has a strong bearing on Shareholders
ROI, Customer Satisfaction, and Business Growth
Denison Organizational Culture Survey (DOCS; a 50-question employee survey) used the Denison
Organizational Culture Model, to measure the specific aspects of an organization's culture based
on four core critical cultural trait areas: Adaptability, Mission, Involvement, and Consistency.
The survey breaks these four areas down into 3 further sub-categories each, giving a total of 12
areas of cultural assessment. Denison has found an important link between four critical cultural
traits and how they can have a significant impact on organizational performance.
Culture and Shareholders’ Return on Equity
A Study of 161 publicly traded companies from a broad range of industries was conducted to
compare the performance of the 10% of organizations with the best culture scores with the 10% of
organization with the worst culture scores.
The average ROE for the organizations with the lowest culture scores is 6%, and the average ROE
for organizations with high culture scores is 21%. Highly similar results for return on total investment.
Culture and Customer Satisfaction
Correlations with customer satisfaction were significant for all twelve indices. Average 24 percentile
point difference between the top and bottom five performers of a large Fortune 500 construction
company in all 12 indices.
Culture and Business Growth
A Study of retail supermarkets in the USA was conducted, comprising 12,000 individuals and 2,500
stores to compare culture profiles with growth rates. 1,305 stores with weak culture records over
5% of sales declined, whereas 424 stores with strong culture records above 5% of sales increased.
II. Stakeholders’ influences and expectations shall be considered in order to determine what the
shareholders want and how much they will cooperate. So that the same can be reflected in the
mission statement and objectives of the organisation. It also needs to be seen whether we are able
to meet their expectations or not while appraising strategic position.
Different stakeholder groups have their own set of forces and tactics that have a strong bearing on
organisations mission and objectives and, in turn, on its strategic position.
Illustration – Google’s key stakeholders are its users, and they will continue using google more and
more if it is convenient to use, freely accessible, and user friendly. This is reflected in Google’s
mission statement. Google's mission is to organize the world's information and make it universally
accessible and useful 14. That's why search makes it easy to discover a broad range of information
from a wide variety of sources.
12 https://www.comparably.com/companies/google/mission
13 https://www.denisonconsulting.com/culture-surveys/
14 https://about.google/intl/ALL_in/
Do You Know?
Do we need to consider all the stakeholders or only those who are significant enough? If only
those limited chunk of stakeholders exist, then how do we identify them?
Mendelow’s Matrix helps in considering the attitude of stakeholders while setting out strategic
objectives. Mendelow’s Matrix consists of four boxes representing stakeholders with:
High Interest and High Power – These will be considered key stakeholders, and a business will
need to actively engage this group. This group is likely to have a significant influence; they may
be the driver behind the change or strategy. They will likely have the power to stop the change
or strategy from going ahead if they are unhappy.
This is the group that requires most focus. Keep them both updated on any strategic changes
and empowered to steer the direction of change (or at least feel that they have the opportunity
to input into the direction of the project).
High Interest and Low Power – This group has an interest in what is happening; however, they
are unlikely to have the power to influence change. This group should be kept informed. While,
they have little power themselves, they could attempt to join forces with a group with power.
Low Interest and High Power – This group of stakeholders has the potential to move into the
‘High Interest and High Power’ group, so it is essential that they are kept satisfied. By keeping
them satisfied, they are less likely to gain interest and exercise their power of influence.
Low Interest and Low Power – This group is unlikely to have an interest in the organization and
its strategic direction. This is often due to their lack of power to influence a situation. They are
likely to accept the position and show little, if any, resistance.
15Mendelow, A. L. (1991), ‘Environmental Scanning: The Impact of the Stakeholder Concept’. Proceedings from the
Second International Conference on Information Systems, 407-418, Cambridge, MA
III. Strategic capabilities in terms of resources and core competences shall be analysed in the
context of the task environment (which may be referred to as the microenvironment) in which
organisation is operating to assess the strengths and weaknesses to appraise the strategic
position.
Strengths shall be used aggressively to exploit opportunities to capture competitive advantage ,
whereas weaknesses need to be analysed at the root-cause level, and those causes shall either be
removed or reduced (if they can’t be reduced).
Practical Insight
If we have to appraise the position of any automobile company in the context of the automobile
industry by identifying its strengths and weaknesses, then we have to consider factors (which may
be positive or negative; if positive, then it becomes a strength, and if negative, then it becomes a
weakness) like –
▪ Market value.
▪ Distribution system.
▪ International presence.
Note – Above factors are only illustrative, and the importance of these factors depends upon the
influence that it may create.
IV. The macro environment (beyond the control of organisation), especially the basis of
competition, industry profitability, industry key success factors, customers’ behaviour, markets and
regulations, etc., shall be analysed to assess Opportunities and Threats to appraise the strategic
position.
Opportunities need to be exploited, whereas a defence mechanism shall be created against threats
that can be mitigated. Risk management is of key importance to protect the organisation from threats
to sustain its strategic position and make the most of opportunities. This will improve its strategic
position, apart from ensuring it realizes the benefits of competitive advantages.
Practical Insight
In line with previous practical insight to identify opportunities and threats to exploit the earlier and
residual the later for any automobile company, the relevant facts may include −
▪ Capabilities in direct and digital marketing.
▪ Relationship with channel partners.
▪ Supply chain integrations and after sale services (cost and availability).
▪ Demand for low cost or innovative products.
▪ Acquisition, merger, or joint venturing to register un-organic growth.
▪ Competitors who are aggressive and striking hard to capture market share.
▪ Stagnation in the economy or industry.
▪ Price war and innovation war among the players.
Note – Above points are illustrative only.
Mind it, tapped opportunities turned into strengths over time, while unattended or mishandled
threats led to weakness.
Do You Know?
What tools are handy for conducting strategic position analysis?
SWOT analysis is the focal tool for Strategic Position Analysis supported by PESTEL Analysis
(specifically relied on for the analysis of remote environmental factors), Porter’s Five Forces (for
industry analysis), Porter’s Diamond Studies, etc. for external environment analysis.
Porter's Value Chain, Critical Success Factors and Core Competencies, Product Lifecycle,
McKinsey 7S, etc. for internal environment analysis.
Note - Lists of tools/ models stated above are illustrative only, not exhaustive.
Cost Driver Analysis includes the examination, quantification, and explanation of the monetary
effects of cost drivers associated with an activity.
It is an in-depth review of the cost drivers to make sure that your firm correctly allocates the
supporting production and service costs to all goods and services. There are different cost driver
analysis methods, including a cost accounting system review, industry analysis, and internal activity
analysis.
In traditional costing, the cost driver used to allocate overhead costs (supporting cost) to cost objects
only relates to the quantity/ volume of output. But under Strategic Cost Management cost driver for
short-term overhead costs (that occur once in a while) may be the volume of output or activity. But
for long-term overhead costs, a variety of cost drivers are used.
Based upon the nature of supporting cost (overhead cost), appropriate drivers can be identified
and categorised into the following classes–
Supporting Cost
Structural cost drivers relate to business strategic choices about an organization’s underlying
economic structure, such as scale and scope of operations, use of technology , and complexity of
products (it is not necessary that more is better).
Executional cost drivers relate to the execution of the business activities, such as the utilization
of employees in terms of involvement, the provision of quality service, product design and
manufacturing, and links with suppliers and clients (higher is the better).
Note - Students are advised to refer Annexure 1 at the end of the chapter for a detailed overview of the
types of cost drivers.
2.2 Key tools of Strategic Cost Management and their nature
Following are the key tools of strategic cost management; their nature is briefly described here to
highlight how they help in aligning costs with business strategies –
Tool Description
Activity Based Costing To provide accuracy in allocating indirect costs.
Benchmarking Process performed to determine critical success factors and study
the ideal procedures of other organizations in order to improve
operations and dominate the market.
Competitive Advantage Defining strategies that an organization could adopt to excel over
Analysis rivals.
Just-in-Time A comprehensive system to buy materials (JIT Purchase) or produce
commodities (JIT Production) when needed at the appropriate time.
Kaizen - Continuous Conducting continuous improvements in quality and other critical
Improvement success factors.
Target Costing Cost that an organization is willing to incur according to a competitive
price that could be used to achieve the desired profit.
Theory of Constraints A tool to improve the rate of transferring material into finished goods.
Total Quality Adapt the necessary policies and procedures to meet customers’
Management expectations.
Value Chain Analysis Add value to customers, reducing costs and understanding
relationship between business organization and customers.
Note - List of tools specified above is only illustrative, not exhaustive.
3. Traditional vs. Strategic Cost Management
Based upon discussion conducted in the previous headings, Traditional Cost Management & its
Limitations and Strategic Cost Management, the following key differences between Traditional and
Strategic Cost Management can be considered–
B. ORGANISATIONAL CONTEXT
Strategic Cost Management is the analysis of cost in a broader context (Organisational as well as
External Environment Context), where the strategic elements become more conscious, explicit, and
formal. The cost data is used to develop superior strategies in route to gaining a sustainable
competitive advantage. Strategic Cost Management gives a clear understanding of the firm's cost
structure in search of sustainable competitive advantage through cost reduction or differentiation.
1. Gaining Competitive Advantage
A Competitive advantage is the ability of an organisation to outperform its competitors and make
more profits than its competitors do from an equivalent set of activities through superior
performance. Gaining and maintaining a competitive advantage over a period of time is challenging
for organisations in the global economy with the speed of competition and information exchange
possible today.
The role of the strategist (including the management accountant as a cost engineer) is to engineer
superior performance within a given industry in which organisation is operating.
A genuine question arises here –
1.1 How can a strategist increase profitability?
The answer lies in having a competitive advantage. Companies must search out “white space” in
the industry, which usually means competing on either one of two fronts–
Differentiation
Cost Leadership
Figure B.1 – Generic strategies to attain competitive advantage (to enhance profitability)
Do You Know?
It’s possible to compete at a low cost and be differentiated at the same time, but companies that
try to be all things to all customers can wind up getting stuck in the middle, a strategic mistake
that Michael Porter calls “the kiss of death”.
1.1.1 Differentiation
Driving up prices is one way to increase profitability. To command a premium price, a company must
deliver distinctive value to customers. A customer may perceive the high value of any product and
be ready to pay a premium due to the differentiation it offers. E.g., Apple. Product differentiation
is achieved by investing more time and resources into activities like research and development,
design, or marketing that can help the organisation’s product stand out.
▪ Source - Differentiation can be sourced from quality (design, knowhow or performance),
innovation, customer relations/ response (including after sale services), a wide-product range
etc.
▪ Benefits - Differentiation helps either earn a huge margin by charging the top price or build
market share by charging lesser than premium price.
1.1.2 Cost Leadership
Driving down costs is another way to increase profitability. To compete on cost, firm must balance
price with acceptable quality and become the lowest cost producer in an industry. A firm can create
a cost advantage in two different ways, by reducing the cost of individual value chain activities and
by reconfiguring the value chain as shown below in figure B.2
▪ Source - Cost Leadership can be sourced from cost effective inputs, process innovation or re-
engineering, low-cost distribution channel, superior operation management, learning curve,
and the economics of scale.
▪ Benefits - 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, or by charging a
lower price than others, it can capture market share.
Reconfiguring
the value
chain
Reducing
the cost of
individual
value chain
activities
Cost
Leadership
Strategic Emphasis
Aspects Product
Cost Leadership
Differentiation
Role of standard costs in assessing Not very important Very important
performance
Importance of concepts such as flexible Moderate to low High to very high
budgeting for manufacturing cost control
Perceived importance of meeting budgets Moderate to low High to very high
The competitive advantage can be sourced from product differentiation or cost leadership, either by
reconfiguring the value chain or by reducing the cost of each individual value chain activity; hence,
conducting a value chain analysis is essential in both scenarios. So, another question arises here:
1.3 How to conduct a Value Chain Analysis?
There are three steps involved in conducting value chain analysis –
16Shank (1989), Strategic Cost Management: New Wine or Just New Bottle? Journal of Management Accounting
Research (1): 47-65
Internal Cost Analysis helps in understanding the cost of processes/ activities and identifying the
sources of profitability. The steps are as follows –
▪ Identify the firm’s value creating processes.
▪ Determine the portion of the total cost of the product attributed to each value creating process.
▪ Identify the cost driver for each process.
▪ Identify the link between processes.
▪ Evaluate the opportunities for achieving a relative cost advantage.
To illustrate
If your primary goal is to reduce your firm’s costs, you should evaluate each piece of your value
chain through the lens of reducing expenses.
▪ Which steps could be more efficient?
▪ Are there any that don’t create significant value and could be outsourced or eliminated to
substantially reduce costs?
Internal Differentiation Analysis helps in creating and offering superior differentiation to
customers. In order to increase the value perceived by customer, the following steps are to be
performed −
▪ Identify the customer’s value creating process.
▪ Evaluate differentiation strategies for enhancing customer value.
▪ Determine the best sustainable differentiation strategies.
To illustrate
If primary goal is to achieve product differentiation, you should evaluate each piece of your value
chain through the lens of–
▪ Which parts of your value chain offer the best opportunity to realize that goal?
▪ Would the value created justify the investment of additional resources?
Vertical Linkage Analysis – Creating an extendable organisation by extending the value chain
across the firms of suppliers and users.
Using value chain analysis, you can uncover several opportunities for your firm, which can prove
difficult to prioritize. It’s typically best to begin with improvements that take the least effort but offer
the greatest return on investment.
We already discussed in the previous section of this chapter that Value Chain Analysis (three steps
explained above) requires a strategic framework that can collect a variety of strategic information
that will be used while performing the above three steps (especially the third one). Three essential
analyses to collect such strategic information are –
❑ Industry Structure Analysis – to determine industry profitability and the basis of competition.
❑ Core Competencies Analysis – to determine whether organisation possess the desired key
success factors.
❑ Segmentation Analysis – to understand customers and markets.
Note - These three analyses are discussed in detail in an upcoming section of this chapter.
Note - Value Chain as a Model, along with how an organisation uses value chain to gain and sustain
competitive advantage (desired performance), is discussed in detail under heading 2 in the Chapter, An
Introduction to Strategic Performance Management.
For creating a sustainable competitive advantage, in depth analysis of Value Propositions is
essential, for which Osterwalder's Business Model Canvas can be helpful. But prior to move on
to Osterwalder's Business Model Canvas, it is important to consider what a business model is or
what consists of.
2. Business Model
A business model explains how a business works and the economic logic behind it. It is a way of
representing and communicating how an organisation creates values for itself while delivering
products or services to customers.
Margretta proposed that a business model should include all the activities associated with two key
components –
a. Producing or making something.
b. Selling something.
But in 2008, Johnson along with Christensen & Kaggerman 17 extended the scope and proposed that
a business model also needs a value proposition; a business model should contain three
components –
a. Customer value proposition.
b. Profit formula.
c. Key resources and processes.
Around 5 years later, in May 2013, Alexander Osterwalder further extended the scope and coverage
of business model by suggesting the Business Model Canvas, discussed in detail ahead.
17Johnson M, Christensen C, & Kaggerman H, 2008, ‘Reinventing your business model’, Harvard Business Review,
December, www.innosight.com/insight/reinventing-your-business-model-form.
Business Model Canvas helps the firm to map, discuss, design, and develop robust business
models. Business Model Canvas helps users visualize what is important and forces them to address
key areas that are relevant from the point of view of strategy as well as performance.
a. Customer Segments describe who the customers of a business are and why they buy from it.
Segmentation is discussed in detail in the next section of this chapter.
b. Value Proposition deals with products or services that business offers to target customer
segment in order to solve their problems or satisfy their needs.
18 Osterwalder, (May 2013), ‘A better way to think about your business model’, Harvard Business Review, May,
https://hbr.org/2013/05/a-better-way-to-think-about-yo.
g. Key partners include suppliers and channel partners who make the business model work.
Here, it is important to consider What resources we acquire from them - are those resources
key resources? and What activities they are performing for us as business - are these activities
key activities or not? This element also defines the need for strategic alliances and partnerships
that a company needs to enter.
h. Key activities describe the most important things to do in a business or to keep it running or
working. Here, the need is to define whether the business is a manufacturing solution
(production), supply chain partner (trader or only a logistic partner) , or a problem solving
(service entity).
Key activities become the basis for the determination of cost drivers for absorbing the cost of
supporting activities.
i. Cost includes the expenses to operate the business and perform activities, hosting partners,
and owning the resources. Here the active role of the management accountant comes into
play in determining the cost structure and evaluating the scope as well as scale of
economics. What are the most important costs that require management? What are the most
expensive resources that require control?
3.1 How to draw Business Model Canvas
By answering the questions written next to each element in figure B.6, a business can draw its
business model on a single piece of paper, irrespective of whether it is a mere start-up or a grand
old company.
8. Key Partners 6. Key Activities 4. Customer
Who are our What uniquely Relationship
partners and strategic things How do you interact
key suppliers? does the business 2. Value with the customer 1. Customer
Which key do to deliver its Proposition throughout their Segment
resources are proposition? What’s compelling journey? Who are the
we acquiring about the customers?
7. Key 3. Channels
from our proposition? Why What do they
Resources How are these
partners? do customers buy, think? See?
What unique use? propositions Feel? Do?
Which key
strategic assets promoted, sold, and
activities do
must the business delivered? Why? Is it
partners
have to compete? working?
perform?
9. Cost Structure 5. Revenue Streams
What are the business’s major cost drivers? How How does the business earn revenue from the
are they linked to revenue? value propositions?
Figure B.6 – Questions to answer while drawing a Business Model
Do You Know?
How to use Business Model Canvas?
▪ Element 1, 2, 3, and 4 in figure B.6 are attributed to customers focus (which can be correlated
with the value proposition canvas, i.e., heading 4 of the upcoming topic).
▪ Element 6, 7, and 8 in figure B.6 are attributed to infrastructure.
▪ Element 5 and 9 in figure B.6 signify financial viability.
3.2 Industry Insight
Figures B.7 and B.8 shows the generic business model of any entity operating as an Online Meeting
Platform or a manufacturer & trader of Razor and Blades, respectively.
Customer
Key Partners Key Activities
Relationship
Payment Software and app Value Proposition Customer
Mass customer base,
partners development Free video calling Segment
hence casual
Telco partners cheaper than a Web users
Key Resources globally
Distribution phone (cellular) Channels
partners Software and
Skype.com
developers
Cost Structure
Revenue Streams
Software development; Resolving complaints and
Prepaid or subscription
debugging the technical snags
Figure B.7 - Generic Business Model of any Online Meeting Platform
The tool is based upon two elements of the business model, i.e., the customer segment for whom
the business firm intends to create the value and the value proposition (value proposition map)
that will attract customers to the business. With a value proposition canvas, a business firm can map
out both of these (customer segment and value proposition) with more granularity and show the fit
between what it offers and what customers want.
4.1 Customer Segment Profile
The customer segment profile describes the characteristics of the business’s customers in more
detail. The profile is composed of three elements: first, the jobs (termed as ‘Customer Jobs’) that
customers are trying to get done in their service or product; second, the related pains, i.e., aspects
outlining the negative aspects that customers hate or like to avoid; and third, the gains, i.e., aspects
describing the positive outcomes or benefits that your customers desire to have.
4.1.1 Customer Jobs describes the important issues that business’ customers are trying to solve/
resolve in their work; it could be their needs that they wish to satisfy or a task that they try to perform
and complete in their lives (professional and personal) or at work.
To illustrate, Matrimonial services, legal advice, a specially designed shoe for an internationally
recognised player, construction of the house (safety, look, and comfort can be major concerns),
ordering food with specifications, face mask/ PPE Kit to protect from specific viruses etc.
19By Alexander Osterwalder, Yves Pigneur, Gregory Bernarda, Alan Smith in Value Proposition Design - How to Create
Products and Services Customers Want (2014)
Mind it, customers include industrial customers, and jobs can have functional, social, or emotional/
personal intent. Some jobs may be crucial to customers, while others may be trivial. To illustrate,
an e-vehicle manufacturer seeking specially designed assembly from its vendor for electronic
vehicle, message over the birthday cake ordered, and the seasoning and toppings of pizza you just
ordered are crucial aspects.
4.1.2 Pains describes anything that annoys the customer before, during, or after getting a job done.
This could be unwanted cost, situation, negative emotion, or even risks. Obviously, some of the
customer’s pains will be severe, while others are mild.
4.1.3 Gains describe the outcome or benefits that the customer requires, expects, or desires, as
well as a complementary benefit that he doesn’t expect, but will be excited about or surprised by if
he gets it. This includes things like functional utilities, social gains, positive emotion , and cost
savings. Obviously, some of the benefits will be more relevant to customers than others.
These three elements of the profile describe the customer characteristics that you can observe in
the market.
Concept Insight
A clear and concrete description of pains and gains is essential key to offer a better value proposition.
To clearly differentiate jobs, pains, and gains, describe them as concretely as possible. For example,
when a customer says, “Waiting in line was a waste of time,” ask after how many minutes exactly it
began to feel like wasted time. That way, you can note “wasting more than x minutes standing in line.”
When you understand how exactly customers measure pain severity, you can design better pain
relievers in your value proposition.
Ranking jobs, pains, and gains is essential.
Although individual customer preferences vary, you need to get a sense of customer priorities. Investigate
which jobs the majority consider important or insignificant. Find out which pains they find extreme versus
merely moderate. Learn which gains they find essential, and which are simply nice to have.
Ranking jobs, pains, and gains is essential in order to design value propositions that address things
customers really care about. Of course, it’s difficult to unearth what really matters to customers, but
your understanding will improve with every customer interaction and experiment.
It doesn’t matter if you start out with a ranking that is based on what you think is important to your
potential customers, as long as you strive to test that ranking until it truly reflects priorities from the
customer’s perspective.
4.2 Value Proposition Map
A value proposition map describes the features of a business’s value proposition that it has designed
to address its customers’ jobs (through products and services), pains (through pain relievers); and
gains (through gain creators). Hence, a value proposition map is composed of the three elements:
firstly, the product and services around which your value proposition is built; secondly, the pain
relievers that outlines how the business’s products and services alleviate the customers’ pains;
thirdly, the gain creators describe the positive outcomes and benefits that business’s products and
services create for your customers.
4.2.1 Products and Services outlines the bundle of products and services that the business is
offering to its customers to help them get a functional, social, or emotional / personal job done and
to address their pains and gains in the process.
4.2.2 Pain Relievers explicates how your products and services will alleviate specific customer
pains before, while, and after the customer tries to get the job done. Pain relievers show or highlight
which of all the customers’ pains are addressed by the value proposition by either eliminating or
reducing them.
4.2.3 Gain Creators describes how products and services offered by business create customer
gains. Gain creators show which of all the customers’ gains are addressed by the value proposition
by creating benefits and outcomes.
Do You Know?
Can you list the elements that can contribute to customer value creation (act as either pain
reliever or gain creator)?
▪ Newness - Some Value Propositions satisfy an entirely new set of needs that customers
previously didn’t perceive because there was no similar offering. Cell phones, for instance,
created a whole new industry around mobile telecommunication.
▪ Performance - Improving product or service performance has traditionally been a common
way to create value.
▪ Customization - Tailoring products and services to the specific needs of individual customers
or customer segments creates value.
▪ Design - A product may stand out because of superior design. Design is a major element in
determining the cost. Design not only of the product but also of the process and service
through which that product is manufactured and sold.
▪ Brand/status - Customers may find value in the simple act of using and displaying a specific
brand.
▪ Price - Offering similar value at a lower price is a common way to satisfy the needs of price -
sensitive customer segments.
▪ Cost reduction - Helping customers reduce costs is an important way to create value.
▪ Risk reduction - Customers value reducing the risks they incur when purchasing products or
services.
▪ Accessibility - Making products and services available to customers who previously lacked
access to them is another way to create value.
▪ Convenience/ usability - Making things more convenient or easier to use can create
substantial value.
Mind it, the above list is non-exhaustive in nature.
Business is said to achieve a problem-solution fit when the features of its value proposition map
perfectly match the characteristics of customer segment profile. When the market validates this
match and the business value proposition gets traction with real customers, the business has
achieved the product-market fit.
It is worth noting that successful and sustainable businesses have more than just great value
propositions; they also have a great business model that makes a great customer value proposition
possible.
Do You Know?
What are the key questions that businesses are supposed to ask while defining its value
proposition or working on its value proposition canvas?
▪ What value do we deliver to the customer?
▪ Which one of our customers’ problems are we helping to solve?
▪ Which job are we helping the customer get done?
▪ Which customer needs are we satisfying?
▪ What bundles of products and services are we offering to each customer segment?
To conclude, the Value Proposition Canvas has two sides. With the customer profile, business can
have a clear understanding of customer character. With the value map, business describes how it
intends to create value for that customer. Business achieve Fit between the two when one meets
the other.
An industry is a group of companies that are relatively comparable based on their primary
business activities, or it can be seen as a group of organisations or business units participating in
similar economic or commercial activities and producing similar products or services. Here, it is
important to note that there is no single universally acceptable definition of industry. Further, what
industry will consist of depends upon the width and depth of the business firm.
To illustrate, when a fast-food retail chain started its operations in the USA, its industry analysis
was reserved only up till the customers and fast-food chains (competitors and rivals) operating in
the USA. The moment it decides to go beyond borders (continents Asia, Europe, Australia, etc.), the
scope of industry has been changed, and now the factors of those continents or countries also
become relevant while making decisions or crafting strategies.
Hence, any single economic definition of industry can’t be relied on here; business organisations, in
light of the competitive market in which they operate need to come up with their own concept of
industry.
To illustrate, A two-wheeler riding app-based transport company may not consider a four wheeler
riding app-based transport company as its competitors; hence, scope of the industry may be restricted
to the other two wheeler ride provider only (where power to substitute (perfect substitute) exists), but
reciprocally, it may be possible that a four wheeler riding app based transport company also consider
a two-wheeler riding app based transport company as its competitor while performing industry analysis.
Therefore, the scope of industry (definition with narrow or wide inclusions) is a subjective issue.
Narrow scope may make analysis more manageable, but exclusion of relevant substitutes or
disruptive influences may make it meaningless, whereas a wide scope of industry can ensure more
relevance and utility but will be more resource consuming and complex. Cost benefit analysis came
into play here.
For further analysis, the external environment is usually broken down into two sub-sets: called the
remote environment and the industry operating environment, including the competitive
environment.
The element of remote environment, such as social, technological, economic, environmental,
political, legal, and ethical factors (STEEPLE), comprises factors that originate beyond (and usually
irrespective of) any single firm's operating situation. Remote environment presents firms with
opportunities, threats, and constraints, but rarely does a single firm exert any meaningful reciprocal
influence.
By working systematically through each of the elements of the remote environment, business should
have a comprehensive list of factors that have shaped the historical growth of the industry and are
likely to affect the future growth of the industry.
Illustration – Due to technological advancement, the cellular phone changed dramatically from a
QWERTY keypad-based handset to a smart phone (touch screen phones with better battery backup
and function like internet connectively, a camera etc.). A cellular phone manufacturer that was once
the market leader and held a substantial percentage of market share failed to respond to the
changing technology, hence being replaced by an emerging brand that later occupied the position
of market leader. Hence, remote environment is beyond the control of single firm operating in the
industry. The same factor (technology in this case) brings threat to one and opportunity to the other.
Concept Insight
Industry analysis was conventionally performed using the PEST Framework, i.e., Political,
Economic, Social, and Technology, but this approach has evolved to reflect the dynamics of the
business environment, to PESTEL with the addition of environmental and legal issues, and now
to STEEPLE with the addition of ethical aspects.
Further, as part of the analysis of the industry’s operating environment (including the competitive
environment), it is important to consider all the factors (within the particular industry) that affect
industry profitability as well as the competitive position of business organisations within it. These
factors can be grouped into elements such as customers, competitors (as well as potential entrants),
suppliers, advocacy groups, regulations, regulatory groups, and many other elements such as the
industry life cycle, supplier’s suppliers, and buyer’s buyers, etc. Basically, it considers the wider
picture through factors that are capable of determining the growth trajectory in addition to future
profitability.
Hence, further in this section, we will consider the forces that determine the profitability of industry,
the basis of competition and key success factors that can help business organisations gain a
competitive advantage, apart from understanding how customers and markets behave and related
aspects thereto in the context of the external environment.
1. Industry Profitability
Michael E. Porter20 suggests five force model to assess the intensity of industry competition.
Industry structure (or environment) analysis highlights the profitability potential of any industry using
Porter’ five forces model. A higher intensity of competition results in lower potential profitability, and
vice versa. The five forces that are enumerated by this model are pictured below –
20 In 1980, in his book Competitive Strategy - Techniques’ for analysing industries and competitors
21 Figure 1-1 at p.4 of Competitive Strategy - Techniques for analysing industries and competitors (1980) by Michael E Porter
To illustrate – As far as the Indian ‘Airline’ business is concerned, the industry is extremely
competitive because of a number of reasons, which include the entry of low-cost carriers, tight
regulation leading to high fixed costs, and high barriers to exit. As the same time, the switching cost
is low or nil for passenger; hence, rivalry becomes more intensive and stiffer. The passenger market
share in the Indian aviation industry in Jan 2015 and Oct 2022 is given below for reference–
January 2015 October 2022
Airline Total 6.2 million passengers Total 11.4 million passengers
carried during Jan 2015 carried during Oct 2022
Air India 18.7% 9.1%
Vistara 0.2% 9.2%
Air Asia India 1.3% 7.6%
IndiGo 36.4% 56.7%
Spice jet 9.4% 7.3%
Jet Air 19.6% -
Go Air 8.9% -
Jet Lite 4.5% -
Go First - 7%
Alliance Air - 1.3%
Source: Indian Express Dated 4 th December 2023 p.13 Economy
Concept Insight
Interconnectedness of Barriers (Exit Barriers and Entry Barriers) and Profitability - Although exit
barriers and entry barriers are conceptually different, their joint level is an important aspect of
the analysis of an industry. Often, exit and entry barriers are related. Substantial economies of
scale in production, for example, are usually associated with specialized assets, as is the
presence of proprietary technology. Taking the simplified case in which exit and entry barriers
can be either high or low, refer to Figure C.2.
All five competitive forces jointly determine the intensity of industry competition and profitability, and
the strongest force or forces govern and become crucial from the point of view of strategy
formulation.
To illustrate, even a company with a very strong market position in an industry where potential
entrants pose no threat will earn low returns if it faces a superior, lower-cost substitute. Even with
no substitutes and blocked entry, intense rivalry among existing competitors will limit potential
returns.
The five forces enumerated by Porter’s five force model are constantly changing, which makes the
model a dynamic analytical tool.
Porter’s Five Forces is a good starting point to evaluate an industry but should not be used in
isolation. You could, for example, combine it with a Value Chain Analysis or through the VRIO
framework in order to get a better sense of where your company’s competitive advantage is coming
from and to better position your company among rivals. Moreover, Porter’s Five Forces is often
combined with the STEEPLE analysis to give a good overview of the organization’s environment.
Note – Students are advised to refer to the Annexure which contains a list of Porter’s Five Forces factors.
Market consists of the business firm that is selling the product or rendering the services in addition
to the buyer who is buying/ hiring them. Market can be physical (where brick and mortar stores exist)
or virtual (based on an e-platform). There may be many sellers and buyers, or only a handful. Market
also includes potential buyers.
2.1.2 Segment or Market Segment
A market segment is a category of customers who have similar likes and dislikes in an otherwise
homogeneous market. In order to be recognised as a segment, the following criteria must be
satisfied–
▪ The segment should be homogeneous internally in terms of constituents (which may be their
demographic character, behaviour, trait, or any other basis of segmentation).
To illustrate, Fabric or readymade clothing firms have kid/ children’s ranges in addition to male and
female collections. These segments are homogeneous internally; for the first segmentation, age is
the basis, whereas for the later two, gender is the basis; all three segments are demographic in
nature.
▪ The segments should be heterogeneous externally in terms of other segments. Each segment
must be different from the others.
To illustrate, Passenger vehicles and commercial vehicles for automobile companies. Now
electronic vehicles are also seen as entirely separate segment. In the given example, all the
segments are heterogeneous externally based upon the user (or purpose of use) and source of
energy/ power (fuel vs. electricity).
▪ Segment shall be clearly identifiable. A business firm must be able to distinguish between group
members and non-group members. The characteristics of group members due to which they fall
under a particular segment shall be consistent. The basis of segmentation should be strong enough
to make identification easy.
▪ Segment size shall be reasonable, if not substantial, at least of sufficient size so that specific
marketing efforts can be made considering potential profitability. Mind it, any size can be considered
reasonable, if it can be operated profitably.
To illustrate, most of the companies that adopt the focus strategy or offer limited edition products
are still able to operate profitably despite having a small number of target customers.
▪ A segment must be responsive in the sense that it must respond / react to marketing offerings.
Do You Know?
What benefits Market Segmentation provides?
Benefits of market segments includes create stronger marketing messages, identify the most
effective marketing tactics, design hyper-targeted ads, attract (and convert) quality leads,
differentiate your brand from competitors, build deeper customer affinity, identify niche market
opportunities, stay focused.
3. Basis of Competition
Competition is a situation where two or more people or organizations are trying to achieve, obtain,
etc. the same thing or to be better than somebody else. The competition can be natural or strategic.
Natural competition arises in the process of evolution and refers to the survival of the fittest, as
stated at the beginning of this section. Natural competition forced the weaker rivals to exit the market
or collapse in search of survival; only those able to sustain themselves either adapt to the change,
counter the change, or make the change. Whereas strategic competition deals with the deployment
of resources based on a high degree of insight into a business system.
The basis of competition is the reason why customers of particular business choose it over its
competitor. It can be a product, feature, function, style, availability, or a host of other things. Once
a business is done with the industry analysis and has also developed an understanding of the market
and customer, it may be able to identify what exactly drives demand, choice, price, and cost;
assess the current and potential risks that may affect future developments in the industry ; and
discover what underpins sustainable competitive advantage.
Do You Know?
Determining the basis of competition may involve asking certain questions, such as -
▪ What drives demand for the products and services of the industry?
▪ How does the customer make a choice as to price, feature, and quality of the product?
▪ How is price determined in the industry?
▪ What are the main drivers of costs in the industry?
▪ What are the current and potential risks?
After assessing the competitive forces in a particular industry and determining the basis of
competition in the market wherein business operate, it is easy to identify the key success factors
(KSFs) to gain a competitive advantage in that industry and also ensure the availability of resources
and core competencies involved in KSFs to compete in the market and generate a sustainable
competitive advantage.
4. Industry Key Success Factors
There are certain factors in every industry that are critical to the success of any business
organisation in generating and sustaining a competitive advantage. The availability of resources
and core-competencies pertaining to such factors and the strategic use thereof can really help an
organisation outperform its peer (or competitor) in its target market. Such factors are called Key
Success Factors (sometimes called Critical Success Factors i.e., CSFs). In effect, it articulates
what the company must do, and do well, to achieve the goals outlined in its strategic plan. Examples
would include agility, reliability, diversity, and emotional connection with clients.
Further, with each CSFs, Key Performance Indicators (KPIs) are attached to measure the
performance of the business organisation regarding said CSF.
To illustrate, cycle time is a critical or key success factor in many businesses, lead time or run time
shall be attached as a KPI to the CSF of time.
Key success factors are one of three elements a company’s management team must articulate as
part of its strategic planning process, with the others being its strategic goals and its strategic scope.
Under a dynamic business environment, with the passage of time, Key Success Factors may
change; therefore, the discourse of that market or industry may change, hence, business firms need
to be aware of the changes (in assessing them, adapting them, or responding to them) and
periodically re-assess the CSFs.
To illustrate, A cellular phone manufacturer that was market leader at onetime (when critical
success factors were reliability and an efficient distribution network) lost its leadership position to an
emerging brand when smart phones were launched, and the dynamics of the industry changed
because users started considering phones as gizmos for receiving and sending emails, playing
music, taking photos, and even searching the internet. Resultantly, R&D, Screen Size, Megapixel of
the Camera, etc. become new Key Success Factors.
5. Core-Competencies Analysis
Core Competency is a unique preposition that helps a firm stand out in the industry by providing
value to its customers. Core Competency leads to either cost leadership or product differentiation,
which are the primary sources for a firm to gain a competitive advantage.
Prahalad and Hamel22 suggest that "Core Competences" are some of the most important sources of
uniqueness: these are the things that a company can do uniquely well and that no one else can copy
quickly enough to affect competition.
Prahalad and Hamel used examples of slow-growing and now-forgotten mega corporations that
failed to recognize and capitalize on their strengths. They compared them with star performers of
the 1980s (such as Canon and Honda), which had a very clear idea of what they were good at and
grew very fast. As they switched efforts away from areas where they were weak and further focused
on areas of strength, their products built up more and more of a market lead.
Do You Know?
What can be a source of core competencies?
Core competencies can arise out of-
▪ Resources – Which firm has, and others don’t.
▪ Capabilities – Ability to coordinate resources and make optimal use of them.
22 C. K. Prahalad and Gary Hamel (1990), "The Core Competence of the Corporation”
Do You Know?
How can core competencies be exploited?
▪ Validate (ensure, establish, and exploit) core competencies in the current business.
▪ Leverage competencies in the value chains of other existing businesses/ segments.
▪ Use core competencies to reconfigure the value chains of existing businesses – basically, keep
on improving.
▪ Use core competencies to create new value chains.
Information Systems (IS) are collections of multiple information resources (e.g., software,
hardware, computer system connections, the system housing, system users, and computer system
information) to gather, process, store, and disseminate information. IS strategy is concerned with
aligning IS development with business needs and seeking strategic advantage from information
technology. It is usually formulated at the same level as the product/ market strategy for the SBU.
It deals with resource planning to ensure IT layout is put into practice.
Information Management (IM) concerns a cycle of organizational activity, the acquisition of
information from one or more sources, the custodianship (role and responsibilities of those who deal
with information), and the distribution of that information to those who need it, and its ultimate
disposal through archiving or deletion. IM strategy tries to 'put management into IT' by defining the
role and structure of the IT activities in the organisation. It is concerned with the management
controls for IT, management responsibilities, performance measurement, and management
processes. Here, it is decided who can assess the data and who can’t. It is formulated at organisation
wide level. It deals with control over the layout of IT uses in organisation.
Information Technology (IT) is the use of computers to create, process, store, retrieve, and
exchange all kinds of data and information. IT forms part of information and communications
technology. An IT strategy (information technology strategy) is a comprehensive plan that outlines
how technology should be used to meet IT and business goals. It is usually prepared at the activity
level. It decides the layout of use cases of IT in the organisation.
Michael J. Earl23 developed a framework to analyse the linkages and distinctions between three
interrelated types of strategy: Information systems, Information management, and Information
technology.
The linkage expressed by him is summarised in the following table for reference –
23 Management Strategies for Information Technology by Michael J. Earl; Prentice Hall, 1989 (Page 63)
Do You Know?
Why are firms supposed to have an IT/ IS strategy?
Apart from having the ability to impact business at all levels, the need to have an IT/ IS strategy is
observed due to the –
▪ They are capable of creating competitive advantages and sustaining them for a long time. The
use of IT can help organisations counter the five forces (identified by Michael E. Porter) in a
more appropriate manner.
▪ IT is a dynamic stream; a lot of new technologies in the wake of industry 4.0, like Big Data,
IOT, IOS, and Blockchain, are coming into play; businesses can use them to tap new
opportunities. To illustrate, Fintech, with the use of technology, revamps the BFSI sector.
▪ The cost of Information Technology tools and establishing an Information System is high.
Most decisions pertaining to IT/ IS involve not only huge investments but are also irreversible
in nature. Even a single error or mistake can be risky.
▪ For better integration across the value chain and supply chain, IT/ IS are essential. For
effective value and supply chain flow, information flow is foremost requirement, which can
only be assured through the use of IM, for which appropriate IT/ IS strategies are underlying
need.
▪ The use of IT makes change management easy. For efficient change management, the timely
and accurate communications are of great importance; hence the strategic context of IT/IS is
multi-fold.
Based upon the points discussed so far, one thing that we can conclude is that IT, together with IS
and IM, has the potential to transform the business around the corner. Let’s see the impact of IT and
IS specifically in the case of Michael E. Porter’s Five Forces and Value Chain.
1.3.2 Lock the Customer – Information Technology can be used to lock (retain) the customer either
by configuring and adjusting the compatibility of product in such a way that spares must be of the
same manufacturer (as main/ principal product) or the cost of switching will be too high.
A scheme of rewards, loyalty bonuses, and cash back, etc. may also be relied on to retain customers.
To illustrate, E-retail platforms or apps, even certain retail stores or service providers, offer
premium/ plus status to some of their high value customers, giving them privileges and early access
of offers. Some of the stores and businesses offer promo discounts on their first (or few initial) orders
from their app.
1.4 Threat of Substitutes
Threat of substitute products or services may cause a loss of revenue (topline) or an increased cost
of retention. Threat will be high if the substitute is perfect in nature and cheaper. Substitutes can be
from different segments and different industries. Switching cost is also relevant here. IT and IS itself
substitute for many products.
To illustrate, laser printers are a fast and perfect substitute for dot-matrix printers; Kindle replaces
hard cover or paper bound books; and every other technological innovation.
Note - Threat applies both between industries (e.g., rail travel with bus travel and private car) and
within an industry (e.g., long-life milk as a substitute for delivered fresh milk).
But technology can also be used to counter the threat of substitutes. The threat from substitutes can
be minimised by ensuring that an organisation develops a product before its rivals and then protects
that product for a number of years by means of patents. This approach is widely used in the
pharmaceutical and biotech industries, where specialist software is now widely used in the drug
discovery process, enabling drugs to be developed that target specific human and animal diseases.
Basically, firms can use computer-aided design and manufacturing to develop new products first and
remain ahead of their competitors.
Practical Insight
Within a couple of years, Google sold Motorola, the iconic handset maker, to Chinese PC maker
Lenovo for $2.91 billion, which it bought for $12.5 billion. The reason being that Motorola’s IPRs
and R&Ds have been transferred in Google’s favour. Google used that technology or knowledge
as a resource to stay ahead of its rival, therefore counter the threat of substitute24.
24 https://qz.com/172207/why-google-just-sold-motorola-to-lenovo-for-3-billion
Practical Insight
Restaurant and Robots
Robots can also be used for more customer-facing tasks, such as taking orders, collecting
payments, or even serving food and drinks. One restaurant that has embraced robotics is YO!
Sushi, a Japanese chain with locations in the UK, US, and Australia.
The Wingman joins hamburger-making robots like Flippy from Miso Robotics that White Castle
recently bought for 100 of its locations and other kitchen robots that are automating food
processing, cooking, and presentation, particularly in fast food settings.
Note – As per robotlab.com, the Robot-as-a-Service (RaaS) program starts at $1,215 per month
and includes shipping, onsite installation, training, and unlimited ongoing support.
2.1.3 Outbound logistics covers storing, distributing, and delivering finished goods to customers.
Apart from bar-coding system or RFID, information technology is used for vehicle scheduling and
automated warehousing.
2.1.4 Marketing and sales activities comprise market research and the marketing mix (product,
price, place, and promotion). Customer databases are maintained digitally for ease in market
segmentation, apart from analysing customer habits and trends therein. Together, these make CRM
(Consumer Relations Management) easy.
Do You Know?
Having a website that works seamlessly on all devices helps you outperform.
As per Sweor.com
▪ 75% of consumers admit to making judgements on a company’s credibility based on the
company’s website design.
▪ 83% of mobile users say that a seamless experience across all devices is very important.
▪ Mobile e-commerce revenue accounted for above 50% of total U.S. e-commerce revenue.
Digital marketing, social marketing, internet marketing, and viral marketing are gaining importance.
25 https://www.zdnet.com/article/ups-takes-wireless-to-the-next-level/
Practical Insight26
Nike started with a more effective use of analytics, focusing on digital consumer data. They also
updated their e-commerce strategy with things such as improved UX (user experience) and better-
adjusted membership options. Their offline activities corresponded with their online marketing
strategy. Nike focused on delivering a unique experience to shoppers who visited their offline
stores, especially the flagship stores.
2.1.5 After-sales service includes all those activities that occur after the point of sale, such as
installation, training, and repair. Computer system can be relied on for scheduling repairs. Further
IoT-enabled remote service software helps manufacturers of equipment, machines, and complex
devices monitor their products and provide after-sales product support and maintenance at the
customer sites. Such solutions often integrate with a manufacturer’s asset management software,
ERP, and customer service module, thereby reducing downtime and transportation costs.
2.2 Secondary Activities
2.2.1 Firm infrastructure deals with organisational structure, which can be improved through
collaborative workflow using Intranets, Electronic scheduling, Office automation systems and any
ERP (Enterprise Resource Planning) for identifying and planning the enterprise-wide resources
needed to record, produce, distribute, and account for customer orders.
2.2.2 Technology development describes how the firm uses technology; therefore, this includes
IT/IS strategies. For state roadways buses, now online ticket booking is available. This helps in
better management, apart from reducing the risk of fraud (involved in using manual tickets). Mind it ,
here the technological advancement of primary and support services is considered not a product
that will be covered under operations.
2.2.3 Human resource management describes how people contribute to competitive advantage.
There’s a range of technologies that are impacting HR practices; some of the most interesting and
disruptive technologies are powered by artificial intelligence and automation.
Do You Know? Human resources technology (popularly known as HR Tech) is a buzz now.
HR tech refers to the software and hardware technology used to automate essential HR functions.
HR tech functions as a co-pilot, helping HR professionals streamline time-consuming tasks, including-
▪ Payroll management.
▪ Talent management - AI is making recruitment smarter.
▪ Applicant tracking systems.
▪ Learning and development.
▪ Performance management - analytics drive better performance management.
▪ Employee engagement - better analytics boosts diversity and inclusion.
26https://www.forbes.com/sites/forbestechcouncil/2019/10/07/how-nike-is-using-analytics-to-personalize-their-
customer-experience/?sh=5e4a5aaf1611)
2.2.4 Procurement means purchasing, but not just materials. Techniques like Electronic Data
Interchange for exchanging information with vendors for auto-supply and e-procurement or e-
tendering for receiving and appraising Expression of Interest (EoI) from vendors have proven handy.
Practical Insight
Ford Motor Company has set up the Computer Aided Design module in association with its suppliers,
with the intent of providing them clarity on design specifications so that the costs (time and monetary
resources) of design and changes can be reduced.
Do You Know?
Not only private enterprises, which are working solely/ substantially for-profit motives, but even
public enterprises, which have the twin objective of economic growth and social welfare, are using
technology to be cost efficient. This is evident from the launch and use of the Central Public
Procurement Portal (https://etenders.gov.in/eprocure/app) for e-procurement by the Government of
India. The e-Procurement System enables the tenderers to download the tender schedule free of
charge and then submit the bids online through this portal.
In the end, it can be concluded that IT/IS has the capabilities to revamp the value chain and empower
the organisation to tap the opportunities for creating greater values.
Technology
Leadership
Figure E.1 - Management accountant is at the crossroads of technology, financial analysis and strategy, and leadership
Mind it, being a leader is way different from just being a manager in many ways, such as –
▪ Leaders create a vision; managers create goals; manager don’t.
▪ Leaders are change agents; managers maintain the status quo.
▪ Leaders are unique; managers do copy.
▪ Leaders take risks; managers control risk.
▪ Leaders are in it for the long haul; managers think short-term.
▪ Leaders grow personally, and managers rely on existing, proven skills.
▪ Leaders build relationships, and managers build systems and processes.
▪ Leaders coach; managers direct.
▪ Leaders create followers; managers have employees (subordinates).
2. Management Accountant - In the Role of a Leader Who Drives the Strategy
Leadership is required to develop an organisational strategy, drive change, and align the
organisation’s structure, resources, and culture with the strategy.
In the previous section (especially in point 1.4, i.e. Leadership - From Planning to Execution, stated
above on this page), we acknowledge that Management Accountant assume the role of leader, who
need to make or assist in decision-making in wake of organisational strategy, make
communications (of strategy, plans, vision, and values) while getting such decisions executed
either himself or through others; and remain ethical throughout. Let’s consider each of these three
highlighted dimensions of the role of the management accountant as a leader in detail.
Communication
Business Decision
Ethics Making
2.1 Communication
Communication is a two-way process that involves the transfer of information or messages from one
person or group to another. Considering the organisational structures and level thereof, it can be
classified as vertical (upward and downward), horizontal, and diagonal.
From the perspective of a management accountant in a strategic context, communication includes
all formal and informal exchanges of ideas, beliefs, imaginations, emotions, or thoughts. The
Management Accountant who is considered an agent of change (to align the organisation’s structure,
resources, cost structure, and culture with the strategy), while communicating the change and the
need for it, also needs to communicate the vision and strategy; this will reduce resistance and make
the process of change smoother. The new strategy needs to be communicated with actions as well
as words.
Concept Insight
The message in full, and then process the message to construe the real intent.
Communication is more than just sending messages
Communication is something more than just sending a message; it includes feedback from the
receiver; only then, it become dialogue else monologue. Receiving and analysing the feedback is
important because it signifies what is actually conveyed. The importance of this aspect has
increased in the case of communication done by management accountant in strategic contexts
because feedback will help to understand the resistance, if any, and the nature thereof.
Listening is more than just hearing
The receiver should listen carefully (both sender and listener should try to reduce the noise, i.e.,
barriers to communication) to receive.
Management Accountant, apart from reporting to the C-suite, used to talk to workers and staff either
in quality circle meetings, or corner meetings or on the production floor (some time on the shop
floor also) to communicate informally but effectively.
Techniques such as management by wandering/ walking around (MBWA)27 are helpful. MBWA
refers to a style of business management that involves managers wandering around, in an
unstructured manner, through the workplace(s) at random (rather than a plan where employees
expect a visit from managers at more systematic, pre-approved, or scheduled times), to check with
employees, equipment, or the status of ongoing work. The expected benefit is that a manager, by
random sampling of events or employee discussions, is more likely to facilitate improvements to the
morale, sense of organizational purpose, productivity, and total quality management of the
organization as compared to remaining in a specific office area and waiting for employees.
27Management consultants Tom Peters and Robert H. Waterman had used the term in their 1982 book In Search of
Excellence: Lessons from America's Best-Run Companies.
Practical Insight28
“Management by wandering around" is very similar to the Japanese Gemba walk method
developed at Toyota.
The origin of the MBWA has been traced to executives at the company Hewlett-Packard for
management practices in the 1970s.
In the end we need to recognise that technological advancement has changed the mode and style
of communication drastically. In order to have effective communication, management accountants
also need to consider the mode of communication very consciously; the choice shall be based upon
the criteria of intellectual level of the receiver, cost budget, availability of time resources, and nature
of information (highly sensitive or operational), among others.
2.2 Decision-Making
Decision-making is the process of making choices by identifying a decision, gathering information,
and assessing alternative resolutions. Decision-making process is substantially impacted by the type
of organisation structure adopted in addition to its size, industry, level of maturity, vision, mission ,
and goals. The impact may be either positive or negative. If the aspects specified in the immediate
previous sentence are clearly defined and communicated to stakeholders, then the process of
decision-making will be smooth or else complicated. Where it is complicated, a stronger leader is
required who has a transformational leadership style.
Decision-making is required at every step of the strategy development process. Being part of the
strategy development process, management accountant required to either make decisions or assist
the C-suite in making decisions. Since decisions taken (or assisted) by management accountant are
deciding factors in organisation’s direction and growth, hence, criteria for making decisions shall
be rational. A decision is said to be rational if it is objective, fully informed, conscious, explicit,
deliberate, consistent (but considering the need for an hour or warrant of situations), logical,
and aiming for end goals.
Do You Know?
Why do business managers or leaders make irrational decisions?
▪ Enthusiasm to quickly get to the end of the analysis process, i.e., jump straight from analysis
to recommendation without considering any other alternatives.
▪ Not listing to others (and their perspective).
▪ Error in forecasting and determining the affecting factors.
▪ Readily agree with the leader’s proposal.
▪ Superficial understanding of facts.
▪ Judgement error or lack of expertise.
▪ Carrying pre-notions - having prior views about the ‘best’ solution.
Management Accountant has to make decisions regarding the benchmarks, standards, budgetary
allocations, quality limits, and many more in association with others in the organisation; hence, must
have strong rapport and communication with his counterparts in other departments of functional
expertise.
In the end, we must acknowledge that leadership style has a strong bearing on the decisions that
management accountant make and the effectiveness thereof.
2.3 Business Ethics
Ethics deals with moral philosophy that involves systematizing, defending, and recommending
concepts of right and wrong behaviour, whereas business ethics is a form of applied ethics or
professional ethics that examines ethical principles and moral or ethical problems that can arise in
a business environment. It applies to all aspects of business conduct and is relevant to the conduct
of individuals and entire organizations.
Business ethics are closely related to the values of organisation; hence, ethics should reflect
values. Undoubtedly relying upon Milton Friedman’s arguments, the classical approach to ethics
suggests that business leaders are responsible for the wealth maximisation of fund providers only,
but business has changed its orientation from shareholder to stakeholder. Hence, rather than
leveraging the classical approach of ethics, the socio-economic approach shall be observed, which
suggests that in order to be sustainable, every business organisation needs to balance the
economic motive and social costs of their actions. Competitive and profit-maximising
organisations may well be efficient in the eyes of shareholders or fund providers, but an overriding
focus on efficiency and profit can lead to ethical issues and dilemmas such as unequal income
distribution or damage to the environment.
Therefore, in determining how the organisation will achieve its goals, leaders establish or shape the
ethics and values that guide the activities of the organisation and set the limits or the extent to which
the ‘means justifies the ends’. Therefore, the management accountant while making decisions and
communicating the same, shall observe business ethics.
To illustrate, for performance evaluation, he/ she may use the triple bottom line as a framework. In
lifecycle cost, he/ she may consider site cleaning costs at the end of the project as well as
displacement costs incurred to run the project.
SUMMARY
❑ Traditional Cost Management aims at cost reduction. It revolved around the central theme ‘that
cost cutting always results in enhanced profits’, whereas Strategic Cost Management deals
with measuring and managing costs and aligning them to the business strategy.
❑ Strategic Cost Management is the application of cost management techniques so that they
simultaneously improve the strategic position of a firm and reduce costs.
❑ Strategic cost management has three important pillars, viz., strategic positioning, cost driver
analysis and value chain analysis.
❑ Value Chain is the sequential chain of activities which leads to delivery of final product to the
customer, it also depicts how value (utility) accumulates to customer. Typically, increasing the
performance of one of the four secondary activities can benefit at least one of the primary
activities.
❑ Value Chain Analysis is a process of categorising the activities into value added and non-value-
added activities, with objective of eliminating non-value added activities to obtain cost
leadership and focus (by further resource deployment) on value added activities to improve
product differentiation.
❑ An alternate representative of a value chain is the value shop, which is essentially a problem
resolution model. The primary activities are problem finding and acquisition, problem solving,
choosing among solutions, execution, and control/ evaluation.
❑ Strategic positioning reflects choices a company makes about the kind of value it will create
and how that value will be created differently than rivals. Strategic positioning should translate
into either one of two things: a premium price (i.e., Differentiation) or a lower cost (i.e., Cost
Leadership)
❑ Cost Driver Analysis includes the examination, quantification, and explanation of the monetary
effects of cost drivers associated with an activity.
❑ Companies must search out “white space” in the industry, which usually means competing on
either one of two fronts; a premium price (i.e., Differentiation) or a lower cost (i.e. Cost
Leadership). It’s possible to compete on low cost and be differentiated at the same time —but
companies that try to be all things to all customers can wind up getting stuck in the middle, a
strategic mistake that Michael Porter calls “the kiss of death.”
❑ To command a premium price, a company must deliver distinctive value to customers. To
compete on cost, companies must balance price with acceptable quality and become lowest
cost producer in an industry.
❑ A business model explains how a business works and the economic logic behind it. It is a way
of representing and communicating how an organisation creates values for itself while
delivering products or services for customers.
❑ Alexander Osterwalder proposed a nine-element business model canvas wherein four
elements pertaining to cost (key partners, key activities, key resources, and cost structure; on
left side of canvas) are connected to another four elements pertaining to revenue (customer
relationships, channels, customer segments and revenue streams; on right side of canvas)
through ninth element that is value proposition.
❑ The Value Proposition Canvas has two sides. With the Customer Profile business can have
clear understanding of customer character. With the Value Map business describe how it intend
to create value for that customer. Business achieve Fit between the two when one meets the
other.
❑ Business is said to achieve a problem-solution fit when the features of business’s value
proposition map perfectly match the characteristics of your customer segment profile. When
the market validates this match and business value proposition gets traction with real
customers, business achieved the product-market fit.
❑ External environment comprising the factors that are beyond the control of organisation
(outside organisation boundary) but having influences on organisation, its performance, and
strategic positions. The external environment is then broken down into two categories for
further analysis, called the remote environment and the industry operating environment
including the competitive environment.
❑ An industry is a group of companies that are relatively comparable based on their primary
business activities. There are segments inside the industry. Industry classifications are typically
grouped into larger categories called sectors.
❑ Industry analysis was conventionally performed using the PEST Framework i.e., Political,
Economic, Social and Technology, but this approach has been evolved to reflect dynamics of
the business environment, to PESTEL with add-on of environment and legal issues and now to
STEEPLE with add-on of ethical aspects.
❑ All five competitive forces jointly determine the intensity of industry competition and profitability,
and the strongest force or forces are governing and become crucial from the point of view of
strategy formulation. The five forces enumerated by Porter’s five force model are keep-on
changing, this makes model a dynamic analytical tool.
❑ Market consists of business firm that is selling the product or rendering the services in addition
to buyer who is buying/hiring them. A market segment is a category of customers who have
similar likes and dislikes in an otherwise homogeneous market.
❑ Market segmentation is the process of dividing a broad target customer base or business
market, into small but more defined sub-groups of customers based on some type of shared
characteristics such as demographics, interests, needs, or location. Basis of Segmentation can
be Product, Demographic, Psychographic, Behavioural, and Geographic characteristics.
❑ Basis of competition is that reason why your customer chooses you over your competitor.
❑ There are certain factors (Called Critical Success Factors) in every industry that are critical to
success of any business organisation in generating and sustaining competitive advantage.
Further with each CSFs, Key Performance Indicators (KPIs) are attach ed to measure the
performance of business organisation regarding said CSF.
❑ Core Competences are some of the most important sources of uniqueness: these are the things
that a company can do uniquely well, and that no-one else can copy quickly enough to affect
competition.
❑ Information Technology (IT), Information System (IS) and Information Management (IM), all
three are inter-connected; but not same. Information technology techniques are used as part
of information system to manage information. Organisations develop strategies to ensure
alignment among these three and overall organisational strategy in place.
❑ IT collectively with IS and IM has potential to transform the business around the corners. It has
strong influence on Michael E Porter’s Five Force, Moreover IT/IS has capabilities to revamp
the value chain and empower the organisation to tap the opportunities for creating greater
values.
❑ Management Accountant is a position that holistically addresses the various aspects, which
affect the sustainability of a business's performance. The management accountant is at the
crossroads of technology, financial analysis and strategy, and leadership, helping to identify
what is driving the company's profits and losses, rather than simply reporting them.
❑ Management Accountant assume the role of leader, who need to make or assist in decision
making in wake of organisational strategy, make communications (of strategy, plans, vision
and values) while getting such decisions executed either himself or through others; and remain
ethical throughout.
MCQ 2
In continuation to previous MCQ
Mr. Nilanjan is hired by Avantha holding as independent consultant for drafting of value proposition
map. He suggests that ranking of customer’s jobs, pains, and gains is essential to respond them.
Mr. Anirban is not convinced with need of rank said three elements of customers’ profile; hence he
seeks your help in evaluating following two statements regarding the customer’s jobs, pains, and
gains.
I. Pains and Gains are controlled by Business.
II. All the pains and gains need not be responded or addressed.
Options
a. Both the statements are correct
b. Both the statements are incorrect
c. Only statement 1 is correct
d. Only statement 2 is correct
Key - d
Reason – Pain relievers and gain creators are distinctly different from pains and gains. Business
have control over the former, whereas it doesn’t have control over the latter. Business decides (i.e.,
design) how it intend to create value by addressing specific jobs, pains, and gains. Business don’t
decide over which jobs, pains, and gains the customer has and no value proposition addresses all
of a customer’s jobs, pains, and gains. The best ones address those that matter most to customers
and do so extremely well.
MCQ 3
The technique of “Management by wandering around" is concerned with which of following
leadership aspects of management accountant.
I. Communication
II. Decisions Making
Options
a. Both of I and II
b. Only with I
c. Only with II
d. None of I and II
Key - b
29 Management consultants Tom Peters and Robert H. Waterman had used the term in their 1982 book In Search of
Options
a. I, II and III only
b. I, II and IV only
c. I, III and IV only
d. II, III and IV only
Key - b
Reason – In 2008, Johnson along with Christensen & Kaggerman 30 extended the scope of business
model to what was earlier proposed by Margretta and proposed that a business model also needs a
value proposition, therefore business model should contain three components–
1. Customer value proposition.
2. Profit formula.
3. Key resources and processes.
MCQ 6
Shakti Bearing Ball Trading Limited is considering the proposal to enter into trading of casting iron
as well. Mr. Madhu Sudan, chief strategic enumerate the entry exist barriers of proposed business
line and called a review meeting at request of CEO to consider final advice of C-suite. You (Chief
Cost Advisor) also attended the meeting and suggested that barriers have influence on profitability
(rate as well as nature). Mr. Sudan told SBBTL expected that there will be high entry and exit barriers
you are advised to tell nature and margin rate in context of five force model.
Options
a. Low margin with stable return
b. Low margin with Risky return
c. High margin with stable return
d. High margin with Risky return
Key - d
Reason – Impact of exit and entry barriers on profitability (margin) are depicted below-
30Johnson M, Christensen C & Kaggerman H, 2008, ‘Reinventing your business model’, Harvard Business Review,
December, www.innosight.com/insight/reinventing-your-business-model-form.
MCQ 7
The board of Modern Furniture Limited considering the need of strategies for Information related
aspects. Chief Information and Technology officer made a statement “Information Technology (IT),
Information System (IS) and Information Management (IM), all three are inter-connected; but not
same. Information technology techniques are used as part of information system to manage
information”. He further highlights the nature of IT/IS/IM strategies and suggests–
I. IT strategy is supply-oriented
II. IS strategy is demand-oriented
III. IM Strategy is dimension-oriented
Which of the above specified statements are incorrect
Options
a. I only
b. III only
c. I and II only
d. I and III only
Key - b
Reason – IM strategy trying to 'put management into IT' by defining the role and structure of the
IT activities in the organisation. It is concerned with the management controls for IT, management
responsibilities, performance measurement and management processes. Here it is decided who can
assess the data and who can’t. It formulated at organisation wide level. It deals with control over the
layout of IT uses in organisation. Hence IM strategy is relationship oriented.
MCQ 8
Ali Fabrics Limited (AFL) has recently decided to invest in an Electronic Data Interchange system
that will enable the AFL to automatically place orders with its major suppliers. Currently, AFL
purchasing department staff have to place orders using postal mails and telephone to the company’s
suppliers, which is slow and inefficient.
Which activity within AFL’s value chain will the new EDI system improve?
Options
a. Infrastructure
b. Inbound Logistic
c. Procurement
d. Outbound Logistic
Key - c
Reason – The EDI system will improve the system for sourcing and purchasing materials. This is
procurement. Note that inbound logistics refers to inventory management - not the purchasing of
inventory itself.
MCQ 9
Management Accountant assume the role of leader, who need to make or assist in decision making
in wake of organisational strategy, make communications (of strategy, plans, vision and values)
while getting such decsions executed either himself or through others; and remain ethical
throughout. Which of the following statements are incorrect?
I. An increasing number of organizations are segregating management accountants in separate
managerial-accounting departments.
II. Management accountants often are part of cross-functional teams.
III. Management accountants make significant business decisions and resolve operating problems
while support in strategic decision making.
IV. The role of management accountants has changed considerably over the past decade .
Options
a. Only I
b. Only III
c. Both I and III
d. Both I and II
Key - a
Reason – Management Accountant is a position that holistically addresses the various aspects,
which affect the sustainability of a business's performance. The management accountant is at the
crossroads of technology, financial analysis and strategy, and leadership, helping to identify what is
driving the company's profits and losses, rather than simply reporting them.
MCQ 10
Tara Fabrics considering the decisions regarding segmentation. Management Accountant raised
and said it was acknowledged that managerial discretion and judgment determine which markets
are selected and targeted and which others are ignored. In order for ma rket segmentation to be
effective, all segments must be –
Options
a. Distinct, Artistic, Measurable and Profitable.
b. Distinct, Accessible, Measurable and Popular.
c. Desperate, Accessible, Many, and Profitable.
d. Distinct, Accessible, Measurable and Profitable.
Key - d
Reason – In order to be recognised as segment, the following criteria shall be satisfied the segment
should be homogeneous internally, heterogeneous externally (distinct), identifiable (measurable),
shall be reasonable if not substantial (profitable), and must be responsive (accessible).
MCQ 3
Which of following is correct combination of Pain Relievers?
a. Item No. 1, 7 and 9
b. Item No. 4, 7 and 9
c. Item No. 1, 8 and 12
d. Item No. 4, 8 and 12
Key – c i.e., Item No. 1, 8 and 12
Reason – Refer answer to first descriptive question of this case-let
MCQ 4
Which of following is correct combination of Gain Creators?
a. Item No. 1, 7 and 9
b. Item No. 4, 7 and 9
c. Item No. 1, 8 and 12
d. Item No. 4, 8 and 12
Key – b i.e., Item No. 4, 7 and 9
Reason – Refer answer to first descriptive question of this case-let
Descriptive Question 1
Do you agree to the opinion of larger chunk of industry experts or not? Justify you answer.
Answer - The opinion of larger chunk of industry expert is correct considering value proposition
canvas.
Value Proposition describes the benefits that customers can expect from product and the bundle of
products and services that business offer to specific customer segment to create value. Therefore,
value proposition canvas 31 is the tool that will help the organisation to design, test, build and
manage the great customer value propositions.
The Value Proposition Canvas has two sides. With the Customer Profile business can have clear
understanding of customer character. With the Value Map business describe how it intend to create
value for that customer. Business achieve Fit between the two when one meets the other.
31By Alexander Osterwalder, Yves Pigneur, Gregory Bernarda, Alan Smith in Value Proposition Design - How to Create
Products and Services Customers Want (2014)
Pain relievers
Pains
Growing network of charging points
Insufficient number of charging points
Developed interior ergonomics FIT
Lack of luggage space
75 minutes to charge 100% with
Slow charging
supercharging stations
Business is said to achieve a problem-solution fit, when the features of business’s value
proposition map perfectly match the characteristics of your customer segment profile. When the
market validates this match and business value proposition gets traction with real customers,
business achieved the product-market fit.
The value proposition canvas drawn above shows fit (problem-solution as well as product-market)
exist, hence options of larger chunk of expert is factually correct.
Descriptive Question 2
How establishing manufacturing in Country C help such multinational automotive to do better
in primary activities of their value chain?
Answer – Primary activities of value chain consist of the inbound logistics, operations, outbound
logistics, marketing & sale, and after sale services. Automobile industry use assemblies, which are
usually procured from countries with low-cost model (because such countries are capable to produce
these assemblies cheaply, substantially due to cheap labour rates). Such multinational automotive
company is not an exception to this. Country C is one such country. Therefore, by establishing their
operations in Country C such multinational automotive company is able to reduce inbound cost, also
reduce the cost of operation due to cheap labour rate.
Moreover, Country C is largest market for E-Vehicle. This not only reduce outbound logistic cost as
well as easy and large market hence marketing and sale also become easy; further the fact Country
C is growing market create a great source of value.
Hence, establishing operation in Country C is beneficial to such multinational automotive company
in generating same or higher value (perceived value by customer) for its customer at lower cost level
(than earlier); therefore, increasing margin.
Note – Alternate answers are possible to this particular descriptive question .
ANNEXURE 1
Based upon two distinct nature of supporting cost (overhead cost), drivers can also be
categories into two classes
1. Resource drivers – Concerned with contribution of specific quantum of resources, which
caused cost → electricity costs to produce products and the number of machine hours spent
(machine hour is resource).
2. Activity driver – Concerned with cost incurred on the activities required to complete a specific
task → inspection costs and the number of inspections or the hours of inspection (Inspection
is required activity to ensure quality).
Supporting Cost
ANNEXURE 2
List of Porter’s Five Forces factors
Threat of new entrants
▪ Economies of scale
▪ Product differentiation
▪ Brand identity/loyalty
▪ Access to distribution channels
▪ Capital requirements
▪ Access to latest technology
▪ Access to necessary inputs
▪ Switching costs
▪ Substitute producer’s profitability & aggressiveness
Rivalry among existing competitors
▪ Number of competitors
▪ Diversity of competitors
▪ Industry concentration and balance
▪ Industry growth
▪ Industry life cycle
▪ Quality differences
▪ Product differentiation
▪ Brand identity/loyalty
▪ Switching costs
▪ Intermittent overcapacity
▪ Informational complexity
▪ Barriers to exit
Practical Insight
Quality Management Programs
Today’s customers demand and expect high quality. Companies that do not make quality a priority
risk long-run survival. World-class organizations such as General Electric and Motorola attribute
their success to having one of the best quality management programs in the world. These
companies were some of the first to implement a quality program called Six Sigma, where the
level of defects is reduced to approximately 3.4 parts per million. To achieve this, everyone in the
company is trained in quality. For example, individuals highly trained in quality improvement
principles and techniques receive a designation called “Black Belt.” The full -time job of Black
Belts is to identify and solve quality problems. In fact, Motorola was one of the first companies to
win the prestigious Malcolm Baldrige National Quality Award in 1988 1, due to its high focus on
quality. Both GE and Motorola have had the primary goal of achieving total customer satisfaction.
To this end, the efforts of these organizations have included eliminating almost all defects from
products, processes, and transactions. Both companies consider quality to be the critical factor
that has resulted in significant increases in sales and market share, as well as cost savings.
1 https://www.motorolasolutions.com/content/dam/msi/docs/en-xw/static_files/1988_Motorola_Annual_Report.pdf
Practical Insight
Supply Chain Collaboration Between Wal-Mart and Procter & Gamble 4
Before Wal-Mart and Procter & Gamble started collaborating back in the '80s, retailers shared very
little information with manufacturers. But then the two giants built a software system that hooked
P&G up to Wal-Mart's distribution centers. When P&G's products run low at the distribution
centers, the system sends an automatic alert to P&G to ship more. In some cases, the system
communicates down to the individual Wal-Mart store, allowing P&G to monitor the shelves through
real-time satellite link-ups that send messages to the factory whenever a P&G item swoops past
a scanner at the register. Within the last couple of years, the relationship has expanded to include
radio-frequency identification (RFID) technologies to gain even more insight into ridding
inefficiencies in the supply chain.
With this kind of minute-to-minute information, P&G knows when to make, ship, and display more
products at the Wal-Mart stores. There's no need to keep products piled up in warehouses awaiting
Wal-Mart's call. Invoicing and payments happen automatically too. The system saves P&G so
much in time, reduced inventory, and lower order-processing costs that it can afford to give Wal-
Mart "low, everyday prices" without putting itself out of business.
4 https://www2.cio.co.nz/article/470675/supply_chain_management_quick_guide/
Practical Insight
Apple's Supply Chain Model 5
Supply Chain Planning at Apple Inc. is the classic example of the New Product Development Process.
It's the integration of R&D, marketing, and various functions under supply chain management. Apple
Inc. accelerates the new product introduction by acquiring, licensing, and third-party businesses. Apple
Inc. has to make pre-payments to some suppliers to secure strategic raw materials.
R&D Concept Testing
• Develop new technologies • Conduct market research
• Acquire licensing of intellectual property • Conduct product testing
• Acquire third party business • Assemble cost data
• Identify potential quality defects
Pre-Launch Launch
• Manage production ramp issues • Resolve backlogs
• Provide software for new products • Make demand forecast upto 150 days
• Manage material purchase commitments
• Provide proper inventory levels
• Determine launch quantity
• Raise orders, make pre payments to
suppliers
Quaterly Review
• Review inventory level
• Adjust demand forecast
• Check product life cycle status
• Update new product development status
• Monitor current sales levels
• Monitor component cost trends
Apple Inc. purchases raw materials from various sources and then gets them shipped to an assembly
plant in China. From there, the assembler will ship products directly to consumers (via UPS/ Fedex) for
those who buy from Apple's online store. For other distribution channels, such as retail stores, direct
sales, and other distributors, Apple Inc. will keep products in Elk Grove, California (where the central
warehouse and call centre are located) and supply products from there. At the end of a product's life,
customers can send products back to the nearest Apple Stores or dedicated recycling facilities.
6 Article on ‘Management Accounting – Decision Management’ by Tim Thompson; Strategic Management of Universities in
the Ibero-America Region: A edited by Jairo H. Cifuentes-Madrid, Pablo Landoni Couture, Xavier Llinàs Audet
Example
Cost Savings initiatives and Gain Sharing arrangements at X Ltd.
▪ Supplier will deliver 3% minimum cost savings on the controllable portion of costs.
▪ Cost savings generated in the first year as a result of the supplier idea will be retained by the
supplier.
▪ Cost savings generated in the second year will be shared between X Ltd. and the supplier at
a ratio of 40%:60%.
▪ Cost savings generated in year three will be passed along to X Ltd.
▪ Any cost savings generated by an idea proposed exclusively by X Ltd. that does not require
capital investment by the supplier will be immediately passed along to X Ltd.
Case Scenario
Livlife and Raya has also entered into such arrangement. This is clearly a risky stance for the
supplier i.e., Livlife, because it could spend a fortune and walk away with nothing. Alternatively,
if the benefits to Raya are substantial, Livlife could find itself rewarded with a large return. Cost
savings might be attained from reducing the cost of supplies, implementing new skill and
technologies, revised delivery time, improvements in operations etc.
The gain, benefit, or advantage to be shared is not necessarily financial, although financial
benefits are expected to occur frequently. The Raya, for instance, will not necessarily take cost
savings in the form of a lower contract value but might require a higher specification for medical
treatment. However, to assess any financial benefit, both parties have to provide each other with
access to relevant cost numbers to determine the basis for the assessment of the benefit and the
calculation and sharing of the benefit.
Many contracts involving these arrangements have emphasis on greater openness and shared
development and improvement. In the given case gain-sharing deals are, on the face of it, a win-
win situation for both Raya and Livlife, interest of both are aligned. Livlife is trying to save costs
of Raya while Raya is trying to get world class services.
Concept Insight
Downsizing is different from rightsizing because later is less about reducing costs and more
focused on meeting new business objectives and being optimal. Downsizing is common in a
recessionary situation where downsizing helps to cut costs.
Reasons for downsizing include economic crisis, change in management, excessive workforce,
merging of companies, automation (technological change), outsourcing or offshoring, change in
strategy or area of focus, and company value.
2. Outsourcing
Outsourcing is defined as the transfer of non-core business functions or activities to other external
firms or organizations that specialize in that type of work. The external agency is referred to as a
"Third Party Service Provider" as the set of business processes or the specific project is related to
the arrangement between the client, "The First Party" and the end user , or "The Second Party".
Pros of outsourcing include reduced cost of operations, improved productivity (opportunity to focus
on core functions), striving or driving for specialization, and flexibility (to scale up or down).
Shortcomings of outsourcing include cultural differences, security issues (reliability), and
communication problems (privacy or trade secrets).
The following steps should be taken to ensure the success of outsourcing strategies –
1. When it comes to outsourcing vendors, the bigger and older the better.
2. Outsourcing should be avoided for jobs that are proprietary or require strict security.
3. It is best to start small and constantly monitor.
Without adequate steps, quality control issues, security violations, and poor customer service
experiences can wipe out all cost savings attributed to lower wages and more.
Practical Insight
Outsourcing Practices
The Challenge
A reputed global biopharmaceutical services company needed a recruitment solution that would
not only source and screen potential candidate, but also develop and build talent pipelines,
understand the labour market, deliver top candidates during periods of heavy hiring, scale up and
down quickly, and build a strong connection between the hiring manager and recruiting
consultants.
The solution
Company selected ‘IBM Talent Acquisition & Optimization’ and ‘IBM Kenexa Brass Ring on Cloud’
to attract top talent and meet its organizational hiring needs.
The benefits
▪ Hired at 90 percent over forecast in the program’s first year.
▪ Delivered a multi-regional solution, including North America and 17 countries in Europe.
▪ Lowered time-to-fill by 40 percent.
3. Offshoring
Offshoring is the process of moving or relocating an organization's business or functions to another
country where the cost of running such a business or function is lower or cheaper than in the home
country. As a result, offshoring entails establishing physical infrastructure in a different re gion or
country. There is no physical transfer of assets in outsourcing; instead, services are assigned or
delegated to another party or agency that may be located in another region or country.
Concept Insight
It is possible to outsource work but not offshore it; for example, hiring an outside law firm to review
contracts instead of maintaining an in-house staff of lawyers.
It is also possible to offshore work but not outsource it; for example, a Dell customer service centre in
India can serve American clients.
Offshore outsourcing is the practice of hiring a vendor to do the work offshore, usually to lower costs
and take advantage of the vendor's expertise, economies of scale, and large and scalable labour pool.
SUMMARY
❑ Cost of Quality – It is the sum of the costs related to prevention and detection of defects and
the costs incurred due to occurrences of defects. Cost of quality consists of the Prevention
Cost, Appraisal Cost, Internal Failure Cost and External Failure Cost.
❑ Total Quality Management – TQM aims at improving the quality of organizations outputs,
including goods and services, through continual improvement of internal practices.
The plan – do – check – act (PDCA) cycle describes the activities a company needs to perform
in order to incorporate continuous improvement in its operation.
6Cs’ - Commitment, Culture, Continuous Improvement, Co-operation, Customer Requirements
and Control.
❑ Supply Chain Management – The term supply chain can be referred to as the entire network of
organisations working together to design, produce, deliver and service products.
(a) Types of Supply Chain based on forecasted demand and actual demand are push and
pull supply chain
(b) Key to Supply Chain Processes –
▪ Customer Relationship Management – Understanding customer needs and
providing them with the best possible solution to assist in customer retention and
driving sales growth.
▪ Customer Service Management – Better customer service gives higher customer
retention. Customer Service is the source of customer information.
▪ Demand Management Style – Flexibility in manufacturing process to react to
changing market is a must. Orders processed under JIT with minimum lot sizes have
shorter cycle time and thus increases efficiency in meeting customer demands.
▪ Order Fulfilment – Timely fulfilment of customer demands.
A. LEAN SYSTEM
Lean System (a generic but universal incarnation of Toyota Production System) lays its foundation
on the premise of lean thinking, which is an organized management philosophy for aiming to reduce
process waste without sacrificing productivity within a manufacturing system to maximise the value
of the product to the customer. Hence, lean implementation emphasizes the importance of optimizing
workflow through strategic operational procedures while minimizing waste and being adaptable.
To start, a right mindset is required. A manager needs to be a ‘lean manager’, the one who leans on
the value chain by identifying those value chain activities which ‘providing maximum value to
customers’ and eliminating others (non-value-added activities or wastes). While doing so, a lean
manager needs to carry the reverse engineering (backward process) ideology.
Do You Know?
What are the wastes that a lean system will reduce?
There are Seven Wastes classified by Taiichi Ohno, the father of the Toyota Production System -
▪ Overproduction: Producing ahead of demand.
▪ Inventory: Having more inventory than what is minimally required at any point in the process,
including the end-product.
▪ Waiting: Waiting includes products waiting on the next production step.
▪ Motion: People or equipment moving or walking more than what is required to perform the
process.
▪ Transportation: Moving products that are not actually required to perform the process.
▪ Defects (non-right first time): That required repair or rework.
▪ Over-Processing: Unnecessary work elements (non-value-added activities).
Some of the techniques that advance lean thinking and are explained in further sections of this
chapter are Just-in-Time (JIT), Kaizen Costing, 5S, Total Productive Maintenance (TPM), Cellular
Manufacturing/ One-Piece Flow Production Systems, and Six Sigma. These techniques, in some way
or another adherence to the core principles of lean thinking, such as–
▪ Do right the first time (perfect first-time quality),
▪ Waste minimization,
▪ Continuous improvement,
▪ Flexibility (adaptability), etc.
Since a lean system follows a single piece flow, it is expected to result in the elimination of waste
of labour, overproduction, space, defects, inventory, and transportation. Therefore, the
characteristics of lean manufacturing are –
▪ Zero waiting time
▪ Zero inventory
▪ Pull processing
▪ Continuous flow of production
▪ Continuously find ways of reducing process time.
Benefits of lean management
The lean management system is expected to realise the following benefits –
▪ Improved quality and fewer defects due to single piece flow.
▪ Reduced inventory because it believes in producing, purchasing, or storing only that much
inventory which is needed for the next operation.
▪ It requires less space due to manufacturing cells and squeezing machines together so that the
same can be operated by single operators with the fewest number of motions.
▪ Enhances overall manufacturing flexibility because a smaller number of activities (only those
that are capable of generating value) are retained in the value stream system, resulting in the
organisation having more lead time to serve the customer, which enhances adaptability or flexibility.
▪ It makes identifying future kaizen simpler because single piece flow opens up the shop floor (by
eliminating defects and WIP inventory), which will help to trace productive problems and improve
them.
▪ Ensure a safer work environment. Since the manufacturing cells are in use, worker has to perform
repeated tasks, which will reduce or eliminate the unexpected movement, which is one of the root
causes of accidents at the workplace. Therefore, by eliminating the cause of accidents, lean leads
to a safe environment.
▪ Improve employee morale – Production problems are easily identified and solved. Hence, quick
and correct feedback towards employee work will give him more ownership and high morale.
Issues addressed by lean management
▪ Low Productivity – Lean management increases yields, enabling the organisation to generate
more satisfied customers and higher profits.
▪ Prolonged Cycle Time – Complaint resolved beyond the timeline gives birth to another complaint;
hence with the help of lean management manufacturing, flexibility is enhanced and there is more
lead time for the organisation to resolve the issue.
▪ Costly Organisation – As a tool of waste reduction, lean management will give a chance of cost
control.
▪ Rampant Wastage – Less number of activities to generate maximum value will make the value
stream free of any waste (optimal use of limited factor resources). Kaizen is also used to do
continuous and future improvement (waste reduction).
▪ Dissatisfied Customers and Employees – Companies need to have a program called ‘WOCAS’
(what our customers are saying) and high morale employees through lean management by
generating value and immediate feedback, respectively.
Employees
Customer Organisation
They are the organisation's
Nothing is more important Mix of people (Director, CEO
wheel.
than a delighted customer. & Owners) and Processes.
Hence, need to be well
Because value is defined by Well managed and balanced.
compensated and
the customer.
professionally directed.
1. Just-in-time (JIT)
A just-in-time approach is a collection of ideas that streamline a company’s production process
activities to such an extent that waste of all kinds, viz., time, material, and labour, is systematically
driven out of the process. JIT has a decisive, positive impact on product costs.
CIMA defines:
“Just-in-time (JIT): A system whose objective is to produce or to procure products or components
as they are required by a customer or for use, rather than for stock. The just -in-time system Pull
system, which responds to demand, in contrast to a push system, in which stocks act as buffers
between the different elements of the system such as purchasing, production , and sales”.
“Just-in-time production: A production system which is driven by demand for finished products,
whereby each component on a production line is produced only when needed for the next stage”.
“Just-in-time purchasing: A purchasing system in which material purchases are contracted so that
the receipt and usage of material, to the maximum extent possible, coincide”.
Comments
Though KPL is saving `41,017 by changing its production system to Just-in-time but it has to
consider other factors as well before taking any final call, which are as follows:
(i) KPL has to ensure that it receives materials from its suppliers on the exact date and at the exact
time when they are needed. Credentials and reliability of the supplier must be thoroughly
checked.
(ii) To remove any quality issues, the engineering staff must visit suppliers ’ sites and examine
their processes, not only to see if they can reliably ship high-quality parts but also to provide
them with engineering assistance to bring them up to a higher standard of product.
(iii) KPL should also aim to improve quality at its process and design levels with the purpose of
achieving “Zero Defects” in the production process.
(iv) KPL should also keep in mind the efficiency of its work force. KPL must ensure that labour’s
learning curve has reached a steady rate so that they are capable of performing a variety of
operations in an effective and efficient manner. The workforce must be completely retrained
and focused on a wide range of activities.
2. Kaizen Costing
The kaizen (改善 is a Japanese word that means ‘Continuous Improvement’.
Kaizen Costing is a cost reduction system through small, continuous, and incremental improvements.
It is based on the belief that nothing is ever perfect, so improvements and reductions in cost are always
possible. Kaizen goals are set based on actual results from a prior period. The goal is to reduce the
actual cost of the current period in the coming period/(s).
Figure A.5 – Kaizen Costing Chart used by Daihatsu Motor Company (Osaka, Japan) 1
Concept Insight
Kaizen Principles – The Core of Kaizen
There are 5 Fundamental Kaizen Principles that are embedded in every Kaizen tool and in every
Kaizen behavior. The 5 principles are –
1. Know your customer – Understand them and their interests so that business can enhance
their experience. (Aim for creating customer value)
2. Let it Flow – Everyone in the organisation aims to create value and eliminate waste. (Aim for
targeting zero waste)
3. Go to Gemba – Value is created where things actually happen - go there; go to the real place.
Hence, the act of visiting the shop floor in Lean and Kaizen. (Aim for following the action)
4. Empower People – Set the same goal for your teams and provide a system and tools to reach
them. (Aim for organizing your teams)
5. Be Transparent – Performance and improvement should be tangible and visible. (Aim for
speaking with real data)
Therefore, the premise of Kaizen practice includes –
✓ The system seeks gradual improvements in the existing situation at an acceptable cost.
✓ It encourages collective decision making and the application of knowledge.
✓ There are no limits to the level of improvement that can be implemented.
✓ Kaizen involves setting standards and then continually improving these standards to achieve
long-term sustainable improvements.
✓ The focus is on eliminating waste, improving systems, and improving productivity.
✓ It involves all employees and all areas of the business.
Do You Know?
How is the cost reduction target established (Agreed Target/ Goal)?
While establishing the cost reduction target, the workforce is empowered through the bottom-up
path, i.e., asking them to participate in establishing the target and searching for or suggesting
means to attain it.
Case Scenario
M. India Ltd. (MIL) is an automobile manufacturer in India and a subsidiary of Japanese automobile
and motorcycle manufacturer Leon. It manufactures and sells a complete range of cars, from the
entry level to the hatchback to sedans and has a present market share of 22% of the Indian
passenger car market. MIL uses a system of standard costing to set its budgets. Budgets are set
semi-annually by the Finance department after the approval of the Board of Directors at MIL. The
Finance department prepares variance reports each month for review in the Board of Directors
meeting, where actual performance is compared with the budgeted figures. Mr. Suzuki, group CEO
of Leon, is of the opinion that the Kaizen costing method should be implemented as a system of
planning and control in the MIL.
Required
RECOMMEND key changes vital to MIL’s planning and control system to support the adoption of
‘Kaizen Costing Concepts’.
Solution
Kaizen Costing emphasizes small but continuous improvement. Targets, once set at the beginning
of the year or activities are updated continuously to reflect the improvement that has already been
achieved and that is yet to be achieved.
The suggestive changes which are required to be adopted in Kaizen Costing concepts in MIL are
as follows:
Standard Cost Control System to Cost Reduction System: Traditionally Standard Costing system
assumes stability in the current manufacturing process and standards are set keeping the normal
manufacturing process into account thus the whole effort is on to meet performance cost standard.
On the other hand, Kaizen Costing believes in continuous improvements in manufacturing
processes and hence, the goal is to achieve cost reduction target. The first change required is the
standard setting methodology i.e., from earlier Cost Control System to Cost Reduction System.
Reduction in the periodicity of setting Standards and Variance Analysis: Under the existing planning
and control system followed by the MIL, standards are set semi-annually and based on these
standards monthly variance reports are generated for analysis. But under the Kaizen Costing
system cost reduction targets are set for small periods, say for a week or a month. So, the period
covered under a standard should be reduced from semi-annually to monthly and the current
practice of generating variance reports may be continued or may be reduced to a week.
Participation of Executives or Workers in standard setting: Under the Kaizen Costing system
participation of workers or executives who are actually involved in the manufacturing process is highly
appreciated while setting standards. So, the current system of setting budgets and standards by the
Finance department with the mere consent of Board of Directors required to be changed.
Practical Insight
Kaizen Practices2
Kaizen Costing becomes part of the Package. At the start of 2002 a UK company called Kappa
Packaging (now part of the Smurfit Kappa Group) had a factory in Greater Manchester that made,
among other products, cartons to hold bottles of drink. That year, the firm introduced a new approach
to cutting the amount of wastepaper and cardboard it was producing, which stood at 14.6 percent of
the raw materials consumed. The new approach included the following initiatives: a) Making
employees more aware of how much waste was being produced. b) Requiring them to monitor the
amount of waste for which they were individually responsible. c) Establishing a Kaizen team to find
ways of reducing waste. As a result, Kappa was able to reduce waste from 14.6 percent to 13.1
percent of raw materials used by the end of 2002 and down to 11 percent in 2003. Each percentage-
point saving was worth an estimated £110,000 a year.
3. 5S
5S is the foundation of the pillars of TPM (Total Productivity Maintenance). 5S is the name of a
workplace organization method that uses a list of five Japanese words: seiri, seiton, seiso,
seiketsu, and shitsuke. It explains how a workspace should be organized for efficiency and
effectiveness by identifying and storing the items used, maintaining the area and items, and
sustaining the new order.
Figure A.12 – 5S implementation as part of the PDCA Cycle for continuous improvement and innovation
Case Scenario
Y & E Chartered Accountants offers a wide range of specialized, multi -disciplinary professional
services that meet the immediate as well as the long-term business needs of clients. One of
partner ‘E’ was upset with office documentation. ‘E’ argued that a document management solution
is needed to maximize efficiency within the firm. The senior partner ‘Y’ has recently attended a
seminar on lean system and heard the ‘5S’. He said that old files hide the key files from the eye
and force staff to ask which to use. Accordingly, he desires to implement ‘5S’.’
Required
ADVISE on the implementation of ‘5S’ in Y & E.
Solution
Office processes often have huge amounts of paperwork, and this not only makes processes
slower but also allows errors to be introduced. 5S is a method of both cleaning out the working
area and maintaining its cleanliness to improve process quality. The 5S process is based on:
Sort (Seiri)
This is the sorting and removal of unnecessary files, papers, books, and documents in the work
area. Sorting is designed to make the work area neat, organized and arranged so that relevant
items can be found easily. If an item is not relevant to the work, then it should not be in the work
area.
LEARNING OUTCOMES
After studying this chapter, you will be able to:
❑ EVALUATE and ANALYSE, the factors that are acting a key driver of
change in business environment that are also referred as to change
drivers.
❑ UNDERSTAND and EVALUATE, how the dynamic business environment
is giving rise to new business models.
❑ UNDERSTAND and APPRAISE the emerging business models relevant
to Hyper Disruptive Environment, Sustainability, Emerging markets.
❑ EVALUATE and APPLY strategies (drafting and implementation) in
response to change drivers that results in emerging business models.
CHAPTER OVERVIEW
The business environment is, by definition, dynamic and ever-changing. This chapter will focus on
the underlying elements driving the change. The chapter then highlights how a rapidly changing
business environment is giving rise to new business models and how organisations are gearing up
for such emerging models. The chapter also discusses the various business models relevant to the
hyper-disruptive business environment, sustainability, and emerging markets. Towards the end, it
suggests strategic responses to such emerging business models.
Prior to adapt the change, it is essential for business leaders (including management accountants)
to understand the change and the drivers thereof. This helps in the effective analysis of the business
environment. The change drivers include a wide range of key elements, including hyper
competition, advancements in technologies (especially in the digital space), disruptions due to an
increasing focus on sustainability, stakeholders, innovation, incubation of ideas, etc. The quantum
and force of change drivers collectively determine the degree of environmental dynamism. Some of
these change drivers are causes, whereas others are effects.
To illustrate, digital technologies are cause of the driver, while advanced manufacturing is the effect of
the driver. Ecosystem is the root cause, but agile organisations and lean start-ups are effects. Let’s go-
through the prominent change drivers that revamped the business environment in the last decade or so.
1. Digital
11. Supply Chain Technologies 2. Business
Partnerships Ecosystems
Change Drivers
of Dynamic
Business 4. Transformation and
9. Intrapreneurship Disruption
Enviornemnt
8. Start-ups vs 5. Advanced
Incumbents Manufacturing
1. Digital Technologies
Digital technologies are electronic or automated tools, systems, devices, and resources that
generate, store, or process data. Well known examples include multimedia, smart phones or devices,
the cloud, the internet of things (IoT), blockchain, etc. Network or Internet is the underlying basis of
all digital technologies’ advancements.
The last two decades have remained revolutionary from the perspective of rapidly transforming
digital technologies. To illustrate, we witness gizmo devices such as mobile phones becoming
smarter through technological advancement, which bring shopping, banking, marketing , and many
more to your figure-tip when connected to other technologies such as cloud-based apps or the
internet. Further, AI-enabled frontier technologies in the health sector are assisting in the saving of
lives, the diagnosis of illnesses, and the extension of life expectancy.
Do You Know?
What is the UN observation on the advancement of digital technologies1?
Digital technologies have advanced more rapidly than any innovation in our history, reaching
around 50 percent of the developing world’s population in only two decades and transforming
societies. By enhancing connectivity, financial inclusion, and access to trade and public services,
technology can be a great equalizer.
Eleven key technologies for Digital Transformation are enumerated below with brief insight that
created buzz in the last decade and are expected to continue to dominate in times to come.
1.1 Internet of
1.11 Blockchain Things (IoT) 1.2 Robotics
Digital
1.9 Augmented Technologies 1.4 Automation
Reality
1 https://www.un.org/en/un75/impact-digital-technologies
Manufacturers are achieving important digital transformation goals, such as increased efficiency,
flexibility to respond more quickly to market and customer demands, and innovation across their
products and services, with the help of the IoT's increased insights and analytics.
Practical Insight
IDC research suggests that by the end of 2019, 75% of large manufacturers update d their
operations with the Internet of Things (IoT) and analytics-based situational awareness 2.
1.2 Robotics
Robotics refers to technologies that are able to sense input, apply rules or artificial intelligence, and
react physically. Robotics is now being used for more analytically based tasks that are supported by
IoT, sensors, and artificial intelligence, as well as for repetitive tasks. Robotics is an important
component of digital transformation because it increases operational effectiveness and frees up
human labor for higher-level tasks.
Robotics are found to be highly useful in sectors such as Health Care, Agriculture, Food Preparation,
Military/Defense, and Manufacturing. Robotics are used in a variety of manufacturing processes to
help boost output and efficiency while cutting costs. Similar to the healthcare sector, many robots in
manufacturing work alongside humans to complete tedious, complex, or repetiti ve tasks under the
direction and control of the worker. Precision and the capacity to be reprogrammed for tasks of
different sizes and complexity are valued more highly with these machines than speed. The use of
robotic manufacturing technology is also getting safer. Robots can detect and avoid (replace)
humans in the workplace, thanks to cameras, sensors, and automatic shut-off features.
Practical Insight
The new World Robotics Report3 shows an all-time high of 5,17,385 new industrial robots installed
in 2021 in factories around the world. This represents a growth rate of 31% year -on-year and
exceeds the pre-pandemic record of robot installation in 2018 by 22%. Today, the stock of
operational robots around the globe hit a new record of about 3.5 million units. Asia remains the
world’s largest market for industrial robots. 74% of all newly deployed robots in 2021 were installed
in Asia (2020: 70%).
1.3 Artificial intelligence (AI)
AI deals with technologies that can react to data in a way that resembles human thought. Artificial
intelligence is releasing previously unattainable analytics and insights, driven by the exponential
growth in data and access to data, as well as computer power and connectivity. New strategies for
approaching and resolving issues are consequently emerging.
2
https://manufacturingdigital.com/technology/jump-starting-digital-transformation-manufacturing
3 https://ifr.org/ifr-press-releases/news/wr-report-all-time-high-with-half-a-million-robots-installed
For instance, generative design makes use of AI to quickly optimize designs based on a list of system
design specifications. It generates answers that would require hours (and hours) of engineering
work.
Practical Insight
A McKinsey survey from 2021 found that 56% of companies have adopted AI in at least one
function within the organization, which is an increase from 50% the year prior 4.
Concept Insight
Machine learning is an application of AI. It is the process of using mathematical models of data
to help a computer learn without direct instruction. This enables a computer system to continue
learning and improving on its own, based on experience.
1.4 Automation
Automation, in a layman’s sense, deals with technology that is able to perform work on its own,
which was traditionally performed by humans.
Automation is a term for technology applications where human input is minimized. This includes
business process automation (BPA), IT automation, and more. Types of Automation include–
1.4.1 Basic automation takes simple, rudimentary tasks and automates them. Business process
management (BPM) and robotic process automation (RPA) are types of basic automation.
1.4.2 Process automation ensures the consistency and transparency of business processes.
Dedicated software and business apps are typically used to manage it. Process automation includes
workflow automation and process mining.
1.4.3 Integration automation is where machines can mimic human tasks and repeat the actions
once humans define the machine rules.
1.4.4 Artificial intelligence (AI) automation is the most complex level of automation. With the
addition of AI, machines can "learn" and make decisions based on previous situations encountered
and analyzed.
1.5 Cloud
Cloud allows computer infrastructure and software services to be delivered over a network. The
cloud is an important component of most digital transformation initiatives because it allows for
greater flexibility and agility across an organization, as well as faster scalability in many cases.
4 https://www.mckinsey.com/capabilities/quantumblack/our-insights/global-survey-the-state-of-ai-in-2021
Cloud computing is the act of using an interconnected network of Internet-hosted remote servers to
manage, store, and process data.
The five key terms that describe cloud computing are XaaS (Anything-as-a-Service), SaaS
(Software-as-a-Service), PaaS (Platform-as-a-Service), IaaS (Infrastructure-as-a-Service), and
BaaS (Backend-as-a-Service).
Practical insight
Migration strategies from specific application to the cloud – Efforts and Opportunities
“5 R's” model published by Gartner in 2010, which defined all the basic options to migrate a
specific application to the cloud.
Amazon Web Services (AWS) adopted this model and extended it to the 6 R's: Re -host, Re-
platform, Re-factor/Re-architect, Re-purchase, Retire and Retain 5.
The complexity, opportunity to optimize, and effort of these six strategies vary (Cost and time). The
graph below should help you understand which strategy is the simplest and which is the most difficult.
5 https://aws.amazon.com/blogs/enterprise-strategy/6-strategies-for-migrating-applications-to-the-cloud/
3D printing can cost anywhere from $3 up to thousands of dollars 6. It's hard to get the exact cost of
a 3D print without a 3D model. Factors such as material, model complexity, and labo ur affect the
price of 3D printing. 3D printing services can sometimes cost more than an entry level 3D printer.
Practical Insight
According to McKinsey, the additive manufacturing market will grow to $250 billion by 2025 7.
1.8 Digital Twin
Digital twins, as one of the Strategic Technologies, play an important role in digital transformation.
Digital twins are virtual representations of their physical counterparts. They can represent products,
processes, or tasks and be used to comprehend and even predict their physical c ounterpart. With
the increasing adoption of IoT, augmented reality, and digital thread, digital twins have become more
powerful and impactful through the integration of product lifecycle and design/engineering CAD
data. There is a growing number of digital twin use cases across the value chain, including
engineering, operations, maintenance, and service.
1.9 Augmented Reality
Augmented Reality makes it possible to connect the physical, digital, and human worlds more seamlessly.
Augmented reality is "IoT for humans". When frontline workers wear Microsoft HoloLens, they can
connect to their physical surroundings while also leveraging the cloud's data and analytics power 8.
This allows them to complete a task with real-time information in a highly visual format.
This is just one of the many emerging augmented reality use cases in the industrial market. Improved
worker productivity and quality, differentiated products and next-generation human machine
interfaces, knowledge transfer and training, and new customer support and services are all
advantages of Enterprise Augmented Reality.
1.10 Mobile Internet
Mobile internet enables continuous connectivity of computing and smart devices. Mobile has
irreversibly altered the world we live in over the last two decades. Mobile's influence pervades our
daily lives, from increased connectivity to powerful technology at our fingertips. Mobile technologies
present numerous opportunities for manufacturing and industrial companies, particularly with the
upcoming capabilities of 5G. It's no surprise that 81% of manufacturing CEOs consider mobile
technology to be strategically important 9.
In many ways, mobile is a foundational technology that enables other game -changing technologies.
Shop floor workers, for example, are using smartphones to view machine data points in augmented
reality (AR); field service technicians can get interactive, real-time guidance from experts at
headquarters through AR to repair an industrial asset; engineers are using their phones to review
CAD designs on-the-fly; and global sales teams are creating quotes for custom products based on
current pricing and delivery dates.
6 https://prtwd.com/guides/how-much-does-3d-printing-cost/
7
https://www.cio.com/article/217888/3d-printing-will-disrupt-manufacturing-industry.html
8
https://www.ptc.com/en/blogs/corporate/digital-transformation-technologies
9
https://www.forbes.com/sites/louiscolumbus/2019/04/10/how-securing-mobile-devices-is-defining-manufacturings-
future/?sh=718fa9d72097
As mobile technology improves with 5G, ripple effects will be felt throughout the manufacturing
industry. Improved connectivity for robotics and automation in the factory, as well as faster real -time
analytics from field operations, will be available.
1.11 Blockchain
Blockchain technology is a system that records public transactions, or blocks, in multiple records
known as "chains" in a system linked by peer-to-peer connections. This type of storage is also known
as an electronic or digital ledger. Each block on the chain contains several transactions, and when
a new transaction occurs on the blockchain, a record of that transaction is added to the ledger of
each participant.
DLT (Distributed ledger technology) is a decentralized database with many members. Every
transaction in this ledger is verified and protected by the holder's digital signature. As a result, the
digital ledger's data is extremely secure.
Blockchain is a data storage method that makes it difficult or impossible to change, hack, or defraud
the data. A blockchain is a digital transaction log that is replicated and distributed across a network
of computer systems. A blockchain is a type of distributed ledger technology in which transactions
are recorded using an immutable cryptographic signature known as a hash.
Concept Insight
A change in business model on account of technological advancements can be classified into the
following categories–
❑ Automation is the mere replacement of humans with technology without impacting
organisational culture or business processes. Installation of a passbook update kiosk in the bank
lounge.
❑ Extension is using technology to perform extended (new) tasks or processes that enhance the
functions or utility of product/ service. Mobile Banking is an extension of internet banking.
❑ Transformation is the use of technology that not only revamps the product or services that an
organisation offers but also its process and culture. Installing ATMs across the towns and
villages (Withdrawal of cash, print of the mini statement of transactions, balance enquiry, etc.
can be done outside of banking hours as well), digital clearing system, etc.
2. Business Ecosystems
‘Ecosystem’ is a metaphor from the field of ecology, first used in 1930 in the context of organisms 10.
Business strategist James Moore in 199311 compared companies operating in the increasingly
interconnected world of commerce to a community of organisms adapting and evolving to survive.
He proposed that a company should be viewed as a member of a business ecosystem with
participants from multiple industries rather than as a single firm.
10 The term ecosystem was coined in the 1930s by British botanist Arthur Tansley to describe a community of organisms
interacting with one another and their environments: air, water, earth, and so on
11 In the 1993 Harvard Business Review article "Predators and Prey: A New Ecology of Competition"
Do You Know?
How does a changing business eco-system impact strategies towards competitive advantage?
Networks are rapidly replacing traditional markets. This shift necessitates new strategies,
wherein the basis of competitive advantage shifts from what the organization 'does better' than
its competitors to how its partnerships and alliances help all involved parties 'do better'.
Understanding business ecosystems is becoming increasingly important for keeping up with and
staying ahead of the pace of change. Participants in business ecosystems collectively create more
value than they could individually. Companies that do not embrace business ecosystems risk falling
behind their competitors.
Ecosystem Strategy Framework involves answering of 8 descriptive questions–
▪ Should we engage in a business ecosystem?
▪ How can we identify viable ecosystem opportunities?
▪ Which role should we play in the ecosystem?
▪ How can we build our own ecosystem?
▪ How can we win against competing ecosystems?
▪ How can we capture value in our ecosystem?
▪ How can we benefit as an ecosystem contributor?
▪ How can our ecosystem strategy evolve over time?
Depending upon the purpose and modality of building ecosystem, it may be described in terms of
innovation ecosystems (together striving for innovation), platform ecosystems (complementary
products around a single product or service), and service ecosystems (exchange of value among
the parties involved).
Illustration - Pharma companies coming together even across borders to share their resources and
knowledge so that together they can develop, manufacture, and distribute the vaccines and
medicines that can prevent from/ cure COVID-19 is an apt case of an innovative ecosystem wherein
logistic and fund support (largely from government agencies and public bodies) were also involved
in addition to pharmaceutical cooperations.
To illustrate further, Covishield has been developed by the University of Oxford along with the
British pharmaceutical major AstraZeneca. Pune-based Serum Institute of India, the world’s largest
vaccine manufacturer in terms of numbers, partnered with Oxford University to manufacture their
Covid-19 vaccine in India 12. The Serum Institute of India produced 5,000 doses of the vaccine per
minute in their assembly lines 13. Funding (as an advance for the order) and logistic support were
assured by the Indian Government.
Do You Know?
How does the business ecosystem influence cost, value, and performance?
While answering the question specified above, how can we build our own ecosystem? Every
organisation must focus on the secret source in the design of business ecosystem: three mutually
reinforcing flywheels that are data flywheel (learning effect from more and richer data that provide
deeper and better insight), growth flywheel (network effects from more users and partners by
offering them an improved value proposition), and finally the cost flywheel (scale effects by
spreading the fixed cost that results in lowering the unit costs; which in turn improve s the value
proposition).
Organizations must understand their external environment in terms of business ecosystems, in
which various organizations collaborate and cooperate to create value while also seeking to
capture value for themselves.
12
https://www.cnbc.com/2021/03/19/india-covid-19-vaccination-drive-serum-institute-director-weighs-in.html
13 https://www.livemint.com/news/india/5000-doses-of-covishield-minute-a-look-at-serum-institutes-s-vaccine-journey-
11610809058833.html
14 BCG Henderson Institute Analysis
3. Hyper Competition
Hyper-competition is a condition when the competition is so intense that it creates instability in the
market. The bargaining power of buyers is also getting stronger, putting more pressure on producers.
Consumers can easily switch to competing products when unsatisfied with a product. That, in turn,
drives them to want not only higher quality products but also cheaper ones. Because of these
conditions, any competitive advantage an organisation establishes cannot be sustained for a long
time; therefore, businesses must constantly change their strategies.
3.1 The Characteristics of the Hypercompetitive Market are listed below–
▪ High level of rivalry among the players.
▪ Strategic maneuvers occur at a quick, intense, and unexpected pace.
▪ Rapid technological and structural changes.
▪ Adoption of flexible strategies is common because the competitive landscape is changing rapidly .
▪ Low entry barriers, allowing new players to enter and challenge existing companies.
▪ The diminishing of geographic and industrial barriers due to globalization.
▪ Significant global alliances among competitors with deep pockets.
▪ Strong bargaining power of the buyer (with fragmented preferences).
▪ The competitive advantage is temporary. The new strategic competitiveness would immediately
appear, destroy, and replace the old ones.
Do You Know?
How does hyper-competition influence cost, value, and performance and reflect in strategies?
In a hyper competitive market, companies often aggressively challenge their competitors not to sustain
competitive advantage but to sustain value creation. Organizations strive for a series of short-term
advantages relying upon market disruption; when such disruption matures, such organizations will
move to another disruption; basically, they have to be too innovative. An example of certain cellular
phone manufacturers can be considered here: they keep on launching new editions of phones to stay
ahead of rivals, who undoubtedly deal in the low-price category but are perfect substitutes due to
features or functions.
Concept Insight
Disruptive Innovation is a bit different from Sustaining Innovation
All innovations are not disruptive. While disruptive innovation expands the market, sometimes
displacing long-standing incumbents; sustaining innovation is incremental and targets existing
customers who used a previous iteration of the product or service. Smartphone companies are
examples of sustaining innovation because they continuously innovate and use new technologies
to improve their existing products in order to increase profitability.
15 https://www.globaldata.com/company-profile/amazoncom-inc/
Do You Know?
What are the components of Disruptive Innovation?
There are three main components of disruptive innovation:
▪ Enabling Technology - Innovation requires the ability to create a better product. The transistor
radio, for example, used the broadcast network to create a low-cost portable radio.
▪ Disruptive or Innovative Business Model - For a disruptive business to succeed, it must use a
new business model that targets new or low-end customers within a given industry. This is what
distinguishes a disruptive innovation from a standard innovation. Even if they are unique, not all
innovations are disruptive.
▪ Coherent Value Network - For a disruptive innovation to succeed, it must be accepted across a
coherent value network, which includes suppliers.
Innovative Enabling
Business Technology
Model
Coherent
Value
Network
Disruptive Innovation
5. Advanced Manufacturing
Advanced manufacturing is the use of innovative technologies and methodologies for improved
competitiveness in the manufacturing sector. Critical thinking, problem-solving, and an agile mindset
are skill sets that manufacturers will need more and more to support advanced manufacturing.
Do You Know?
What is the aim of advanced manufacturing, and how does it impact the cost and value of the product
that an organisation offers? The aim of advanced manufacturing is to–
▪ Enhance output.
▪ Increase added value, quality, responsiveness to the market, and flexibility.
▪ Reduce time to market, unit quantities, material content, and material inventory.
▪ Remove the scenario of underutilized capital plant.
While attaining the above objectives, advanced manufacturing controls the cost and enhances the value.
Meredith and Hill17 have classified advanced manufacturing technologies based on their level of
integration, as shown below in table–
Level Integration Advanced manufacturing technologies
1 Stand-alone Equipment such as robots or numeric controlled (NC) machine tools.
(or unitary)
2 Cells Consisting of groups of equipment and materials for the production of
parts, typically utilizing group technology (GT) and computer-aided
manufacturing (CAM). At its highest level of integration, a cell might
form a flexible manufacturing system (FIMS).
17J.R. Meredith, M.M. Hill. Justifying New Manufacturing Systems: A Managerial Approach. Sloan Management Review, 28
(1987), pp. 49-61.
3 Linked Involving cells from level 2 being linked together into larger production
islands systems which typically utilize CAD/CAM, automated storage and
retrieval systems, JIT, and MRP II.
4 Full Providing linkage of the entire manufacturing function and all its interfaces
integration through an extensive information network. This level of integration is
commonly known as computer integrated manufacturing (CIM).
Explanation of techniques for advanced manufacturing
▪ Group technology/ cellular manufacturing (GT/CM) is a form of production based on a coding system
for parts that allows families of parts to be assigned to manufacturing cells for production.
▪ Numerically controlled (NC) machines are preprogrammed through magnetic tape or microcomputers
to perform a cycle of operations repeatedly.
▪ Flexible Manufacturing System (FIMS) is a system in which groups of production machines are
sequentially connected by automated materials handling and transferring machines and integrated into
a computer system.
▪ Computer Aided Design (CAD) is a computerized process for designing new products or modifying
existing ones.
▪ Computer Aided Manufacturing (CAM) involves the use of computers to plan and program production
equipment in the production of manufactured items.
▪ Computer Integrated Manufacturing (CIM) is the total integration of all business functions associated
with production through computer systems. The components of CIM are shown in the figure.
• CAD • CAM
• CAE • CM
• GT
Business Function
or System Manufacturing
Management Control
• TQM • CAM
• JIT • FIMS
• MRP/DSS • NC
6. Lean Start-up
One must acknowledge that putting up (or committing) too many resources upfront may make any
business vulnerable to hostile and undesired changes, especially if their strategy doesn’t work-out
as a result of the incorrectness (either completely or partially) of assumptions made due to the
irreversibility involved. Here, it is worth noting that around 70 to 80 percent of the product cost is
committed during the design phase only.
Hence, instead of creating elaborative business plans, Lean Startup offers a framework for startups
to test, learn, and adjust their strategy through a cycle of continuous improvement. Alternatively , one
can say that lean startup is an approach to build new businesses based on the belief that
entrepreneurs must investigate, experiment, test and iterate as they develop products.
Therefore, the founders of lean start-ups don’t begin with a business plan, rather they begin with the
search for a business model. Only after quick rounds of experimentation and feedback , reveal a
model that works. Lean start-ups help the organisation to take advantage of discovery-driven
planning, additive manufacturing, design thinking, etc.
The concept of lean startup originated in the early 2000s and evolved into a methodology around
2010. Eric Ries18 explains how lean start-ups help entrepreneurs to navigate extreme uncertainties
by testing scientific hypotheses (statistical assumptions based upon which strategic options are
driven) with a minimal viable product (MVP).
To illustrate; Dropbox is one of the best-known examples of a business that has grown using lean
startup principles. Dropbox started as a minimally viable product in the form of a 3-minute screencast
showing consumers what Dropbox could do 19. Today, Dropbox has more than 700 million registered
users at the end of 2021, generated $2.32 billion in revenue in 2022, and employed 3,118 people at
the end of 202220.
6.1 Traditional vs. Lean Start-up21
In many ways, Lean Start-up is different from Traditional set-up; the major basis are listed below–
Basis Traditional Lean Start-up
Strategy Business Plan and Implementation driven Business Model and Hypothesis driven
New-Product
Product Management Customer Development
process
Either of Agile or Waterfall development Agile development (build the product
Engineering
can be used iteratively and incrementally)
Department by function (people are hired
Organisation Customer and agile development teams
for their experience and ability to execute)
Accounting (Financial Reporting using
Metrics that matters (Customer acquisition
Reporting Income Statement, Balance Sheet, Cash
cost, Lifetime customer value, etc.)
Flow Statement)
18 In his book called ‘The Lean Start-up’ published (2011) by Crown Business, New York (USA)
19
https://www.areusdev.com/types-of-minimum-viable-product-simple-explanation-with-examples/
20
https://en.wikipedia.org/wiki/Dropbox
21 Why the Lean Start-Up Changes Everything; HBR (May 2013)
Figure A.6 – Lean Start-up Methodology. The target is to spin at the maximum possible speed.
The startup will also employ an investigative development method known as the "Five Whys," which
entails asking simple questions to study and solve problems as they arise. When this process of
measuring and learning is carried out correctly, it will be clear whether or not a company is moving
the drivers of the business model.
If not, it's time to pivot or make a structural course correction to test a new fundamental hypothesis
about the product, strategy, and growth engine.
Do You Know?
Influence of Lean start-up on Cost and Efficiency
Implementing Lean Start-up in the correct way will allow an organisation to save money on waste.
Since this aims at increasing efficiency rather than lowering costs, a direct and visible reduction
in cost may not be present, but increasing efficiency would result in cost savings. Furthermore,
implementing the method may occasionally result in the emergence of some additional costs (e.g.,
the budget for experimentation).
7. Agile Organisations
An agile organization is one whose structure, policies, and capabilities are designed to allow
employees to respond quickly to changing environments. This organizational approach's primary
focus is on adapting to changing customer needs and changes in the business environment.
Source – Adapted from Exhibit 1 from the five trademarks of agile organizations 22
Concept Insight
Innovation is the Core of the Design Thinking, Lean Start-up and Agile
Innovation happens when creative solutions and technical capabilities come together. Combining
these three methodologies really drives the innovative process by involving the technical team as
early as possible.
Innovation
Design s
Thinking
Lean Start-
Agile
up
Figure A.9 – Innovations as the Core of Design Thinking, Lean Startup and Agile
Concept Insight
Comparing Design Thinking vis-à-vis Lean Start-up, Agile, and Six Sigma
Hypothesis Development Quality & Process
Empathy Based
Driven Efficiency Driven Driven
You may appreciate that over the life of a product or service that an organisation renders, each
one of these methodologies becomes helpful to focus on concept, model, product, and process,
respectively.
Students are advised to take note-
Lean Start-up and Agile were already discussed in the previous two headings. The concept of Six-
Sigma has been discussed in detail in Chapter 3. Whereas Design thinking is essentially a
problem-solving approach that has the intention to improve products. Design thinking is an
iterative process in which you seek to understand your users, challenge assumptions, redefine
problems, and create innovative solutions which you can prototype and test. The overall goal is to
identify alternative strategies and solutions that are not instantly apparent with your initial level of
understanding.
8. Start-ups vs. Incumbents
Startups have captured the spotlight in recent years with innovative concepts that have resulted in
enormous success. You've probably heard of Netflix, Uber, Paytm, and Byju’s. They are all
businesses that have used technology to establish business model/ (s), completely disrupting long-
standing and traditional established businesses through an innovative approach.
The battle between every startup and the incumbent comes down to whether the startup gets
distribution before the incumbent gets innovation.
A startup is “a temporary organization designed to look for a business model that is repeatable and
scalable.” Alternatively, it can be described as a company that is just getting started, trying out
different models, and isn't well-established in its niche. However, because they are new and more
willing to take risks, they have the potential to cause significant disruption.
8.1 Stages a start-up goes through while transforming into Unicorn (and then into
Incumbent)
There are three main stages that start-ups go through:
8.1.1 Pre-start-up stage- This is the problem-solution FIT stage. Vision and idea are conceptualised,
while considering–
▪ Who will be the customers?
▪ Which of their problems to be solved and
▪ How these will be solved?
8.1.2 Start-up stage- This is the product-market FIT stage. It starts showing commitment. It is intended
to have customer validation that the product offered is a market valuable product. Testing is also
performed to get feedback from clients and iterate the process accordingly.
8.1.3 Scale-up- This is the scale-FIT stage. It starts establishing growth, trying to get to profitable cash
flow. They are creating bigger customer bases and aim to come close to unicorns.
Do You Know?
How does intrapreneurship influence the management of Cost Strategically?
The organisation and its management must have a clear understanding of the internal value, which
intrapreneurs have (or able to create/unlock) in terms of enhanced revenue, either by cutting costs
and/or creating new processes, products, and services.
Though idea generation and incubation lab possess the features of cost and investment centre s;
intrapreneurial teams are usually considered as cost centres, but organisation striving for
sustainability (& cost efficiency) should consider these as profit-centres.
10. Innovation Hubs and Incubators
An innovation hub is a physical space that brings together researchers, creators, and innovators to
nurture ideas into industry-changing products and services.
Incubators focus on early-stage startups that do not have a business model in place. They help
nurture a startup by developing its strong idea into a viable product and are commonly referred to
as a school for startups. Incubators typically work on a fee-basis as opposed to taking an equity
stake in the startup.
Do You Know?
Incubator is same as startup hub but different from accelerator.
Incubators are also referred to as startup hubs, i.e., the places that aim to provide the 'ideal'
conditions for founders to quickly grow their young businesses; through a structured,
collaborative program. Primary Identifiers are-
▪ Guide to form a product or service.
▪ Seed funding and angel investor.
▪ Venture capital.
▪ Presentation skills and business etiquette.
▪ Training program.
▪ Networking opportunities.
Whereas accelerators accelerate growth by removing some of the risk and uncertainty involved
through a short-term program, usually for start-ups that already have a Market Viable Product
(MVP). Primary Identifier are-
▪ Focus on rapid growth.
▪ Set the time frame from weeks to months.
▪ Mentorship and guidance.
▪ Business profitability.
▪ Industry connections.
A clear differentiator between incubators and hubs is the direct contribution they make to startup
creation and success. Incubators make startup creation and development their immediate goal. It’s
therefore unsurprising that the contribution that incubators make directly to startups is typically much
higher than for hubs, at least if they avoid typical pitfalls.
11. Supply Chain Partnerships
Supply chain partnership or collaboration is about coordinating with internal departments and
external partners to sustain an optimized flow through the supply chain in order to efficiently meet
demand and ensure on-time, in-full delivery. Seamless supply chain collaboration is a necessary
component of effective supply chain management and business resilience. Supply chain
collaboration entails various entities collaborating to achieve common goals. It increases agility,
reduces bullwhip effects, and allows businesses to better orchestrate their supply chains; moreover,
it ensures the free flow of information because customers' purchasing decisions have been aided by
greater access to information in the digital age.
11.1 Approaches to Supply Chain Innovations
Three broad approaches to supply chain innovation have evolved in respons e to customer needs
and desires, namely-
❑ Rapid supply chains that prioritize speed and efficiency.
❑ Agile supply chains that emphasise a company's ability to respond to changes in demand
(volume and variety).
❑ Lean supply chains that prioritize waste elimination (including time).
Practical Insight
As per a 2017 chainalytics (https://www.chainalytics.com/) report, nearly 70% of organizations
have supply chain innovation as part of their strategy, but only 20% believe their supply chains
are innovative. Those demonstrated innovative supply chain, tended to work with partners across
the entire supply chain.
Above industry insight posed a question: Why, despite making an attempt at supply chain innovation,
certain organisations are not able to demonstrate innovation? Answer is also specified thereto: either
the collaboration doesn’t exist or is not properly worked for them. But it leads to another question:
What is essential for a successful supply chain partnership? This question is answered in the
upcoming heading of this section.
Do You Know?
Where to collaborate?
▪ Collaborate in an area where you have strong footing.
▪ Turn win-loss situations into win-win opportunities with the right benefit-sharing model.
▪ Select partners based on capability and strategic alignment, not just size.
How to collaborate?
▪ Invest in the right infrastructure and people.
▪ Jointly manage performance and measure impact.
▪ Collaborate for the long term.
Source – Six steps to successful supply chain collaboration 23
Based upon the approaches and essentials listed above in headings 11.1 and 11.2, respectively,
one thing is clear that these rely on information technology to improve processes along the entire
supply chain, namely electronic data interchange (EDI), bar coding and scanning, radio frequency
identification tags (RFIDs), point-of-sale (POS) terminals, and electronic funds transfer (EFT).
B. BUSINESS MODELS
A business model explains how a business works and the economic logic behind it. It is a way of
representing and communicating how an organisation creates values for itself while delivering
products or services for customers.
Margretta, proposed that a business model should include all the activities associated with two key
components, i.e., producing or making something and selling something. But in 2008, Johnson,
along with Christensen & Kaggerman 25 extended the scope and proposed that a business model
also needs a value proposition; therefore, a business model should contain three components,
namely customer value proposition, profit formula, and key resources and processes; hence,
it carries strategic importance from aspects of cost and performance.
In a disruptive business environment, where everyone is striving for sustainability and focusing on
emerging markets, the generic business model may fail to impress; as a result, a new business
model emerges.
24 Seuring, S. (2002), Cost Management in Supply Chains - Different Research Approaches; In: Seuring, S., Goldbach, M. (eds.):
Free models can be sub-categories based upon their revenue streams and value proposition, namely–
1.1.1 Advertising (also known as the Hidden Revenue Model)
The organisation seeks to attract users so that they may be presented with advertising messages.
Users do not pay for the product or service (more commonly) they receive; rather, the advertiser
pays the organisation for access to its audience.
Companies do not have to ask users to pay for their products or services. Therefore, the customer
base is large (wide reach), and secondly, quality is not a major concern (in the absence of enforcing
power with the customer because they didn’t pay any consideration).
Illustration – Most search engines are free to use for everyone. But these make the most money
from Ads. That is, it charges businesses to reach the target audience. Businesses have to pay for
the Ads., they put up on the platform.
1.1.2 Cross-subsidisation (also known as the razorblade business model)
An organization provides a free (or very low-cost) product or service to customers in order to drive
high-margin sales of a complementary product. Since a product is sold at a much lower price to
make the consumer buy higher-priced items later, it is called razorblade. It is one of the tried-and-
true methods of acquiring customers for high-priced products. Companies earn high revenue on a
consistent basis as more and more customers become loyal.
Prevailing in the case of consumer goods in addition to IT/ ITeS industries. It is a pricing business
strategy that is also known as a bait-and-hook model.
Illustration - Printers are sold cheaply to build demand for high-margin printer cartridges.
1.1.3 Open Source (also referred to as the Free Access or Gift Model)
When a product or service is provided for free, the seller or provider either derives satisfaction or
some other benefits; but the buyer or user has nothing to pay. The difference between this model
and the hidden revenue model is that support and other services are not provided under the open-
source model. There is no incremental service cost for each added user, even if there is little or no
customer acquisition cost involved; hence, the product or service is free for anyone to use. It
becomes easier to create a community of users who can improve on the technology.
Knowledge Management, Tech and software companies use this model.
Illustration - Wikipedia26 is the example of open-source services (as a free encyclopaedia). Open
office27 from Apache can be another example.
1.1.4 Promotion
A low-cost product or service is provided in exchange for the purchase of another product or service.
Illustration - Supermarkets offer free gift when customers spend a threshold amount. Free Air,
Water, and Toilet facilities at petrol pumps can be another example. Some of sweetshops and gift
centres offer free packaging. Waiting in lounge at stations or airports.
26 https://www.wikipedia.org/
27 https://www.openoffice.org/why/why_free.html
Concept Insight
Free business model may convert into freemium and then into subscription based model. Free
model can be used for any type of product, whereas Freemium and Subscription models are most
prominently used for services that are rendered only using some app or digital platform.
1.4 The Digital Platform Model (E-Commerce Model)
A company that follows this model will provide a digital marketplace where both buyers and sellers
of a given item can transact. This has provided both flexibility and convenience.
In exchange for any transaction, the buyer and seller in the business receive a fee or commission.
The commission is calculated as a percentage of the buyer's purchase price. Among various
subcategories of E-Commerce models, the major ones are –
The access-over-ownership model provides temporary access to goods and services traditionally
only available through purchase.
Illustration – Apps/ Shops offering vehicle on rental service are perfect example of the access over
ownership model, i.e., having/ accessing the car without owning it, access to a waiting lounge.
1.7 The Service Ecosystem Model
By implementing this model, the company will offer different products, but they will be integrated,
and customers will become accustomed to using one facet. This is a lock system in which the
company limits customers' options and thus eliminates competition.
To illustrate, Premium brands that offer products with differentiation employ this business model,
in which they draw customers into their ecosystem and keep them there.
1.8 The Experience Model
This is a business model in which a company offers unique, stylish, new, and innovative products to
those who can afford to pay for them. To maintain its market leadership, the company must
continually improve its existing products and introduce new ones to ensure that no competitor can
match the products it provides to its customers.
This model disrupts by adding an experience component to a product or service that eleva tes its
value to the customer. This makes it difficult for their customers to switch to competitors after using
their products.
Illustration – When a luxury car manufacturer flies its buyers (of exclusive models) to a plant
(manufacturing site) to have a personal fitting that ensures all internal parts are all positioned to
absolutely match the buyers’ body. Luxury airline lounges are another illustration that adds a level
of experience beyond.
1.9 On Demand Model
By monetizing time, this model will disrupt. They will charge a premium for instant access to the
company's products or services. They provide new value to customers by making service access
easier and more convenient.
This adaptability creates a significant advantage for the organization. By utilizing digital
technologies, the company is able to provide new services and products to their customers.
Illustration – App based (riding and cab booking) transport businesses have caused disruption in
the transportation sector using this business model. Similarly, online grocery and food ordering app s
offer third-party products with time and place convenience.
Figure B.3 – Connecting the business canvas model and the sustainability business model
28 https://www.researchgate.net/figure/Triple-bottom-line-Elkington-1997_fig1_291938273
Concept Insight
The Sustainable Development Goals, adopted by all UN member states in 2015, state that all
countries should promote prosperity while protecting the environment, social needs, equality, and
employment opportunities, combating climate change, and preserving nature. Thus, long-term
sustainable business models incorporate the creation of monetary and nonmonetary value for a
diverse range of stakeholders.
Sustainable business models are extremely beneficial to Industry 4.0, a new stage of industrial
maturity for product firms based on the connectivity provided by the industrial Internet of Things,
in which company products and processes are interconnected and integrated to provide greater
value to customers and internal company processes.
Tima Bansal29 suggests systems theory identifies 5 elements for a sustainable business model, namely–
▪ Diversity of resources, people, and investment,
▪ Modularity of functional operations,
▪ Openness to ideas outside firm boundaries,
▪ Slack resources in capabilities and resources and
▪ Matching the cycles and rhythms of business and environment.
2.2 Approaches for Developing A Sustainable Business Model
Idil Gaziulusory and Twomey 30 (2014) present nine different approaches used in developing
business models that are relevant for creating greater sustainability. These are:
2.2.1 Product service systems are those in which the consumer pays for the services provided by
a product rather than purchasing the product itself. As a result, companies are responsible for the
entire product lifecycle, including repair, replacement, and disposal.
Authors also highlight eight PSS categories: 1. Product-related service, 2. Advice and consultancy, 3.
Product lease, 4. Product renting or sharing, 5. Product pooling, 6. Activity management/ outsourcing, 7.
Pay per service unit, and 8. Provision of functional results, as suggested by Tukker in 2004.
2.2.2 Open innovation is when a company collaborates with other organizations, groups of people,
or individuals to generate and commercialize new ideas. This type of collaboration is especially
suited to dealing with the complex interdependencies that characterize the transiti on to a more
sustainable built environment.
Open Innovation is innovating in partnership with those outside your company by sharing the risks
and rewards of the outcome and process.
Low-carbon Transitions
2.2.3 Peer-to-peer innovation is innovation that results from the collaboration of loosely connected,
widely dispersed individuals (i.e., peer-to-peer networks) by sharing open-source resources and
distributed production capabilities without relying on market signals or top-down commands in
hierarchical firm structures.
2.2.4 Closed-loop production is when the materials used to make a product are recycled
throughout the manufacturing process. The premise of circular models is minimizing or eliminating
waste and maximising resource efficiency in production–consumption systems. It is frequently
referred to as 'cradle to cradle' production or 'industrial symbiosis'.
2.2.5 Crowdfunding is a new source of funding for niche innovation and attracting social media
attention. It frequently addresses issues of social and community development. Crowdfunding is
typically facilitated via online platforms.
Crowdfunding (also known as crowd financing and crowd investing) is the process by which a party
requests and obtains financial or other resources from a large number of people in order to complete
a specific project.
2.2.6 Sharing economy - Participatory sharing schemes provide timely access to resources,
allowing for more efficient use of otherwise idle resources. As an emerging social movement
facilitated by information and communication technologies and online social media, the sharing
economy offers some new business models with the potential for disruptive innovation.
2.2.7 Social enterprises and benefit corporations - Through participation in certification schemes
or under new corporate forms, social enterprises and benefit corporations become legally obligated
to pursue social and environmental value in addition to financial (shareholder) value.
The concept of shared value extends beyond traditional CSR, in which a company monitors and
ensures active compliance with ethical standards and positive social norms.
2.2.8 The gift economy makes use of voluntary donations, such as 'pay what you want,' and
capitalizes on social sustainability concerns. A gift economy is opposed to the commodification of
resources and labour exchange through monetary transactions, arguing that it creates alienation
and the illusion of separation from nature and other humans.
A Gift economy is an extreme form of sharing economy.
2.2.9 New manufacturing paradigm is driven by new capabilities associated with additive
manufacturing (i.e., 3-D printing) and business models that aim to increase production efficiency,
enable rapid prototyping, and thus allow for faster development and diffusion of new offerings and
services.
Simply saying, if a business firm desire to target emerging markets, they either have to accept very
small profits or rethink their business models (build it from scratch) in order to create and capture
value in new ways. They have to act as like start-ups, i.e., develop their business model from the
very foundation to account for the pain and gains of their customer base in emerging markets.
Note - Students are advised to refer to a case-let given at the back of the chapter as part of the exercise
to develop an understanding of this concept and its application.
3.3 Characteristic of Emerging National Markets relevant to the Business Model
In emerging markets, global business models must evaluate and account for important market
conditions such as the influence that business organisations can exercise in addition to the
opportunities available to them in the host country (the emerging market), the non-availability of
quality resources, the prevailing use of unbranded products, etc. Hence, the foremost need is to
evaluate the characteristics of emerging markets that require customization (response) in the
business model of a business firm.
The emerging market characteristics proposed by Jagdish N. Sheth 31 include –
▪ Sociopolitical governance,
▪ Market heterogeneity,
▪ Inadequate infrastructure,
▪ Chronic shortage of resources and
▪ Unbranded competition.
Adesegun Oyedele32 extended the list and suggested that, apart from those stated earlier, the
following are also important dimensions that characterize market conditions in emerging markets.
▪ Prevalence of clientelistic exchange,
▪ Informal institutional flux, and
▪ Channels of distribution challenges.
Students must note that both the authors specified above are professors of marketing; they suggest
characters of the emerging market brilliantly. Adesegun Oyedele33 made a successful attempt at
connecting characters of the emerging market to business model, but we (manager/ c-suite in the
case of business) have to consider the relevance of these characters on our own while developing
strategies, especially those related to cost and management thereof.
31 Sheth, J. N. (2011), “Impact of emerging markets on marketing: Rethinking existing perspectives and practices”, Journal of
Marketing, Vol. 75, pp. 166-182
32 Oyedele, A. 2016, ‘Emerging market global business model innovation’, Journal of Research in Marketing and
34
https://razorpay.com/
2.2.2 Enhanced accountability – Since external parties (who may exist outside the core business
boundary) are involved, all those who collaborate with the business firm must be considered
stakeholders. This requires the business to redefine its strategy.
2.2.3 Free (seamless) flow of information – The communications must take place in a seamless
manner among all the parties in real-time and in a transparent manner. Some information may be
confidential (trade secrets), which parties are hesitant to disclose; this is major reason why
collaborations failed to deliver what they were capable of or expected to be. Clarity is essential.
2.2.4 Shared economy (clustering of firms) → shared resources – Collaborations lead to the
contribution of resources to a common pool, which will be controlled collectively. Hence, the
organisation has access to control over others’ resources, whereas strategic partners may exercise
control over the organisation’s resources; hence, the organisation shall strategically decide which
resources are essential for their own core capabilities (reserving them); the rest can be contributed
to the common pool.
2.2.5 Think of the economics of scope apart from scale – Strategic alliances and collaborations
can be vertical, horizontal, or otherwise; it is not only the economics of scale but also the scope that
is of strategic consideration.
3. Focus on Series of Short-Term Advantages in the Case of Hyper-Competition
In a highly competitive market, companies frequently aggressively challenge their competitors not
to maintain a competitive advantage but to maintain value creation. Organizations strive for a series
of short-term advantages based on market disruption; once such disruption matures, the
organization will shift to another disruption.
To illustrate, Pen manufacturers keep on launching new models with either better grip, tip (pinpoint
or nib), design, material, or ink technology, etc., to maintain their market share because the market
for pens witnesses hyper-competition. Most pen manufacturers first came with long writing pens,
then focused on comfortable grip, then angular nibs, and finally rolling ball tips to liquid ink. New
trends will replace this (liquid ink), as the market is hyper competitive, and advantage sustain for a
short period only because competitors and rivals do copy.
Those companies that fail to innovate constantly or at short intervals may become irrelevant in the
market. Hence, the company must foster a culture where–
▪ Budget make reasonable allocations for research and development activity.
▪ Lean start-up structure shall be promoted (each teamwork as a start-up, to drive common
purpose).
▪ Collaborations for knowledge and resource sharing are encouraged.
▪ Everyone in an organisation, irrespective of position or hierarchy, strives for innovation.
Timing of shifting to the next disruption is critical to the commercial success of an organisation.
Change is essential to remain competitive. Such competitive equilibrium can be attained through
D'Aveni's 7S framework.
Note - Students are advised to take note of D'Aveni's 7S framework explained under para 3.2 of Section
A earlier in this chapter.
4.1.5 Restrict presence and shift focus on core – This includes rethinking about core capabilities
and redefining the core strategy. Neither an aggressive response nor the concerned product line is
completely closed (so that complete solution can be offered), but focus is definitely shifted from that
product line to the core product line to make the most of core capabilities.
To illustrate, Some IT firms are dealing with all the segments i.e., hardware, software, and ITeS;
but some are making more per head profit by focusing on any one of these or any combination of
two of these.
4.1.6 Withdraw – The exit or surrender strategy, wherein rather than combating the disruption;
business decides to withdraw from the relevant segment or completely. Rather than losing all the
value, they prefer to liquidate the value out of assets they can realise. Divert the realised value to
other profitable businesses (to keep their star products intact or convert question marks to stars) .
4.2 Considerations while Selecting/ Crafting the Strategy
So, it is for sure that disruption needs to be responded (not necessarily fully combating against it) in
all the cases without any exception, but response shouldn’t cause risk or threat the capability of the
organisation to meet the expectations of its existing customer base. Hence, an organisation while
making a strategy to counter disruption, may witness a paradox that must be resolved after
considering the–
▪ Availability of resources with the organisation or the sources upon which it depends for resources
(may be customers and/ or investors) and their expectations.
▪ Rather than considering the size of the market/ segment to compete or not (because to a big
firm, a small segment may not seem lucrative), the decision shall be taken based upon the
importance of the segment to the product line in which the company is operating or intended to
operate.
▪ Whether an organisation is good at process/ function wherein in disruption took place, because
capabilities can not necessarily be inherited, these can be acquired.
Above considerations are equally important for the organisation which is rolling out the disruption.
In addition, they need to consider.
▪ Trade-off between first mover advantage and uncertainty (results into predictions rather than
planning, discovery rather than forecasting).
▪ Disruption must be capable of exploiting commercial benefits.
SUMMARY
❑ Changing business environment may force the business organisations to be adopt new
business models. The quantum and force of change drivers, collectively determine the degree
of environmental dynamism. Some of these change drivers are causes, whereas some other
are effects.
❑ The change drivers include wide range of key elements including hyper competition,
advancement in technologies (especially in digital space), disruptions due increasing focus on
sustainability, stakeholders, innovation, incubation of ideas, etc.
❑ Digital technologies are electronic or automated tools, systems, devices, and resources that
generate, store or process data. Network or Internet is underlying all digital technologies
advancements.
❑ Technological advancement includes, Internet of Things (IoT), Robotics, Artificial intelligence
(AI), Automation, Cloud, Autonomous vehicles, 3D printing, Digital Twin, Augmented Reality,
Mobile Internet, Blockchain
❑ Changes in business model on account of technological advancements can be classified into
automation, extension, or transformation.
❑ Networks (business ecosystem) are rapidly replacing traditional markets. This shift
necessitates new strategies, wherein the basis of competitive advantage shifts from what the
organization 'does better' than its competitors to how its partnerships and all iances help all
involved parties 'do better'.
❑ Organizations must understand their external environment in terms of business ecosystems,
in which various organizations collaborate and cooperate to create value while also seeking to
capture value for themselves.
❑ In hyper competitive market, companies often aggressively challenge their competitors not to
sustain competitive advantage, but to sustain value creation. Strategy is that organizations
must strives for a series of short-term advantages relying upon market disruption, when such
disruption matures, such organisation will move to another disruption.
❑ Innovations introduced may change the competitive landscape in a market, resulting in an
industry transformation or disruption. Disruption can be low-end or new market disruptions.
❑ Lean start-ups help entrepreneurs to navigate extreme uncertainties by testing scientific
hypotheses (statistical assumptions based upon which strategic options are driven) with a
minimal viable product (MVP).
❑ Agile organizations are built on a network of empowered teams that adhere to high standards
of alignment, accountability, expertise, transparency, and collaboration. This allows them to
respond to the emergence of new competitors, rapid technological advancements, and sudden
shifts in overall market conditions.
❑ The battle between every startup and the incumbent comes down to whether the startup gets
distribution before the incumbent gets innovation.
❑ Intrapreneuring is a Revolutionary system of speeding up innovations within large companies
by making better use of available or allocated resources (with use of entrepreneurial talent of
Intrapreneur).
❑ A clear differentiator between incubators and hubs is the direct contribution they make to
startup creation and success. Incubators make startup creation and development their
immediate goal.
❑ Cost reduction is one of the most frequently mentioned goals in supply chain management.
Furthermore, in order to reduce costs, companies are increasingly focusing on their supply
chain partners, causing both suppliers and customers to strive for new levels of
competitiveness and profitability.
❑ A business model explains how a business works and the economic logic behind it. It is a way
of representing and communicating how an organisation creates values for itself while
delivering products or services for customers.
❑ In disruptive business environment, where everyone striving for sustainability and focusing on
emerging markets the generic business model may fail to impress as result new business
model emerges. Free, Freemium, Subscription, Pyramid, Digital Platform, Ecosystem,
Experience is leading among emerging business models.
❑ A business model that addresses the social and environmental perspective in addition to
economic perspective is sustainable.
❑ Approaches to develop sustainable model includes Product Service Systems, Open innovation,
Peer-to-peer innovation, Closed-loop production, Crowdfunding, Sharing Economy, Social
enterprises and benefit corporations, the gift economy, and new manufacturing paradigm.
❑ Since these emerging markets represent substantial chunk of global consumption, hence a
great marketing opportunity (potential market that is best suited for market extension strategy,
as per Ansoff matrix i.e., a strategic planning tool that provides a framework to help managers
and marketers devise strategies for future growth), especially in today’s era of globalisation.
❑ The emerging market characteristics includes Sociopolitical governance, Market
heterogeneity, Inadequate infrastructure, Chronic shortage of resources, Unbranded
competition, Prevalence of clientelistic exchange, Informal institutional flux, and Channels o f
distribution challenges.
❑ At-least those change drivers of business environment dynamics, that are the root causes
rather effects need to be addressed strategically; because such cause drivers (either
individually or in any combination thereof) leads to evolution of new business models, whereas
effect drivers are responses in themselves though they also have circular effect (if cause are
managed efficiently, then become virtues cycle else vicious cycle).
❑ Digital technologies, business ecosystems (including strategic partnerships and
collaborations), hyper-competition, and transformation and disruption are causing drivers.
Options
a. Automation
b. Extension
c. Transformation
d. Revolution
Key – c
Reason – Change in business model on account of technological advancements can be classified
into automation, extension or transformation. Transformation is the use of technology that not only
revamps the product or services that an organisation offers but also its process and culture. Installing
ATM can be seen as transformation.
MCQ 4
Identify the option with correct sequence out of given below-
Options
a. Design Thinking → Lean Start-up → Six Sigma → Agile
b. Design Thinking → Agile → Lean Start-up → Six Sigma
c. Design Thinking → Lean Start-up → Agile → Six Sigma
d. Agile → Lean Start-up → Six Sigma → Design Thinking
Key – c
Reason – Post-Ideation phase design-thinking is critical to check/ensure product viability. The journey
from design thinking to lean start-up involves the development of minimum viable product (or service),
while when MVP is tested to map agile story journey advances to agile and further shift to six-sigma
wherein focus shifts from product to process as product become mature.
MCQ 5
Grammarly is an American cloud-based typing assistant. It reviews spelling, grammar, punctuation,
clarity, engagement, and delivery mistakes in English texts, detects plagiarism, and suggests
replacements for the identified errors. It also allows users to customize their style, tone, and context -
specific language. It offers two plans for individuals.
Free for individuals, that offers basic writing suggestions and tone detection (Grammar, Spelling,
Punctuation, Conciseness, and Tone detection)
Premium plan for individual that offers Clarity, vocabulary, and tone improvements (Everything in
Free, Full-sentence rewrites, Word choice, Tone suggestions and Citations).
Grammarly business relying on which of following business models-
Options
a. Free
b. Premium
c. Subscription
d. None of these
Key – d
Reason – Model adopted by Grammarly is Freemium, wherein essential services or product is
offered free and for premium services or more quantum you have to pay (yes, payment can be further
based upon either subscription model or pay as per use model).
Practical Insight
In India, earlier this kind of pricing was known as Bata Pricing. Because Bata Shoe Company
used to charge in this manner for their footwear.
2.4 Value- Based Pricing Method
There is an increasing trend to price the product on the basis of the customer’s perception of its
value. This method helps the firm in reducing the threat of price wars. Marketing research is
important for this method. It is based on:
Objective Value or True Economic Value (TEV)
This is a measure of the benefits that a product is intended to deliver to consumers relative to other
products without giving any regard to whether the consumer can recognize these benefits or not.
True economic value for a consumer is calculated taking two differentials into consideration:
TEV = Cost of the Next Best Alternative + Value of Performance Differential
The cost of the next best alternative is the cost of a comparable product offered by another company.
The value of the performance differential is the value of additional features provided by the seller of
a product.
A firm’s product may be superior to the next best alternative in some dimensions but inferior in
others.
Example
A customer wants to buy a System for a single year (after which it will be scrapped) with plans to
use it for 2,500 hrs.
3. Pricing of Services
Services have some inherent features such as Intangibility, Inseparability, Variability, and
Perishability. Further, services can be classified into the following categories based upon the nature
of the work involved and the involvement of receipt –
1. People Processing Service - Person is involved (physical presence of the customer at the
service system or location).
To illustrate, Consider a haircut and spa.
2. Product/ Possession Processing Services - Such services are related to a specific product
(limited or no involvement of the customer).
To illustrate, Packers and movers or washerman.
3. Mental Stimulus Processing Services - The services that influence the consumer’s mental
abilities, beliefs, behaviour, and perception.
To illustrate, Watching the match at a stadium, a light show, a movie or visiting a Zoo.
4. Information Processing Services - These are a unique form of intangible products where the
information acts as a product.
To illustrate, Buying insurance, consultancy.
Together, these features and classifications result in a variety of issues that must be addressed
while pricing the services.
To illustrate, in the case of a service of showing a movie in a cinema hall, vacant seats (ideal
capacity) are pure waste and hence shall be sold even at discounted prices (similarly in the case of
a flight) because of their perishability (no storage is possible).
When services are uniquely tailored to each customer’s needs, pricing cannot be easy. Each service
transaction is likely to have a distinct pricing structure.
In certain services, the customer’s participation is essential. The customer may have to incur certain
intangible costs over and above monetary costs while making use of a service. The pricing decision
for such services should accommodate the intangible costs that a customer may have to bear.
Some of the services, like health care, education, communication, transport, etc., are of public
importance (more like social or personal services rather than business services). Therefore, the
price of those services tends to be regulated.
Some services’ pricing is determined in a collective manner. Trade associations, professional
bodies, or other institutions may impose broad guidelines for fixing the price.
Further pricing can be used as a strategic tool to manage and balance the demand for services in a
similar manner to tangible products.
To illustrate, the problem of overcrowding in hotels, bars, or cinemas on weekends and ideal
capacity on weekdays can be countered by offering discounts and allowances during weekdays,
while premium pricing can be charged on weekends.
4. Pricing in Case of Emerging Business Models
Emerging business models are explained in detail in Chapter 5 of this part of the syllabus. Emerging
Business Models can be loosely classified into the following three broad categories –
4.1 Hyper Disruptive Business Models
Disruptive business models are those that create, disintermediate, refine, reengineer, or optimize a
product or service, role, function or practice, category, market, sector, or industry. Therefore, the
pricing decision depends on the underlying disruptions and the possibility (as well as the time and
resources required to imitate the same).
4.2 Models Relevant to Sustainability
Pricing Decisions shall reflect social and environmental implications in addition to economic
considerations. The influence of social, environmental, and economic factors need not be equal. It
is the usual notion that luxury goods can be priced higher, while the prices of essential commodities
are regulated through statutory means and/or moral suasion.
4.3 Models Relevant to Emerging National Markets
Emerging national markets are growing markets with huge consumption, but such markets are price
sensitive, such as India, Brazil, etc. Hence, value for money (cost effective solution) is a key
determinant of the pricing decision.
To illustrate, the prices of global edition and edition specifically published for circulation in the
Indian or South and East Asian sub-continent of publication houses are different.
Concept Insight
Competitive Law Aspects Pertaining to Pricing Below Cost
As per Section 4(2), read with explanation b to Section 4 of the Competition Act 2002, selling
goods or services at “predatory price” construes to abuse of dominance. Predatory price means
the sale of goods or provision of services at a price that is below the cost as may be determined
by regulations of production of the goods or provision of services, with a view to reduce
competition or eliminate the competitors.
Practical Insight
Unethical Pricing of cameras and ventilators during the pandemic
Covid-19 pandemic changed the world; the price of many useful articles, apart from essential
commodities, hit all time; despite producers, traders, retailers, and regulators being aware of
unjustified prices. The phenomenon of charging unjustified and unethical prices was not limited to
a particular market or country but prevailed across the world. Just to illustrate, ventilator
manufacturers in a developed country went so far as to auction their products to the highest bidder,
resulting in severe market inefficiencies. Even more worrying is the fact that ventilators were not
necessarily sold to the state or hospital that needed them the most, but to the one that could afford
to pay the highest price, leading to the loss of human lives.
Mind it, customers today don’t view each transaction in isolation; they care more about establishing
long-lasting relationships with brands and companies. The complexity of product offerings is ever
increasing, so customers prefer to simplify some of their decisions by relying on brands as trusted
partners. A customer being a business partner (under relationship marketing) shall be dealt with
respect, charging such high and unethical prices is betrayal upon them.
Hence, the manufacturer or trader who charges such unethical prices will surely lose their
customer or will not be able to maintain trustworthy relations with them.
7.1.1 Ethical pricing issues that hurt businesses –
1. Price Fixing (Collusion or cartelization) - A price fixing agreement involves a group of people
on the same side of a market agreeing to buy or sell a good or service at a fixed price. Typically,
competition for consumers among these participants drives down prices for goods and services.
Concept Insight
Vertical price fixing is allowed in some cases, whereas horizontal price fixing is totally prohibited.
Horizontal price fixing is illegal, which means corporations on the same level of the supply chain
cannot agree on a target, maximum, or minimum price (among other things) through cartelization
or any other means. However, vertical price fixing is allowed. For example, wholesale companies
can limit how much retailers charge for clothes. A Franchisor or Licensing authority can fix prices
for franchisees and licensees.
Students may refer to Section 3 and 4 of the Competition Act, 2002 along with decided case laws,
for specific provisions in this regard. The view on allowing vertical price fixing is divided among
the courts or regulators across the world, while horizontal price fixing is strict.
2. Price Skimming – It involves the discrimination through a timeline, which results in a gradual
reduction in price. Price skimming occurs when a product is initially sold at a very high price and
then gradually reduced. The goal here is to capture each step on the demand curve; those who need
it early have to pay more, while each decrease in price triggers a new group of purchases.
To illustrate – The prices drop within months of a release, and new iterations happen within six to
12 months.
3. Bid Rigging – It involves favoritism or collusion. Rather than directly impacting the customer, it
hurts them indirectly because the best producer doesn’t necessarily receive the work.
To illustrate – A highway tender under the BOT model given to some construction company with a
bid higher than it should be as a result of favoritism or bid rigging will result in higher toll charges
from commuters.
4. Price Discrimination – It involves anti-favoritism. Price discrimination is the strategy of selling
the same product at different prices to different groups of consumers, usually based on the maximum
they are willing to pay.
5. Super Pricing for article with high perceived value – Sometimes the value that consumers
place on a good is much greater than the cost of producing that good. Business if charges a
correspondingly higher price, the same shall be considered unjustified, especially where no
disclosure is made to such buyers/ customers.
7.2 Non-Financial Considerations
Despite the fact that price in itself is a monetary aspect and the only element of the marketing mix
that is a source of revenue, its determination has a strong bearing from non-financial factors such
as –
▪ Brand image - buyer’s attitude towards the product.
▪ Stage of the product in its life cycle.
▪ Intensity of competition.
▪ Bargaining power of buyers.
▪ Features and quality of the product or service.
▪ Government controls and regulations.
▪ Societal Considerations.
Note –Students are advised to take note that the above specified list is illustrative only; there may be
many more non-financial considerations.
14 Themodel of customer satisfaction (known as Kano Model) was published in Japan in 1984 by Noriaki Kano, a professor
of Quality Management at Tokyo University of Science.
Performance attributes (One-dimensional qualities) (O) - These are features that, as businesses
invest in them, result in a proportionate increase in customer satisfaction. Dr. Noriaki referred to this
type of feature as "one-dimensional" due to the direct, linear relationship between the amount of
money invested in it and the amount of customer satisfaction it provides. These also include
customers who know what they want and consider carefully when deciding whether to buy yo ur
product or your competitor's. To illustrate - battery life of smart phones.
Excitement or Delight attributes (Attractive qualities) (A) - These characteristics provide
satisfaction when they are met but do not cause dissatisfaction when they are not met. They are not
usually expected and thus frequently go unspoken. Hence the wow factor therefore yields high ROI.
To illustrate – seat upgrade in a flight/ train.
Indifferent qualities (I) - These aspects are neither good nor bad and have no effect, positive or
negative, on customer satisfaction. To illustrate – look of emoticons in messaging apps, placement
of logo on phone, size thereof.
Reverse qualities (R) - If these aspects exist, they lead to dissatisfaction; if they do not exist, they
do not lead to satisfaction. To illustrate – Pop-up messages appear on phones whenever open apps
for approval or have too much complexity to operate.
Questionable attribute (Q) - An ambiguous feature whose presence is doubtful or questionable. It
behaves in a similar fashion to reverse quality.
Concept Insight
1. Higher the level of threshold, performance, and excitement attribute, higher the customer’s
willingness to pay.
2. Perceptions change over time, therefore results in–
Customer expectations of a product can change over time as more competitive products may
enter the market.
Customer needs can change according to the environment they’re in.
Attitudes may change, meaning that the excitement attribute may become a performance
attribute or threshold attribute over time. To illustrate, earlier, 2 GB of RAM and a 2 or 5 Mega
Pixel Camera in a phone were considered to be good configuration; these have become basic
parameters now.
3. Based upon the above discussion, it can be concluded that a business must make an effort to
Include
Basic Threshold
Performance
Excitement
Exclude
Indifference
Reverse
Questionable
SUMMARY
❑ Short run decision making – Based on relevant costs, short run in nature, referred to as tactical
decisions, choosing among alternatives, often have long run consequences, immediate or
limited time frame, small scale actions that serve a larger purpose.
❑ CVP analysis involves analysing the interrelationships among revenues, costs, levels of
activity, and profits. It helps in planning, controlling decisions and evaluating decisions.
❑ Conventional CVP analysis assumes volume-based measures. Activity based costing provides
a more accurate determination of costs because it separately identifies and traces non - unit
based costs to products rather than combining them in a pool of fixed costs as volume based
approach does.
❑ The Break-even can then be expressed as follows:
Break-even units = [Fixed costs + (Setup cost × Number of Setups) + (Engineering Cost
× Number of Engineering Hours)]/ (Price - Unit Variable Cost)
❑ A comparison of the ABC break-even point with the conventional break-even point reveals two
important differences. First, the fixed costs differ. Some costs previously identified as being
fixed may actually vary with non-unit cost drivers, in this case setups and engineering hours.
Second, the numerator of the ABC break-even equation has two non-unit-variable cost terms:
one for batch-related activities and one for product- sustaining activities.
v
CONTENTS
Chapter-1 Introduction to Strategic Cost Management
Chapter-2 Modern Business Environment
Chapter-3 Lean System and Innovation
Chapter-4 Specialist Cost Management Techniques
Chapter-5 Management of Cost Strategically for Emerging Business Models
Chapter-6 Strategic Revenue Management
Chapter-7 Strategic Profit Management
Chapter-8 An Introduction to Strategic Performance Management
Chapter-9 Strategic Performance Measures in Private Sector
Chapter-10 Strategic Performance Measures in The Non-For-Profit Organisations
Chapter-11 Preparation of Performance Reports
Chapter-12 Divisional Transfer Pricing
Chapter-13 Standard Costing
Chapter-14 Case Study
Appendix
Skill Assessment
Chapter Overview
This chapter will help students to understand the need for and importance of performance
management (i.e., the selection and applications of tools and techniques for measurement,
evaluation, and improvement of performance) in the context of strategy and its role in strategic
decision making.
Further, this chapter will also help students to develop and present appropriate strategies taking
into consideration the performance, structure, culture, behaviours, and risk profile of the
organization.
It is worth noting that the effectiveness of a strategy depends on the efficiency of strategic planning
and control.
2. What is Performance Management?
Performance Management is considered as key aspect of management accounting, which deals
with–
▪ Determining an appropriate organisation's structure, level of decentralisation, etc.
▪ Establishing a responsibility centre and assigning responsibility to the manager.
▪ Establishing a performance measurement system and fixing the yardsticks.
▪ Reviewing the performance periodically and taking corrective measures where performance is
not acceptable.
In simple words, performance management systems help an organisation in measuring how well it
is performing against its goals and objectives and identify areas where performance can be
improved in order to help the organisation achieve those goals and objectives.
To cut a long story short, the central premise of performance management is to improve an
organisation's performance. For this, performance management system relies on various tools
and models such as the Balanced Scorecard, Performance Pyramid, Building Block, Triple Bottom
Lines, etc. Many of these models will be studied in detail in the upcoming chapters.
It is noteworthy that performance evaluation under the performance management system
accumulates information related to performance to analyze the same and take corrective action; in
order to align efforts to ensure that goals and objectives are attained.
To illustrate - Tools used for measurement and evaluation of performance includes Balanced
Scorecard (shown in Figure A.1) and Performance Pyramid (shown in Figure A.2). Both models keep
strategy as either a focal point or a starting point.
Robert S. Kaplan and David P. Norton, in 1992 suggested the balanced scorecard that can translate
a company’s strategy into specific, measurable objectives. Further, both authors also suggested
that “a failure to convert improved operational performance, as measured in the scorecard, into
improved financial performance should send executives back to their drawing boards to rethink the
company’s strategy or its implementation plans”.
In 1989, F. Cross and R. L. Lynch published an article titled "The SMART way to define and sustain
success." In this article, they suggested Strategic Measurement Analysis and Reporting Technique
(SMART) which is popularly known as performance pyramids due to the four-level hierarchy applied
in the framework. The attractiveness of this framework is that it integrates the business’ strategic
objectives with operational performance dimensions, considering the internal efficiency vis-à-
vis external effectiveness.
1 Robert S. Kaplan and David P. Norton, The Balanced Scorecard: Translating Strategy into Action (1992)
2 K. F. Cross and R. L. Lynch, The SMART Way to Define and Sustain Success (1989)
Do You Know?
Business integration can overcome the problem of sub-optimisation as well.
BPR experts such as Hammer and Davenport highlight through their research findings that many
organisations have departments and functions that try to maximise their own performance and
efficiency at the expense of the whole, which leads to sub-optimisation.
Business integration can be seen as proposed solution because, through it –
▪ Processes are viewed from an entity’s perspective (rather than from the viewpoint of an
individual department or function), that stretch from the initial order to the final delivery of a
product.
▪ Information Technology breakthroughs can be used to integrate these processes and
activities.
Dynamics of business integration can be understood with a variety of business models; in the
upcoming headings of this chapter, frameworks like Porter's Value Chain and McKinsey's 7S will
be discussed in detail.
3. Value Chain/ Value Chain Analysis
Value Chain3 is the sequential chain of activities that leads to the delivery of the final product to the
customer. It also depicts how value (utility) accumulates for the customer.
3 In his book Competitive Advantage: Creating and Sustaining Superior Performance, Michael E . Porter introduced the
generic value chain in 1985. This book answered the questions he posed in his earlier book, ‘Competitive Strategy -
Techniques for Analysing Industries and Competitors’ written in 1980.
4 Figure 2-2 at p.37 of Competitive Advantage: Creating and Sustaining Superior Performance (1985) by Michael E. Porter.
Practical Insight
Primary activities at Apple Inc.5
Inbound logistics - Apple collects its raw materials from China, America, Europe, and various
Asian countries. Although it doesn’t apply the Just-in-Time principle in inbound logistics, its
supply chain practices are a benchmark for efficiency for global businesses. The main source of
value is economies of scale due to the massive scope and scale of business operations. This
helps them to be cost-effective.
Operations - Apple operations are conducted by around 150k full-time equivalent employees
worldwide. Apple designs and sells; it hardly manufactures the components of the product it is
selling. Outsourcing manufacturing to locations with lower resource costs is the main source of
value for Apple operations. Apart from a few models of Mac that are manufactured in the USA
and Ireland, the rest are outsourced to manufacturing units based in Asia, largely in China. This
strategy provides advantages such as a focus on the core competencies of the business, such
as research and development and designing new products. It tries to keep operations lean, but
it does not apply the six sigma principles like its competitor, Samsung.
One may appreciate to note that Apple’s operations are divided into the following reportable
operating segments: America, Europe, Greater China, Japan, and the Rest of Asia Pacific.
5
https://www.edrawmax.com/article/apple-value-chain-analysis.html
Outbound logistics - For technology items such as smartphones, tablets, and laptops inventory
depreciation rates are very high due to short product life cycles. The company tries to keep
minimum inventory in their warehouses.
The company ships finished products to Apple Stores, that are typically located at high-traffic
locations in quality shopping malls and urban shopping districts. But currently , the company is
focusing on E-Commerce sales because E-Commerce is more cost-effective compared to sales
via Apple Store.
One may appreciate to note - In the US, in terms of size of e-commerce business, Apple is only
behind Amazon.com and Wal-Mart Stores Inc.
The massive source of value addition also lies in Apple’s market penetration into Asia in general
and China in particular, because selling in this particular geographical market would not involve
massive outbound logistics expenses (as assembly took place in China largely), and this cost
advantage can be passed on to customers to increase the overall appeal of offers.
Marketing and Sales - Apple sells its products through the following seven sales channels i.e.,
retail stores; online stores; direct sales force, third-party cellular network carriers, wholesalers,
retailers, and value-added resellers.
Apple is consistently increasing its share of sales through direct sales channels as opposed to
indirect sales channels. In 2020, the company’s net sales through its direct and indirect
distribution channels accounted for 34% and 66%, respectively, of the total net sales.
After sale service - Apple is famous for the exceptional quality of customer service during all
three stages: pre-purchase, during the purchase, and post-purchase. Apple sales assistants are
usually trained and polite young males and females who are technically savvy and happy to
demonstrate product features and capabilities. Products can be returned within 14 calendar days
after the purchase. Post-purchase customer service is also impressive, with unique iPhone trade-
in programs that allow iPhone users to upgrade their phone to newer models with additional
payment.
3.2 How does an organisation use Value Chain to gain and sustain competitive
advantage (desired performance)?
Following are the ways in which the value chain is helpful in presenting an integrated view of business
activities to seize competitive advantage while focusing on the scope of improvement in performance.
3.2.1 Classification of value-added and non-value-added activity6
Classification of activities into value-added and non-value-added activities is helpful in devising
appropriate strategies because the money saved by improving the efficiency of a value-added activity
is as valuable as the money saved by reducing a non-value-added activity.
Classifying activities as value-added or non-value-added is problematic. People usually cannot
consistently define what constitutes a value-added or non-value-added activity. Another major difficulty
with this classification is employee reaction. Employees can be annoyed if informed that they are
performing non-value-added activities which higher level managers have told them to perform.
An alternative to the dichotomous classification (which is difficult to make by drawing a clear line of
distinction between value-added and non-value-added activities) into value-added or non-value-
added activities is Kaplan and Cooper's (1998) suggestion of a classification into a four -category
value-added scheme:
▪ An activity that is required to produce the product or improve the process; the activity cannot,
on a cost-justification basis, be improved, simplified, or reduced in scope at this time.
To illustrate, employing organic farming techniques as part of agribusiness can fall under this
category. Farming is a necessary activity, and organic farming can be an improved (value -
added) way to do it, but it is expensive currently, which may justify its application.
▪ An activity that is required to produce the product or improve the process; the activity can be
improved, simplified, or reduced in scope.
To illustrate, accepting online payment (POS)
▪ An activity that is not required to produce the product or improve the process; the activity can
eventually be eliminated by changing a process or company procedure.
To illustrate, time spent on the maintenance of machines is reduced to a certain level over a
period of time as work experiences learning (effect of a learning curve). This applied to the
elimination of waste as well.
▪ An activity that is not required to produce the product or improve the process; the activity can
be eliminated in the short run by changing a process or a company procedure.
To illustrate, an automobile company, after reverse engineering, instantly decided to remove
certain features (such as the rear Windshield Wiper) after recognizing it as a non -essential
requirement.
To summarise the above discussion, consider the following table to decide the course of action after
classification.
To illustrate, United Parcel Services (UPS), a logistics company, implemented the wireless network.
(Reduce paperwork and improve sorting and tracking; helps in resource planning in terms of capacity
at hub provides timely information)7.
Managers at Microsoft have chosen to outsource Xbox manufacturing to Flextronics to focus on core
competencies8.
3.2.2 Decision on Outsourcing
Undoubtedly, non-value-added activities that can’t be eliminated will be outsourced (especially if
they are non-core in nature). But a question arises here: can a value-added activity also be
outsourced to enhance value? Answer depends on various quantitative and qualitative factors (cost
effectiveness and core competencies).
3.2.3 Value Chain can make comparison easy 9
A firm can evaluate its value chain relative to the value chains of its competitors or the industry. This
will help in process mapping, gap analysis, and benchmarking.
3.2.4 Customer’s Perspective
At each stage of the value chain, even inside the organisation, the next user shall be considered a
customer. If each stage goes well, this will automatically generate value for the end consumer.
3.2.5 To look at Big Picture, ‘Value System’ (Wider Integration)
Extended value chain encompasses the customer’s customers and the suppliers’ suppliers. Because
by creating an extended organisation a dynamic and hostile environment can respond in a better
manner. A firm's value chain is connected to what Porter calls a value system.
7
https://www.zdnet.com/article/ups-takes-wireless-to-the-next-level/
http://www.mobileinfo.com/News_2002/Issue47/UPS_WiFi_Bluetooth.htm)
8
https://www.termpaperwarehouse.com/essay-on/International-Business/171627
9 Shank and Govindarajan (1992)
Do You Know?
Why is it necessary to consider the big picture (Value System)?
Because value chain recognises no organisation can operate in isolation from its supplier and
customers, for example, the meal served to you at a restaurant drives its value from ingredients
that are determined and impacted by the grower.
3.3 Linkage of Value Chain Analysis and Performance Management
Value Chain Analysis
Management
Performacne
Driver Activities and integrated by leads to more value
Linkage among consolidating the perceived by the
different activities linkage among the consumer (at the
(How does such People, Operation, same or lower cost),
linkage impact Strategy, and therefore increasing
value?). Technology, etc. the margin
(performacne).
Figure B.2 – Linkage between Value Chain Analysis and Performance Management
All activities in the value chain affect each other. Together, these activities generate value that
leads to competitive advantage. Value chain highlights such linkages between activities. Linkage
requires co-ordination; hence –
▪ Strategies shall take an integrated view of organisation to focus on key value drivers (value
generating, core activities).
▪ Operation shall be smoothed by eliminating or outsourcing of non-value-added or non-core
activities, respectively, and by consolidating the linkage (enhancing co-ordination).
▪ To enhance co-ordination, Information system must use technological breakthroughs to
ensure the free flow of information between different activities.
▪ Job descriptions must mention the activities to be performed by people and the relative
importance of such jobs (or underlying activities), as well as the reporting hierarchy attached
to it.
This will eventually ensure sustainable competitive advantage, i.e., increase in margin, which in
turn will improve performance.
In the context of technology and people, the purpose of improving communication is to empower the
individual in an organisation to start talking about their abilities, needs, and requirements with others
(which helps in developing culture).
4. McKinsey’s 7S
McKinsey's 7S10 framework maps a constellation of interrelated factors (called Subsystems) that
influence an organization’s ability to change in order to attain its objectives. McKinsey’s 7S is a
consulting framework that guides the organisation to assist with organizational change, implementation
of a new strategy, understanding the weaknesses (blind spots) of an organization; moreover, to
understand how its sub-systems are interconnected and influence each other. Since sub-systems are
interconnected, a change in one element will have repercussions on the others.
Do You Know?
There is no hierarchy, and all areas are of the same size in a constellation (a constellation is
a group of stars that forms a pattern and has a name). In other words, the 7S model considers
all areas equally important, but Shared Values positioned in the centre to indicate that the
organization’s values are central to all elements.
McKinsey's 7S's model describes the links between the organisation's behaviour as a whole
and the behaviour of individuals within it as a determining factor.
10McKinsey consultants Tom Peters, Robert Waterman, and Julien Philips, with help from Richard Pascale and Anthony
G. Athos, developed the 7S model in the late 1970s. For the first time in 1982, it was featured in the book ‘In Search of
Excellence’ by former McKinsey consultants Thomas J. Peters and Robert H. Waterman.
4.1 Elements of 7S
The 7S framework is divided into two areas, i.e., Hard S and Soft S.
The hard areas comprise 3S, namely Strategy, Structure and System. It is easy for management
to influence and change this area because these 'hard' elements are easily quantified and defined,
and deal with facts and rules.
Whereas soft areas comprise 4S, namely Style, Staff, Skills, and Shared values. Since these are
influenced by the culture of the organisation, hence more difficult to describe (less tangible), it is
therefore relatively difficult for management to make change.
4.1.1 Strategy
It is a plan or method put in place, specific to the organisation, to achieve its goals with an available
set of resources (usually scarce). This is helpful to attain a competitive advantage over the other
firms. A sound strategy is one that is:
▪ Clearly articulated.
▪ With a long-term orientation.
▪ Helps achieve competitive advantage, and
▪ Reinforced by a strong mission.
▪ Vision and values.
To illustrate, Strategy of a premium phone manufacturer may be differentiation or differentiation
with focus. Strategy of a hospital can be to provide cost effective treatment to its patients, while the
strategy of another hospital may be to provide all treatment under a single roof.
When strategy is examined in isolation, it is difficult to determine whether it is well -aligned with other
elements of 7S. The 7S model does not look at organizations and its elements to find great
strategies, structures, systems, and so on, but rather to look in and ensure that they are aligned with
other elements. To illustrate, a company's strategy with a short-term orientation is usually a poor
choice, but if it is aligned with the other six elements, it can produce excellent results.
Students are advised to take note that generic strategies and means to apply them are already discussed
in detail in Chapter 1 of this course.
4.1.2 Structure
It is the formal framework by which job tasks are divided, grouped, and coordinated. It is the formal
pattern of interactions and coordination designed by management to link the tasks of individuals and
groups towards achieving organizational goals.
To illustrate, a hospital is usually having divisional structure, while a construction company has a
matrix structure (project oriented), and start-ups used to have a flexible structure.
Organisational structure outlines the roles of individuals in the organisation and decide s the way in
which authority and responsibility are allocated among them and how they are coordinating with
each other to attain organisational objectives.
Organisation structure is a critical aspect of performance management, especially in determining
the nature of the responsibility centre (classification into cost, revenue, profit, or investment centres)
based upon the responsibilities and authority assigned.
What does it entail, and why?
When it comes to organisational structure, it includes both the formal structure defined by the
organization chart and the unwritten lines of power and influence that indicate whose contributions
are most valued. Hence, organisational structures are likely to reflect power and show important
roles and relationships. The need for a well-defined organizational structure includes–
▪ To link individuals in an established network of relationships.
▪ To group together the tasks required to fulfil the organization’s objectives as a whole.
▪ Allocate people to suitable individuals and groups.
▪ Allocate authority to the suitable individuals or groups.
▪ To coordinate the objectives and activities of separate units.
▪ Enable the flow of work, information, and other resources (communication and co-operation).
Do You Know?
What are the underlying principles of organising (defining organisational structure)?
1. Functional definition – Different duties, responsibilities, authority, and relationships need to be
identified clearly and also need to be allocated to people in a systematic fashion.
2. Supervision (Span of Control, i.e., number of employees/ number of managers) – Guidelines as
to how many subordinates or junior employees can be handled or supervised by a single manager.
The span of control can be wide or narrow, resulting in wide and tall organisations, respectively.
The span of control determines the number of relations, in turn the cost of communication,
reporting, etc. The formula used to calculate cross-relationship under the span of control is n (n–
1), and relations will be [n (n-1)]/2. Therefore, cross-relationship will always be double the number
of relations.
Illustration – A is the reporting manager to B and C. Here, the value of ‘n’ that superior along with
subordinates is 3, i.e. A, B, and C.
The number of relations will be 3, i.e. [3(3-1)]/2 → A-B, A-C, and B-C
Cross relations will be 6, i.e., 3(3-1) → A-B, B-A, A-C, C-A, B-C, and C-B
The span of two results in 3 relations and 6 cross relations.
Task for you – Mr. Amar has reported on Mr. Akbar, Ms. Arman, and Mr. Anthony, find relations
and cross-relations.
Hint – Relations will be 6 and cross relation will be 12, if the controlling span is 3.
3. Specialization (leads to delegations) – To ensure that maximum efficiency is achieved. The basis of
division or delegation shall be the skills, qualifications, and abilities of the subordinates.
Organisations where authorities are delegated to subordinates are called decentralised organisations,
whereas they are otherwise centralised. The level of delegations is a critical consideration in determining
organisational structure.
Centralisation offers control and standardisation. It describes the degree where decision making
is concentrated at a single point in the organization. Power and authority are retained at the top
organizational levels; therefore, benefits include coordinated decision making, better management
control, conformity with overall objectives, goal congruence that is likely to be achieved,
standardization, balance of power, use of experience in decision making, lower overheads, and
leadership to ease the growth for the company, etc., while limitations include reduced job
satisfaction, a narrowed ability to make decisions (vested with top management only), stress for
top management, subordinates experiencing restricted, less flexible, and possible communication
problems, etc.
Decentralisation utilizes talent and local knowledge. It describes the degree to which lower-level
employees provide input or make decisions. Power and authority are delegated to lower-level
management and staffs. Benefits include reducing the workload and stress of top management,
allowing them to focus on strategic matters, higher job satisfaction, better application of local
knowledge, more flexibility, and speedy responses, while limitation include dilution in control,
individual decisions that may not be aligned with the objectives of the organisation as a whole,
higher overhead costs, organisation may become fragmented and may face agency problems
among others.
4. Scalar chain – The chain of command to ease organization through minimization of waste and
avoidance of duplication, etc.
5. Unity of command - Subordinates shall be answerable or accountable to one reporting manager
at a time to best use resources, ensure clear communication and stability in the organization, etc.
Types of Organisational Structure
Post entrepreneurial structure, the next fundamental forms of organisation structure were line and
staff (functional) organisations initially, but dynamics changed during the latter half of the 20th century
when divisional, matrix, and project structure evolved; undoubtedly, divisional structure has
dominance over others. The trend toward network or virtual organisations emerged recently. Each
one of these structures has its own set of pros and cons.
Organisational Structures
Entrepreneurial - In such an organisation, management and control revolve around the proprietor
(entrepreneur), who acts in a dual capacity, both as owner and manager.
On the other side, a strong matrix is still a functional organizational structure but has a completely
separate project management arm. All of the project roles are still fulfilled within the functional
departments, but the project manager is on the same level as the functional managers.
Project Organisation – Each project may have a different sub-department, highly dependent on the
nature of the project. Project managers are usually full time in the role, and for small projects, they
might manage several projects at once. Project Manager has greater autonomy.
Network or Virtual Organisation possesses features such as outsources major business functions,
being highly centralized, networking done through electronic technology, less formal but more
opportunistic, and creating the possibility to create the ‘best of everything’. These allow someone
who has an innovative idea but little money to compete with large companies. Limitations include
reducing management’s control, and the reliability of partners may be doubtful.
Do You Know?
Following is a list of the factors that influence the organisational structure (also referred to as
drivers of structure):
▪ The types of problems the organization has when constructing strategies.
▪ Diversity of the organization, the needs of a multinational, multi-languages, and multi-currency.
▪ Adoption of technology for communication and control, apart from core operations.
▪ Type of ownership and involvement or influence of owners and other stakeholders.
▪ Size, Environment, Culture, Values, Objectives, and Future strategies of the organisation.
▪ People as well as skills and abilities they possess in reference to the task assigned to them
and the complexity thereof.
4.1.3 Systems
These are the processes and daily activities undertaken by people who work in the organisation.
To illustrate, operations (processes) such as accounting, personnel, management information, and
so forth. In a hospital, doctor’s day includes largely three activities: IPD, OPD, and Operation
Theatre.
All these daily activities and processes must be seen as system that are placed around an
information system as the core, because executing all these activities involve some sort of
processing of data that consumes and creates knowledge.
To illustrate, Accounting is an information system; it processes details pertaining to monetary
transitions and provides knowledge about financial performance and position; similarly HR related
system provide knowledge regarding intellectual health; while marketing and selling activities
process the most critical data of customers’ choices and behaviours to gain knowledge about
consumer behaviour so that an appropriate strategy can be opted through decision making using
such generated knowledge.
Hence, system signify knowledge management, seamless flow of information, defined process
charts, and sequence of activities. Tools and techniques pertaining to analytics, technology,
statistics, and POM (production and operations management) have proven to be handy for an
efficient system.
4.1.4 Style
These are the informal rules of the organisation and include the culture of the organisation. It is the
way the organisation presents itself to the outside world.
To illustrate, the ways of working, attitudes, and beliefs of organisation and people working therein.
Style is the combined outcome of the style of management adopted by the leader, prevailing stories
and culture, usage of symbols and practices.
There are numerous leadership theories ranging from behavioural to great -man, transformational to
transactional, and contingency to relationship that explain different leadership styles. Some of these
are autocratic, while others are bureaucratic or democratic. Choice shall be based upon the size and
life-cycle phase of the organisation, but it must be supported and integrated into strategy.
To illustrate, the style of the current leader to lead the organisation and make decisions in the
process of same may be different from the style of earlier leaders.
4.1.5 Staff
These include the intellect capital, i.e., people, or the Human Resource of the organisation. Mind
it, people are the resources that create organisation and culture thereat.
To illustrate, at the hospital, there are largely four different groups of staff, i.e., doctors, nurses,
technician (lab, machine operators, etc.), support staff (cleaner, keeper, etc.)
Human Resource is no more a mere operation function; it has gained strategic importance because
staff is the most precious resource that an organisation can have; more importantly, they are rational
as well as emotional too, who carries perceptions; therefore, they have become the most significant
factor in executing strategy to drive towards organisational success.
Do You Know?
Why is the integration of Staff (HR as a function) into strategy essential?
Though a satisfied and balanced workforce drives organisational productivity to higher levels, the
most prominent are–
▪ Staff are your biggest resource and can affect public perception of your brand; they are indeed
your brand ambassadors and the face of your company.
▪ Retraining, recruiting, and rehiring are expensive. Turnover is costly in terms of valuable
resources, but it can also affect morale among both current employees and clients.
▪ Empowered (well-trained, participative, and motivated) staff become change agent rather than
resisting factor.
▪ Culture and staff are often seen in a cyclic nature. A virtues cycle may have an empowering
culture resulting in motivated and skilled staff that leads to higher productivity, which in turn
leads to higher profitability and therefore better pay; ultimately, it enhances or maintains the
motivation to remain or be more productive. The cycle may be vicious too if staff is not aligned
with the rest of the 6 elements.
4.1.6 Skills
It involves identifying and getting insight into the core competencies of the organisation and
working on them. The organisation must analyse the skill gap and work on filling it. It must also
keep outsourcing as an option for non-core skills.
To illustrate, at hospital diagnosis, prescribing medicine, nursing, and performing surgery are core skills.
4.1.7 Shared Values
These are the values of the organisation that transverse through horizontal and vertical segments across
different divisions. It is indeed guiding the beliefs of people in the organisation as to why it exists.
To illustrate, people (all the employees, be they doctors, nurses, or support staff) in a hospital seek to save
lives.
Note: Shared values were called "superordinate goals" when the McKinsey S7 model was first
developed.
Practical Insight
How does the fast-food chain, McDonalds leverages the 7S framework?11
McDonalds with 40,031 stores, is the globally largest fast-food restaurant chain in 2021, while second in terms
of employees, employing around 2,00,000 people, and fifth in terms of revenue, with a total revenue of US$23.2
billion (out of which revenue from sales by company-operated restaurants is US$8.71 billion, whereas revenues
from franchised restaurants is US$ 14.49 billion; remaining from other sources).
Strategy - Cost leadership has been the age-old strategy of McDonald’s, striving to offer a wide range of
products to its customers at the lowest possible price.
The company operated and franchised a total of 40,031 restaurants worldwide in 2021. This figure has seen a
year-on-year increase for the last 16 years. McDonald's has implemented a growth strategy named “Velocity
Growth Plan” for its emphasis on speed of expansion.
McDonald’s sets SMART (Specific, Measurable, Achievable, Relevant, and Time-bound) and these goals are
clearly communicated to all employees to ensure that everyone is on the same page.
Structure - McDonald’s is present in multiple countries and owns a huge business, but rather than having a
strict hierarchical structure, it has a flat structure, and the manager of each outlet usually manages assistants
and employees.
All employees work as a team and have easy access to senior leadership if needed.
Systems - McDonald’s has some of the most efficient sales, marketing, operations, and supply chain
management systems in the world.
They constantly innovate to make their systems better. To illustrate, after introducing drive-through, they keep
reducing order time. They multiple reduction targets of 30 seconds (this way reduces order time to the
benchmark level).
Shared Values - McDonald's core values are Serve, Inclusion, Integrity, Community, and Family.
Here, Serve and Inclusion intended to cover a wide range of customers, while integrity highlights expectations
from employees that they will showcase a high level of integrity.
Inclusion and Family together give stress on hiring employees from different backgrounds and encourage
teamwork.
Community signifies giving back some profits to the community.
Skills - Skills are specially focused at McDonalds to ensure flawless service; hence, training and workshops
are conducted regularly.
Style - McDonald’s adopted a participative leadership style. Seniors engage the employees and consider their
feedback to improve strategy and operations, as well as resolve conflicts.
Staff - Being the second-largest restaurant chain globally, employs a base of over 2,00,000 people worldwide.
The McDonald’s team is a global family.
People from different backgrounds work happily because McDonald indeed believes in diversity.
It is important to note that, the household name McDonald’s accounted for around 2,00,000 employees in 2021.
This figure remained consistent with the previous year's total in 2020. Overall, the number of McDonald's
employees has more than halved in the past six years. Technological innovation is the reason for the same.
Do You Know?
Symbols are virtual representation of organisation including logos, titles, dress code, types of
language, and terminology. To illustrate, does organisation parking have a designated space for
directors and c-suites, or can anyone park in any space? Both have own pros and cons. Another
illustration, the colour of the belt and the designated names show the expertise and role one can
play in a six-sigma project/ organisation.
Concept Insight
Organisation as a whole needs to answer the following questions pertaining to each of S.
Strategy - What will the company do? How does the organisation plan to outperform its
competitors, or how does it intend to achieve its objectives?
Structure - How should it be organised? How are departments and teams structured, including
who reports to whom?
Systems - What procedures need to be in place? Too many or limited procedures in place?
Style - What management style will work best?
Staff - What staff will we require?
Skills - What skills will our staff/ company need?
Shared Value - What culture (attitudes) will be most suitable?
Above stated list of questions is illustrative, not exhaustive.
Step 4: Review the changes. As you adjust and align the elements, you'll need to use an iterative
(and often time-consuming) process of making adjustments and then re-analysing how that impacts
other elements and their alignment.
All elements, both hard and soft, must pull in the same direction for the organisation to be
effective. Indeed, if all elements move in the same direction, it means the organisation is striving
for a greater level of business integration.
Do You Know?
Change Management and Gap Analysis run parallel with the 7S framework
In Steps 1 to 3, as stated above, changes are required to be made; hence, first there is a need
to identify such changes, then implementation thereof; therefore, change management is helpful
in implementing changes (especially in countering resistance). Every change is an attempt to
move from an existing situation to a desired position; hence, gap analysis is useful.
After accepting or rejecting the proposal (requests for change) based upon the Stakeholder
Impact Assessment, following steps of the Change Management can be handy–
▪ Prepare the organization for change.
▪ Craft a vision and plan for change.
▪ Implement the changes.
▪ Embed changes within company culture and practices.
▪ Review progress and analyze results.
It is worth noting for students that the three-C principle can help you overcome this change
management challenge. Managers should ensure the changes they are communicating are clear,
compelling, and credible.
The steps involved in gap analysis are specified below–
▪ Understanding the current situation (position).
▪ Determining the desired position.
▪ Determining the action plan to reach the desired situation.
▪ Execute the action plan.
▪ Perform a periodic review of the situation.
It is worth noting for students that, gap analysis is a way to enter the next level; hence, tools or
models such as SWOT Analysis, McKinsey 7s Model, Fishbone Diagram, Burke-Litwin Change
Model, Nadler-Tushman's Congruence Model and PERT Technique can prove handy.
This realignment leads to improved performance, therefore attaining the objective of performance
management .
Business Integration
Management
Performacne
McKinsey 7S
Decentralised control
Performance related
Functional Structure &
Centralised control Performance related
data to be collected data to be collected
structure
at functional level, and analysed
but analysed at the lower down in the
upper level and hierarchy, hence
then feedback sent managers have
to the functional more discretion and
levels autonomy
Network
Organisations
Complex Strategic
supply chains alliances
Complex
Business
Structures Joint ventures
Multinationals
Licensing Franchising
Do You Know?
A virtual organisation is also considered as a complex business structure.
A virtual organisation that works on the Assets Lite Model which means there are little or no
physical premises but where employees and managers work remotely (typically from their own
location) and are connected using IT. These are sometimes also called hollow or network
organisations, especially where people are connected to each other through some common
platform such as online trading or retail platforms.
To illustrate, App-based platforms that provide services related to mobility, etc. The presence of
these is largely virtual.
Online retail platforms (or even product specific online platforms) are also a sort of virtual
organisation.
To illustrate, a large number of orders placed on online retail platforms are forwarded to suppliers,
who then send the goods directly to the customer.
Do You Know?
How is a Joint Venture different from a Strategic Alliance?
A Strategic Alliance agreement is less complex and less binding than a joint venture. In a joint
venture, two businesses pool resources to create a separate business entity, whereas in a
strategic alliance, they retain their independence.
Despite this major difference, both forms are useful for sharing costs, risks, and expertise.
Do You Know?
Information Technology breakthroughs can be game changer for complex business structure –
Accurate, Reliable, and Timely information can be the answer to the majority of issues that
performance management may face in complex business structure. Hence, information systems
often play a crucial role in complex business structure.
The core organisation may invest in the development of an information system , which is required
to be used by all partners. Having one system used by all partners means that everyone is using
the same data. There should be less difficulty collecting information about the performance of
partners since the information will all be stored on one system.
In order to cut a long story short, the greater use of business partners to perform crucial business
processes may lead to lower costs and greater specialization. However, the reliance on external
partners can lead to additional challenges for performance management. These must be considered
in drafting contracts with the partners. The use of shared IT systems can also assist in many of the
challenges.
E. BEHAVIOURAL ASPECTS
As specified earlier in Section B of this chapter, human resources are the deciding factor that makes
an organisation different and better from the rest. Since an organisation’s performance as a whole is
the sum of the people’s performance who are working in it, it is important to consider the behavioural
aspect(s) of humans in the context of the Performance Management System and the impact of the
same on strategic decisions pertaining to performance measurement and evaluation thereof.
Do You Know?
Behavioural aspects are one of the 7 human attributes that the life wheel encompasses.
The 7 human attributes are: self-aspect, behavioral aspect, social aspect, physical aspect,
emotional aspect, mental aspect, and spiritual aspect.
The behaviour of executives can be understood and controlled through the principle of accountability
using control mechanism; performance measures also act as a stimulus to mend the behaviour in a
particular way, whereas the behaviour of management (and the responses thereto by staff) can be
seen through the management style chosen.
1. Accountability
When humans are made accountable for their actions and decisions, they become more conscious
and strive for better performance.
Accountability for business managers’ (i.e., Directors) who are acting as agent of shareholders under
fiduciary relations instilled through agency theory, whereas for the rest of people working in
organisation, accountability is instilled though accounting and management control system as
discussed below–
1.1 Accountability and Accounting
The effectiveness of an accounting system (especially management accounting) is essential for an
efficient performance management system. From an accounting angle there are two categories of
accountability: hard and soft accountability.
1.1.1 Hard Accountability involves consideration of financial and quantitative information and
covers aspects such as converting activities and outcomes into numbers and further reporting those
numbers with underlying reasons.
1.1.2 Soft Accountability involves consideration of the human input to the system and its role in
shaping, evaluating, and implementing goals.
1.2 Accountability and Control
Management control systems have an important role to play in developing accountability, and in
turn, accountability leads to better performance. There are three broad categories of control
mechanism which any business can use-
1.2.1 Behavioural Control – to ensure only desired actions take place.
1.2.2 Personnel and Cultural Control – for every job, a person with appropriate skills and a
conducive environment is provided.
1.2.3 Reporting Control – to control the collection and reporting of information pertaining to
performance (basically to ensure the outcome of efforts must be reported fairly).
Do You Know?
Ethical behaviour supports performance management.
Apart from any moral duty to be ethical, the prime purpose of a business is to maximise
shareholder wealth, and the chance of this happening is increased by the adoption of ethical
behaviour.
2. Performance Measures (CSFs & KPIs thereto) Act as Stiumli
Since people are conscious of the activities wherein their performance is being measured, especially
if they know that after being measured, their performance will be evaluated as well, we can say that
clearly communicated performance measures (CSFs and KPIs thereof) act as stimuli (stimuli means
a force that either promotes or prevents a person from doing a particular act) that mend the way
people behave, therefore in turn influencing performance.
Berry, Broadbent, and Otley rely on the principle that ‘what gets measured, gets done’ while
suggesting the benefits and problems of using performance measures.
Do You Know?
What gets measured, gets done.
People will make a greater effort to perform well in aspects of their roles which they know are
being measured, compared to those which are not.
3. Management Styles & Culture Modify Behaviour, therefore Influence Performance
It is essential to ensure that the management style employed is appropriate to the organisational
context.
To illustrate, budget-constrained style of management is appropriate for businesses working in the
maturity phase, where cost control is of significant importance, whereas a profit-conscious style is
highly recommended when businesses are in the growth phase.
Note –The maturity and growth phases are referred to here as stages of the business or product life cycle.
Further students are advised to refer to Hopwood’s three distinct management styles (budget-constrained
style, profit-conscious style, and non-accounting style) for better understanding.
Management must ensure that the overall culture prevailing in the organisation is aligned with its
strategy.
To illustrate, organisations that are pursuing cost leadership strategies would be expected to have
elements of Financial Control Cultures, while organisations that are pursuing differentiation
strategies would be expected to be more aligned with Excellence/ Service Cultures.
Z score is generated by calculating five key ratios, which are then multiplied by coefficients (pre-
determined allocated weight) and added together to reach a single discriminate score. The equation to
compute the Z score is –
Z Score = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5
Wherein,
X1 = working capital/total assets
X2 = retained earnings/total assets
X3 = earnings before interest and tax/total assets
X4 = market value of equity/total liabilities
X5 = sales/total assets
1.2, 1.4, 3.3, 0.6, and 1.0 are pre-defined weights (coefficients).
Mind it, there is no concept of an ideal score. The computed Z score indicates the likelihood of failure
(bankruptcy) as per the table shown below –
Zone of Prediction regarding corporate failure (due to
Z-Score
discrimination bankruptcy)
Companies with a Z score of below 1.81 are in danger and
Less than 1.81 Distress
possibly heading towards bankruptcy.
Companies with scores 1.81 to 2.99 need further
1.81 to 2.99 Grey
investigation.
More than 2.99 Safe Companies with a score more than 2.99 are financially sound.
Practical Insight
The original data sample used by Altman consisted of 66 firms (half of which had already filed for
bankruptcy). All businesses in the database were manufacturers with assets base of $1 million or
above. Altman found that the ratio profile for the bankrupt group fell at −0.25 average and for the
non-bankrupt group at +4.48 average.
EXAMPLE
Numerical Application of the Altman Z score Model - Sigma Cast & Pig Moulder (SC&PM) Limited
has been in the business of moulding cast and pig irons for more than a decade. SC&PM is listed on the
National Stock Exchange, and its market value of equity is `7,000 crores.
Their total assets are worth ` 3,500 cores, while they have a working capital of `4,200 crores. SC&PM
has Earnings before Interest and Tax of `6,500 crores, which is enough to employ more staff and
increase installed capacity. Moreover, SC&PM is also enjoying stable revenue streams, i.e., top line with
a total sale of `8,300 crores.
But with a recent loan taken to facilitate automation, the investors are sceptical about the sustainability
of SC&PM and hence want to know how it is doing. Their liabilities stand at `5,000 crores, while retained
earnings amount to `800 crores. To put an end to the haze among shareholders and fund providers
regarding the possibility of bankruptcy, the BoD decided to report the Altman z-score along with financials.
For the calculation of the same, they hire you –
Altman z-score can be computed as 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5
Wherein,
X1 = working capital/total assets
X2 = retained earnings/total assets
X3 = earnings before interest and tax/total assets
X4 = market value of equity/total liabilities
X5 = sales/total assets
Hence, the Z score will be equal to –
= {[1.2 × (4,200 / 3,500)] + [1.4 × (800 / 3,500)] + [3.3 × (6,500 / 3,500)] + [0.6 × (7,000 / 5,000)] + [1.0
× (8,300 / 3,500)]}
Therefore, the Altman Z-Score for SC&PM Limited is 11.097.
Analysis of Computed Altman Z-Score - Companies with a Z-score of 3 or above are considered to be
financially sound. With a score of 11.097, SC&PM is firmly in the safe zone; hence investors can
comfortably toss away their fears regarding bankruptcy threat over SC&PM.
Practical Insight
Whether is the Z-score Model reliable for predicting corporate failure?
In its initial test, the Altman Z-score was found to be 72% accurate in predicting bankruptcy two
years before the event, with a Type II error (classifying the firm as bankrupt when it does not go
bankrupt) of only 6% (Altman, 1968).
In a series of subsequent tests covering three periods over the next 31 years (up until 1999), the
model was found to be approximately 80%–90% accurate in predicting bankruptcy one year before
the event (Altman, 2000).
4.1.2 Beaver’s Univariate Model (1966)
William Beaver was the first to apply a statistical method (t-tests) to predict bankruptcy for a pair-matched
sample of firms. Beaver’s Univariate Model is simple because Beaver evaluates the importance of each of
several accounting ratios based on univariate analysis (using each accounting ratio, but one at a time).
Practical Insight
Since only one ratio is reviewed at a time, Beaver’s Univariate Model is considered to be a flawed one and
was replaced by the Altman Z score later in 1968. Altman's primary improvement was to apply discriminant
analysis as a statistical method that could take into account multiple variables simultaneously.
Manageent Defects
Accounting Defects
❑ Mistakes will occur over time as a result of the defects. Defects and Mistakes are interconnected.
To illustrate, if the management and accounting system are weak, then mistakes are bound
to happen. A mistake includes high gearing, overtrading, or failure of a big project, etc.
❑ Symptoms of failure will surely be present if the mistakes identified above are of a continuing
nature. Eventually, these symptoms will become visible. Symptoms of failure can be something
like deteriorating ratios or creative accounting.
In addition to the total score, the scores of the three groups are also reviewed and evaluated to
appraise the more about the performance, as group score are capable of revealing the root cause
(which in turn makes the choice of corrective measures easy). For example, a high score in mistakes
made, will reveal poor management.
Calculation of A score – Areas and Score
Source of Observed variable
Score
problem
Management defects
Chief Executive is an autocrat 8
Chief Executive also holds the position of Chairman 4
Passive board of directors 2
Unbalanced board of directors, not representing all business functions, or dominated
2
by directors whose background is in the same business function
Weak Finance Director 2
Group A – Lack of 'management in depth' 1
Defects Poor response to change: old-fashioned product or
service, obsolete production facilities, out of date 15
marketing methods; old directors
Accounting defects
No budgets or budgetary controls 3
No cash flow forecasts, or not up to date 3
No costing system: costs and contribution of each product or service are not known 3
Sub Total 43
High gearing; inability to service debt 15
Overtrading: company expanding faster than funding; capital base too small for level
Group B – 15
of activity; or capital base unbalanced for type and nature of the business
Management
A big project that has gone wrong; any obligation that the company will be unable to
mistakes 15
meet if something goes wrong
Sub-Total 45
Financial analysis appears to indicate failure or difficulties (e.g., poor Z-score) 4
Group C – Creative accounting (e.g., gaming; misrepresentation) 4
Symptoms Any non-financial signs of problems: unclean and untidy offices and factories, high
4
of trouble staff turnover, low morale, rumours, and so on
Sub-Total 12
Grand Total 100
Interpretation of A Score
The maximum score allotted is 100 (43 from Group A, 45 from Group B, and 12 from Group C). For
a firm to be cleared as healthy, its overall score must be less than the maximum acceptable score
of 25 (with 10 and 15 being the maximum acceptable scores in Group A (defects) and B (mistakes)
respectively). If a firm scores anything in Group C, this is immediately seen as an indicator that the
firm is at risk.
A firm that scores more than 25 overall, even if it scores below the individual thresholds in either
Group A (10) or Group B (15), would still be considered at risk.
Example
Score under Argenti's A score Model and Interpretation thereof.
Sr. No. Defects Mistake Symptoms of Overall Score Remark
trouble
1 10 15 0 25 Healthy
2 2 15 0 17 Healthy
3 10 15 4 29 Risky
4 0 0 4 4 Risky
5 15 0 0 15 Risky
6 0 30 0 30 Risky
4.2.2 Shortcomings of using a qualitative model to predict corporate failure
Qualitative model also possesses certain shortcomings; the major among those are –
▪ Subjectively – The expert or user has to apply his or her judgement, that leads to subjectivity
in results, which reduces the reliability of the same.
▪ Qualitative model, in addition to financial information, requires a large amount of non-financial
information, which undoubtedly provides a more holistic picture and reliable result, but
obtaining non-financial information is not easy.
▪ Results are only as good as the inputs into them. Since qualitative information is used, the
reliability of such information and its relevance upon conversion into numbers is a critical affair.
▪ Qualitative model though able to identify the root-cause of the problem (corporate failure) as it
lists out defects and mistakes, but it doesn’t suggest a solution (corrective measures).
4.3 Preventing Corporate Failure
Since things that can be measured, can also be managed, hence if corporate failure is predicted,
the same can be prevented by the spot-on warning signs early and taking corrective action quickly.
The corrective action is more like performance improvement strategies; the major ones among these
are –
▪ Once the signs of impending failure are seen, it is important to investigate and identify the
causes. Sometimes it may be wise to seek external advice and help from technical experts to
identify the problem.
Note - The causes may be related to a range of different functions within the business, such
as financial management, marketing, or production. Hence, function expertise may help in
detecting the causes and then preventing against the same.
▪ It is important that the managers of the business accept that there is a problem , and that
mistakes have been made, and to move on to a solution rather than apportioning blame.
▪ The actions needed will depend on the particular situation. Actions may involve major strategic
change, such as getting out of a loss-making business, or making changes to the way
operations are managed, such as changes to production management.
▪ To prevent failure, it is essential to have effective management systems in place, because
sometimes the action needed may also include putting in controls to prevent further loss.
Summary
❑ Performance management is capable to bring ease in strategic planning and control for
management of any business, while strategy acts a guiding force for establishing performance
indicators and parameters thereof.
❑ Business integration is bringing all aspects of business in an alignment, so that business
objectives can be achieved; by effective implementation of strategies while making efficient
use of available set of resources. Four aspects in particular need to be linked as part of
business integration effort i.e., people, operations, strategy, and technology.
❑ Value Chain is the sequential chain of activities which leads to delivery of final product to the
customer, it also depicts how value (utility) accumulates to customer.
❑ McKinsey's 7S framework maps a constellation of interrelated factors (called Subsystem) that
influence an organization’s ability to change in order to attain its objectives. The 7S framework
is divided into two areas i.e., Hard S and Soft S. The hard areas comprise 3S namely Strategy,
Structure and System, whereas soft areas comprise 4S namely Style, Staff, Skills, and Shared
values.
❑ Organisation's Structure, Culture and Strategy has implications on performance; therefore,
selection of techniques and methods of performance measurement also depends upon the
Structure, culture and strategy adopted by business.
❑ The greater use of business partners to perform crucial business processes may lead to lower
costs and greater specialization. However, the reliance on external partners can lead to
additional challenges for performance management. These must be considered in drafting of
contracts with the partners. The use of shared IT systems can also assist in many of the
challenges.
Options
a. Finances
b. Logistics
c. Technology
d. Knowledge
Key – c
Reason – Four aspects in particular need to be linked as part of business integration effort i.e.
people, operations, strategy, and technology. Performance management improves as result of
integration of these four aspects.
MCQ 3
‘A’ Motors directed ‘A’ Steels to deliver a specific metal material for its upcoming e-vehicle
considering the design. Engineers from Production and Operation division of ‘A’ Motors visited to ‘A’
Steel to explain the needs after deliberation decided some of process need to be performed in such
metal while in process at ‘A’ Steel’s plant only (even prior to bring to ‘A’ Motors’ Plant). One of
engineer from ‘A’ Motors placed at ‘A’ Steel till such metal prepared and deliver to keep check at
specifications. Above facts highlights the concept of –
Options
a. Value Chain
b. Value System
c. Value Specification
d. Value Set
Key – b
Reason – Extended value chain encompasses the customer’s customers and the suppliers’
suppliers. Because by creating extended organisation, dynamic and hostile environment can
respond in better manner. A firm's value chain is connected to what, Porter calls a value system.
MCQ 4
The new appointed top brass at Jim-Jam Limited give local manager greater autonomy for decision
making, with intent to improve performance, in light of fact that company introduced a number of
changes in recent past.
Because in past decisions are made at corporate level, local managers only execute them, hence
despite power vested with local manager they didn’t exercise the authority resultantly changes that
were introduced recently failed to create any yield or impact.
Which one of the following elements of McKinsey's 7S's model best explains why the change
initiatives have been unsuccessful at DJK Co?
Options
a. Shared values
b. Strategy
c. Structure
d. Systems
Key – c
Reason - The Jim-jam in past used to have centralised structure but sudden change in structure
from centralised to decentralised make it difficult for staff to mend their ways. Nothing regarding
Shared Values, Strategy and System is specified in facts of case.
MCQ 5
Which of following is not a limitation of complex business structure in measuring and evaluating
performance?
Options
a. Lack of information
b. Disagreement on objectives
c. Legal aspects
d. Cultural conflicts
Key – c
Reason – The generic issues in complex business structure are -
▪ Establishing objective in is never easy, because the parties involved in complex business
structures may have different values, vision, risk appetites and timescales.
▪ Approaches and attitude of parties towards factors that are critical for performance such as
quality, control and risk, etc. may be different.
▪ Since different sets of resources, skills and knowledge contributed by parties, assigning
accountability for performance is a key issue.
▪ Lack of trust is a critical aspect, because for performance measurement and evaluation detailed
information is required, whereas parties of complex business structures may be hesitant to
share information freely if they lack trust in each other.
▪ Cultural conflicts may result in poor performance.
MCQ 6
Which among the following is not a category of control mechanism that can be used as part of
management control system.
Options
a. Behavioural Control
b. Reporting Control
c. Physical Control
d. Cultural Control
Key – c
Reason – Management control systems have an important role to play in developing accountability
and in turn accountability leads to better performance. There are three broad categories of control
mechanism which any business can use are Behavioural control, Personnel and cultural control, and
Reporting control.
MCQ 7
Based upon the Z score the companies are classified into different zone of discriminations, which of
following is not a Zone of discrimination?
Options
a. Distress
b. Grey
c. Safe
d. Warning
Key – d
Reason – There are three zones of discrimination -
Distress – Companies are in danger and possibly heading towards bankruptcy in upcoming two
years.
Grey – Further investigation is required, especially in CSFs and KPIs.
Safe – Companies are financially sound.
MCQ 8
Skyway Airline Limited (SAL), an international carrier took series of loans to finance the M&A deals,
but now observing the working capital crisis. CEO of SAL in response to a question at recent press -
conference, reported the Z-score of 1.6 and assure the investors as well as stakeholders that thing
are under control. In which of following zones, you place the SAL.
Options
a. Distress
b. Grey
c. Safe
d. Warning
Key – b
Reason – The classification criteria (into zones of discrimination) applicable to non-manufacturing
entities, as per Z-score are-
Z-Score Zone of Prediction regarding corporate failure (due to bankruptcy)
discrimination
Companies with a Z score of below 1.1 are in danger and
Less than 1.1 Distress
possibly heading towards bankruptcy.
1.1 - 2.6 Grey Companies with scores 1.1 to 2.6 need further investigation.
2.6 above Safe Companies with a score of 2.6 above are financially sound.
Mind-it, Skyway Airline Limited (SAL) is an international carrier, a non-manufacturing entity.
MCQ 9
Which of following statements are incorrect in regard to Argenti's A score model.
1. Mistakes and defects not inter-related.
2. Threshold is Kept at score of 45.
3. There are three underlying groups (dimensions) i.e., Mistakes, Defects and Symptoms of
failure.
Options
a. Only 1
b. Only 1
c. Both 1 and 2 only
d. Both 1 and 3 only
Key – c
Reason – Mistake and defects are interrelated. To illustrate, if the management and accounting
system is weak (defect) then mistakes are bound to happen. The threshold score to identify the
corporate at risk of failure is 25.
MCQ 10
Following are the scores of six firms as per Argenti's A score model. You are required to identify
healthy firms-
Firm Defects Mistake Symptoms of trouble
1 10 0 4
2 2 15 0
3 10 15 0
4 15 0 0
5 0 30 0
Options
a. Only firm 1, 2, 3, and 4
b. Only firm 1 and 4
c. Only firm 2 and 3
d. Only firm 2, 3, 4, and 5
Key – c
Reason – The maximum score allotted is 100 (being 43 from Defects, 45 from Mistake and 12 from
Symptoms of trouble). For a firm to be cleared as healthy, its overall score must be less than the
maximum acceptable score of 25 (with 10 and 15 being the maximum acceptable scores in defects
and mistakes respectively). If a firm scores anything in Symptoms of trouble this is immediately
seen as an indicator that the firm is at risk.
A firm that scores more than 25 overall, even if it scores below the individual thresholds in either of
Defects (10) or Mistake (15), would still be considered at risk.
In case of 1st firm Symptoms of trouble score is 4, while in case 4 th firm Defects score is more than
10 whereas in case of 5 th firm Mistake scores are 30, which more than acceptable limit of 15, hence
Firm 1, 4 and 5 are at risk. On contrary firm 2 and 3 are healthy.
MCQ 11
Consider the following categories of performance measures.
I. Profitability measures.
II. Customer-satisfaction measures.
III. Efficiency, quality, and time measures.
IV. Innovation measures.
A cruise line operates on a national scale in a very competitive marketplace. In view of this
information, which measures should the company use in the evaluation of its managers?
Options
a. I
b. I and II
c. II and III
d. I, II, III and IV
Key – d
Reason – These categories of performance measures are all the things that a company needs in
order to have a competitive advantage. Competitive advantage is an advantage that a company has
over its competitors which it gains by offering consumers greater value than they can get from its
competitors.
In a very competitive marketplace such as this cruise line is in, competitive advantage is essential.
In order to have a competitive advantage, the company needs to excel in all of these performance
measures. If managers are not evaluated on their performance in these areas, they will not work
toward excelling in them, and the company will not have a competitive advantage. Therefore, the
company should use all of these measures in its evaluation of its managers.
Options
a. Joint venture
b. Strategic Alliance
c. Setting-up plant in other countries
d. Licensing
Key – b
Reason - A strategic alliance is an arrangement between two or more enterprises to undertake a
mutually beneficial project while each retains its independence.
A Strategic Alliance agreement is less complex and less binding than a joint venture. In joint venture
two businesses pool resources to create a separate business entity, whereas in case strategic
alliance they retain their independence. So, NAL through strategic alliance can control the quality
while.
On the other hand, setting up plants in other countries would require huge capital outlay, whereas
licensing lead not control of NAL over quality.
Note - Since independence is retained under the Strategic Alliance, hence it become difficult to put
common performance measures in place and to collect and analyse management information for
same because security of confidential information is a concern.
....continue….. NAL's board of directors is considering a joint venture with Country B's Anumaj
Automobiles Limited (AAL), because Country B, which is a neighbouring country has a rapidly
growing market for environmentally friendly bikes. Though AAL does not currently produce hybrid
vehicles, but it does have excess capacity in its factory.
AAL is also interested in proposal because their sale during proceeding three years has been
declining due to the safety issued in their bikes. Even couple of blast issues report in their bike in
recent past, engine caught fire in both the cases; resultantly petrol tank bust results in blast.
MCQ 3 – Managing performance of Joint-venture is difficult due to which of the following limitations.
I. Difference in Culture and management styles in both the companies (JV partners)
II. Difference in financial reporting framework in both the countries
III. Difference in attitude towards risk and quality in both the companies (JV partners)
Options
a. I and II only
b. I and III only
c. II and III only
d. All I, II and III
Key – b
Reason – Limitations that become root cause of problems in measuring and managing the
performance of JV.
▪ Establishing objective in is never easy, because the parties involved in complex business
structures may have different values, vision, risk appetites and timescales. This shortcoming
highlights the inevitable need of goal congruence.
▪ The approaches and attitude of parties towards factors that are critical for performance such
as quality, control and risk, etc. may be different, hence a common minimum programme needs
to be devised.
▪ Since different sets of resources, skills and knowledge contributed by parties, hence assigning
accountability for performance is key issue. Accountability shall be clearly established and
communicated at the outset.
▪ Lack of trust is a critical aspect, because for performance measurement and evaluation detailed
information is required, whereas parties of complex business structures may be hesitant to
share information freely if they lack trust in each other. Control and reporting framework shall
be mutually decided and climate of trust shall be foster by opting compatible management style.
▪ Cultural conflicts may result in poor performance, hence shared values shall be redefined so
that they may be more liberal and serve the purpose.
MCQ 4 – Which of the following primary activity shall be substantial source of enlarged value for
proposed JV of Nova and AAL.
Options
a. Inbound logistics
b. Outbound logistics
c. Marketing and sales
d. After sale services
Key – c
Reason – Country B has a rapidly growing market for environmentally friendly bikes, hence
managing marketing mix to drive higher margin (through high perceived value) will be easy for JV of
PAL and AAL; therefore, marketing and sales activities shall be substantial source of enlarged value.
DESCRIPTIVE QUESTION
How can information technology breakthrough help Nova and AAL to overcome the limitation
of complex business structure in managing performance of JV they are going to form?
Answer – Joint Venture is considered to be complex business structure; it faces a variety of issues
in measuring and managing performance. Information Technology breakthroughs can be game-
changer for such complex business structure though ensuring accurate, reliable and timely
information.
All the JV parties must agree to use one uniform system for information exchange pertaining to
shared interest. If such information system is separate from their core individual information system,
then plug-in between common system and respective information systems of JV partner shall be
used for real-time information sharing to ensure seamless flow of information.
Having one common system used by all partners’ means that everyone is using the same data. This
will also result in less difficulty collecting information about the performance of partners since the
information will all be stored on one system.
CHAPTER OVERVIEW
B. RESPONSIBILITY ACCOUNTING
Responsibility accounting deals with the collection, summarization, and reporting of information
where an individual manager is held accountable for certain costs, revenue, or assets of the firm.
Hence, Responsibility Accounting lays the foundation as an information sub-system of the
Performance Management System to measure and evaluate performance, both in for -profit (private
sector entities) and not-for-profit (public or social sector) organisations.
We already acknowledged in Chapter 8 that performance measurement is directly linked to the
organisational structure of a business. Responsibility accounting is apt where top management has
delegated authority to make decisions, but it can be used in all sorts of organisational structures.
The idea behind responsibility accounting is that each manager’s performance should be judged by
how well he or she manages those items under his or her control.
No matter how much authority and autonomy are given to responsibility managers, performance
reports are needed to evaluate the performance of the managers at all operating levels of the
organization. At the bottom levels, it helps in determining what corrective measures are required in
their segments. At the top management level, these reports keep top managers informed on the
performance of all segments.
The responsibility accounting performance report collects all of the responsibility accounting budgets
made for each department and summarizes them in one large report.
Do You Know?
Why do entities issue and use performance reports?
▪ Focus attention on issues and aspects that are causing poor performance (bringing these
items to the attention of both managers and employees).
▪ Quantification and prioritisation of issues – to enable report recipients to take a decision if the
flagged item in the report represents significant concerns that warrant immediate attention.
▪ Foster a communication platform that pushes the recipient as well as the responsible manager
to discuss the highlighted issues.
In addition to these, the following can also be included in the list of reasons –
▪ Benchmarking.
▪ Resource planning (including monitoring of workers).
▪ Enhance business performance.
▪ Smooth flow of communication.
▪ Preparation of external reports.
3. Aspects Involved in the Preparation of Performance Reports
Despite the fact that system of performance reporting (preparation, circulation and use of the same)
can vary from entity to entity, the process of preparation involves certain common aspects that can
be seen as steps in sequence –
3.1 Have a clear idea about the need and use-case for the user/ receipt
This is the standard principle that applies to any reporting system universally that understanding the
user is essential to choose the information to be included, detailing thereof, etc. , ultimately serving
the purpose of performance management.
The performance report is mainly written for senior management, but it is also used by people at the
other two lower levels of management and by executives as well. Their needs from the performance
report are supposed to be considered before drafting the same.
3.2 Establishment of Objectives in light of Organisational Objectives (Vision or Mission)
After identification of the audience, the next big task is to identify the CSFs and KPIs to be reported,
for that aim reporting system need to be established in light of objectives and goals of organisation
which are constructed or drawn from organisational vision and mission.
Note: This topic has been covered in detail in Chapter 9 of this part of the syllabus.
Concept Insight
Value Creation
Value creation is not an independent activity within the organization’s sole control. Value is
created using capital. In integrated reporting, capital is not limited to just financial capital. There
are six different categories: financial, manufactured, human, natural, intellectual, social, and
relationship capitals. The combined effect of these capitals are what results in value creation for
the company.
Example
If any engineering department introduced automation (invested in new technology), then the
performance report considers its effect and shows the implications, such as reductions in variable
cost on account of reductions in man-hours. The budgeted reports would show a low expected
level of these variable costs. Upper management could then check the variances between the
actual and budgeted costs. If upper-level management sees a manager’s efficiency and
profitability decrease compared with the budgeted numbers, management can talk with the
department manager and try to correct the unfavorable variances.
SUMMARY
❑ Responsibility Accounting is the collection, summarization, and reporting of financial information
where individual managers are held accountable for certain costs, revenue or assets of the firm.
❑ The performance report responsibility accounting collects all of the responsibility accounting
budgets made for each department and summaries them in one large report.
❑ Responsibility Accounting is implemented by issuing performance reports at frequent intervals that
inform responsibility centre managers of the deviations from budgets for which they are accountable
and required to take action.
❑ Benchmarking, Resource planning (including monitoring of worker), Enhance business
performance, Smooth flow of communication, and Preparation of external reports are among major
reasons or advantages for performance reporting.
❑ Despite the system of performance reporting (preparation of performance report, circulation and
use of same) can vary from entity to entity, the process of preparing involve certain common aspects
that can be seen as steps in sequence.
❑ Earned Value Report, Forecasting Report, Progress Report, Status Report, Trend Report, and
Variance Report are types of reports that can be used to record and report performance related
data for performance evaluation.
❑ Apart from traditional financial reporting framework, certain sustainability oriented reporting
frameworks such as Triple Bottom Line, Global Reporting Initiative, ESG Reporting, and Integrated
Reporting Framework (through value creation) are relevant for practice of strategic performance
management.
❑ It is critical but equally important that entity should set a time frame for analysis, whether it is a
month, quarter, or annual report. This timeframe allows to identify trends.