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Saturday, November 28, 2009
"Modern Chairs" - a TQM video
A Total Quality Management training video that the final year class at the University of Edinburgh made in the style of Charlie Chaplin's Modern Times. The intention was to teach, teamwork, production line processes, process optimisation, defects, quality, and continual improvement 'Kaizen'.
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TQM at QPL Ltd
QPL Ltd., a leader in total quality management, empowers emplyees to ensure uncompromising quality in the production process.
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6s Quality Process of Pharmanex (Video)
Pharmanex uses proprietary technology in its manufacturing processes to maintain tight quality controls through all stages of product development. The key to consistent quality is the Pharmanex® 6S® Quality Process, the basis of the company's pharmaceutical approach to product development.
The attention to detail, strict scientific testing, and commitment to quality ensures that every Pharmanex® product is absolutely safe and effective. The 6S® Quality Process has enabled Pharmanex to become an industry leader in quality and efficacy. (Intrinsic activity or efficacy refers to the ability of a drug-receptor complex to produce a functional response)
6s Quality Process: Selection, Sourcing, Structure, Standardisation, Safety, Substantiation Quality.
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The attention to detail, strict scientific testing, and commitment to quality ensures that every Pharmanex® product is absolutely safe and effective. The 6S® Quality Process has enabled Pharmanex to become an industry leader in quality and efficacy. (Intrinsic activity or efficacy refers to the ability of a drug-receptor complex to produce a functional response)
6s Quality Process: Selection, Sourcing, Structure, Standardisation, Safety, Substantiation Quality.
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Friday, November 27, 2009
Views on Quality Costs
Traditional View
• Cost of conformance is the cost of achieving specified quality standards.
• Cost of non-conformance is the cost of failure to deliver the required standards of quality.
• Cost of conformance is a discretionary cost which is incurred with the intention of eliminating the cost of internal and external failure.
• The cost of non-conformance on the other hand, can only be reduced by increasing the cost of conformance.
The traditional approach to quality management is that there is an optimal level of quality effort, that minimizes total quality costs, and there is an optimal level of quality effort, that minimizes total quality costs, and there is a point beyond which spending more on quality yield a benefit that is less than the additional cost incurred. Diminishing returns ser in beyond the optimal quality level.
The TQM philosophy is different.
(a) Failure and poor quality are unacceptable. It is inappropriate to think of an optimal level of quality at which some failures will occur, and the inevitability of errors is not something that an organization should accept. The target should be zero defect.
(b) Quality costs are difficult to measure, and failure costs are often seriously underestimated. The real costs of failure include not just the costs of scrapped items and re-working faulty items, but also the management time spent on sorting out problems and the loss of confidence between different parts of the organization whenever faults occur.
(c) A TQM approach does not accept that the prevention costs of achieving zero defects becomes unacceptably high as the quality standard improves and goes above a certain level. In other words, diminishing returns does not necessary set in. If everyone in the organization is involved in improving quality, the cost of continuous improvement need not be high.
(d) If an organization accepts an optimal quality level that it believes will minimize total quality costs, there will be no further challenge to management to improve quality further.
The TQM quality cost model is based on the view that:
(a) Prevention costs and appraisal costs are subject to management influence or control. It is better to spend money on prevention, before failures occur, than on inspection to detect failures after they have happened.
(b) Internal failure costs and external failure costs are the consequences of the efforts spent on prevention and appraisal. Extra effort on prevention will reduce internal failure costs and this in turn will have a knock-on effect, reducing external failure costs as well.
In other words, higher spending on prevention will eventually lead to lower total quality costs.
The emphasis is on “getting things right first time” and “designing in quality” to the product or service.
(source: BPP Learning Media)
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• Cost of conformance is the cost of achieving specified quality standards.
• Cost of non-conformance is the cost of failure to deliver the required standards of quality.
• Cost of conformance is a discretionary cost which is incurred with the intention of eliminating the cost of internal and external failure.
• The cost of non-conformance on the other hand, can only be reduced by increasing the cost of conformance.
The traditional approach to quality management is that there is an optimal level of quality effort, that minimizes total quality costs, and there is an optimal level of quality effort, that minimizes total quality costs, and there is a point beyond which spending more on quality yield a benefit that is less than the additional cost incurred. Diminishing returns ser in beyond the optimal quality level.
The TQM philosophy is different.
(a) Failure and poor quality are unacceptable. It is inappropriate to think of an optimal level of quality at which some failures will occur, and the inevitability of errors is not something that an organization should accept. The target should be zero defect.
(b) Quality costs are difficult to measure, and failure costs are often seriously underestimated. The real costs of failure include not just the costs of scrapped items and re-working faulty items, but also the management time spent on sorting out problems and the loss of confidence between different parts of the organization whenever faults occur.
(c) A TQM approach does not accept that the prevention costs of achieving zero defects becomes unacceptably high as the quality standard improves and goes above a certain level. In other words, diminishing returns does not necessary set in. If everyone in the organization is involved in improving quality, the cost of continuous improvement need not be high.
(d) If an organization accepts an optimal quality level that it believes will minimize total quality costs, there will be no further challenge to management to improve quality further.
The TQM quality cost model is based on the view that:
(a) Prevention costs and appraisal costs are subject to management influence or control. It is better to spend money on prevention, before failures occur, than on inspection to detect failures after they have happened.
(b) Internal failure costs and external failure costs are the consequences of the efforts spent on prevention and appraisal. Extra effort on prevention will reduce internal failure costs and this in turn will have a knock-on effect, reducing external failure costs as well.
In other words, higher spending on prevention will eventually lead to lower total quality costs.
The emphasis is on “getting things right first time” and “designing in quality” to the product or service.
(source: BPP Learning Media)
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Costs of Quality & Quality Reports
“Concern for good quality saves money, Poor quality costs money”
Costs of quality can be analyzed into prevention, appraisal, internal failure and external failure costs and should be detailed in a cost of quality report.
Cost of quality is the difference between the actual cost of producing, selling and supporting products or services and the equivalent costs if there were no failures during production or usage.
Cost of quality can be analyzed into:
• Cost of prevention – the costs incurred prior to or during production in order to prevent substandard or defective products or services from being produced.
• Cost of appraisal – cost incurred in order to ensure that outputs produced meet required quality standards.
• Cost of internal failure – the cost arising from inadequate quality which are identified before the transfer of ownership from supplier to purchaser.
• Cost of external failure – the cost arising from inadequate quality discovered after the transfer of ownership from supplier to purchaser.
External failure costs are the costs of failing to deliver a quality product externally. The sum of internal failure costs, prevention and appraisal costs is the cost of failing to deliver a quality product internally.
Examples of Quality-related Cost
(1) Prevention costs
• Quality engineering,
• Design/development of quality control/inspection equipment,
• Maintenance of quality control/inspection equipment.
• Administration of quality control,
• Training in quality control
(2) Appraisal costs
• Acceptance testing,
• Inspection of goods inwards.
• Inspection costs of in-house processing.
• Performance testing
(3) Internal failure costs
• Failure analysis,
• Re-inspection costs.
• Losses from failure of purchased items.
• Losses due to lower selling prices for sub-quality goods.
• Costs of reviewing product specifications after failures
(4) External failure costs
• Administration of customer complaints section
• Costs of customer service section
• Product liability costs
• Costs of repairing products returned from customers
• Costs of replacing items due to sub-standard products/marketing errors
(source: BPP Learning Media)
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Costs of quality can be analyzed into prevention, appraisal, internal failure and external failure costs and should be detailed in a cost of quality report.
Cost of quality is the difference between the actual cost of producing, selling and supporting products or services and the equivalent costs if there were no failures during production or usage.
Cost of quality can be analyzed into:
• Cost of prevention – the costs incurred prior to or during production in order to prevent substandard or defective products or services from being produced.
• Cost of appraisal – cost incurred in order to ensure that outputs produced meet required quality standards.
• Cost of internal failure – the cost arising from inadequate quality which are identified before the transfer of ownership from supplier to purchaser.
• Cost of external failure – the cost arising from inadequate quality discovered after the transfer of ownership from supplier to purchaser.
External failure costs are the costs of failing to deliver a quality product externally. The sum of internal failure costs, prevention and appraisal costs is the cost of failing to deliver a quality product internally.
Examples of Quality-related Cost
(1) Prevention costs
• Quality engineering,
• Design/development of quality control/inspection equipment,
• Maintenance of quality control/inspection equipment.
• Administration of quality control,
• Training in quality control
(2) Appraisal costs
• Acceptance testing,
• Inspection of goods inwards.
• Inspection costs of in-house processing.
• Performance testing
(3) Internal failure costs
• Failure analysis,
• Re-inspection costs.
• Losses from failure of purchased items.
• Losses due to lower selling prices for sub-quality goods.
• Costs of reviewing product specifications after failures
(4) External failure costs
• Administration of customer complaints section
• Costs of customer service section
• Product liability costs
• Costs of repairing products returned from customers
• Costs of replacing items due to sub-standard products/marketing errors
(source: BPP Learning Media)
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TEDxAtlanta Video
How to accelerate the journey to higher level leadership skills.
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Performance Prism
Overview
Performance Prism is a three dimensional model.
The model has Five Facets: The top and bottom facets are Stakeholder Satisfaction and Stakeholder Contribution respectively. The three side facets are Strategies, Processes and Capabilities.
These five facets are linked and have a sequential order starting with Stakeholder Satisfaction and finishing with Stakeholder Contribution.
Step 1 The model starts from the percept that successful organizations have a clear picture of who their key stakeholders are and what they want.
Step 2 These organizations then define what strategies they will pursue to ensure that value is delivered to these stakeholders.
Step 3 They understand what processes the enterprise requires if these strategies are to be delivered and they have defined what capabilities they need to execute these processes.
Step 4 Successful organizations have also thought carefully about what it is that the organization wants from its stakeholders. This includes employee loyalty, customer profitability, and long term investment, for instance.
In essence they have a clear business model and an explicit understanding of what constitutes and drives good performance.
(source : BPP Learning Module)
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Performance Prism is a three dimensional model.
The model has Five Facets: The top and bottom facets are Stakeholder Satisfaction and Stakeholder Contribution respectively. The three side facets are Strategies, Processes and Capabilities.
These five facets are linked and have a sequential order starting with Stakeholder Satisfaction and finishing with Stakeholder Contribution.
Step 1 The model starts from the percept that successful organizations have a clear picture of who their key stakeholders are and what they want.
Step 2 These organizations then define what strategies they will pursue to ensure that value is delivered to these stakeholders.
Step 3 They understand what processes the enterprise requires if these strategies are to be delivered and they have defined what capabilities they need to execute these processes.
Step 4 Successful organizations have also thought carefully about what it is that the organization wants from its stakeholders. This includes employee loyalty, customer profitability, and long term investment, for instance.
In essence they have a clear business model and an explicit understanding of what constitutes and drives good performance.
(source : BPP Learning Module)
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Thursday, November 26, 2009
Six Sigma Solution Video (Part I & II)
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Benefits Claimed by Six Sigma
(a) Making processes more rigorous by using hard, timely data, not opinions or gut feel, to make operating decisions.
(b) Cultivating customer loyalty by delivering superior value.
(c) Strengthening and rewarding teamwork by aligning employees around complex processes whose performance can still be easily, clearly and empirically measured.
(d) Accustoming managers to operating in a fast moving internal business environment that increasingly mirrors marketplace conditions outside the company.
(e) Achieving quantum leaps in product performance.
(f) Reducing variation in service processes, such as the time from order to delivery, or offering a consistent, high-quality service experience.
(g) Improving financial performance, through cost savings from projects, increased revenue from improved products and expanded operating margins.
(source: BPP Learning Media)
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(b) Cultivating customer loyalty by delivering superior value.
(c) Strengthening and rewarding teamwork by aligning employees around complex processes whose performance can still be easily, clearly and empirically measured.
(d) Accustoming managers to operating in a fast moving internal business environment that increasingly mirrors marketplace conditions outside the company.
(e) Achieving quantum leaps in product performance.
(f) Reducing variation in service processes, such as the time from order to delivery, or offering a consistent, high-quality service experience.
(g) Improving financial performance, through cost savings from projects, increased revenue from improved products and expanded operating margins.
(source: BPP Learning Media)
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Six Sigma DMAIC Strategy
Six Sigma Project Phases
Six Sigma process improvement projects follow a five phases pattern known by the acronym DMAIC.
• Define customer requirements
• Measure existing performance
• Analyse the existing process
• Improve the process
• Control the new process
Define Phase
• Is a planning phase – project definition, documentation of the existing process?
• The establishment of precise customer requirements from the process in question is an essential part of this phase.
• Customer requirement can be divided into 3 levels:
o Basic requirements are the minimum the customer will accept.
o Satisfiers improves the quality of the customer’s experience
o Delighters are totally unexpected by the customers
• Both external and internal customers may be vague in stating their requirements so careful research and logical definition are required.
• An important output from this phase is careful documentation of the process as it exists, probably using some form of flow diagram.
Measure Phase
• In this phase, statistical tools selected using black belt expertise, are used to assess current performance. Harmon suggests three measurement principles:
o Only measure what the customer thinks is important.
o Do not measure that the customer is satisfied with.
o Only measure things that can be improved.
• Three main areas for measurement:
o Inputs such as raw materials and product specifications
o Process elements such as cost, time, skills and training
o Outputs and customer satisfaction
• Outputs and customer satisfaction derive from and are determined by inputs and processes. This relationship is represented as an equation Y=f(X), Y is the output and X represent input and processes. Y is used to meant goal or objective.
Analyse Phase
• Each element of the process may be assessed into one of three categories:
o Value adding
o Necessary support to value adding activities
o Non-value adding.
• Establishing the status of the various aspects of the process will require the use of a range of techniques including statistical analysis, Pareto analysis and the Fishbone Analysis.
• Analysis should produce a list of problem causes and potential areas of improvement.
Improve Phase
• It is appropriate to revisit the project charter at the beginning of this phase, so as to incorporate any implications of the information obtained.
• Improving the process demands creative thought, can be guided by the wider experience of the team and its expert consultants.
• The problems identified in the analysis phase will indicate fruitful areas for consideration.
• People closely involved with the operation of a process usually develop ideas for improvement. There is often value in these ideas because of the great intimacy their authors have with the details of the process and its organizational setting.
• It is, however, important that all proposals for improvement are subjected to a rational review so that their implications may be considered in as much detail as possible. Cost and resource consequences are of particular importance.
• Implementation will require careful planning, probably small scale piloting and selling to stakeholders who were not involved in the project.
Control Phase
• Control process is a routine and continuing part of the management role.
• When a process has been improved, it is necessary to maintain some of the measurement process used during the improvement effort in order to exercise control.
• The cost of monitoring must be considered, so that the extent of measurement will be minimized.
• Some processes can be monitored automatically, with control systems that generate exception reports automatically.
(source: BPP Learning Media)
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Six Sigma process improvement projects follow a five phases pattern known by the acronym DMAIC.
• Define customer requirements
• Measure existing performance
• Analyse the existing process
• Improve the process
• Control the new process
Define Phase
• Is a planning phase – project definition, documentation of the existing process?
• The establishment of precise customer requirements from the process in question is an essential part of this phase.
• Customer requirement can be divided into 3 levels:
o Basic requirements are the minimum the customer will accept.
o Satisfiers improves the quality of the customer’s experience
o Delighters are totally unexpected by the customers
• Both external and internal customers may be vague in stating their requirements so careful research and logical definition are required.
• An important output from this phase is careful documentation of the process as it exists, probably using some form of flow diagram.
Measure Phase
• In this phase, statistical tools selected using black belt expertise, are used to assess current performance. Harmon suggests three measurement principles:
o Only measure what the customer thinks is important.
o Do not measure that the customer is satisfied with.
o Only measure things that can be improved.
• Three main areas for measurement:
o Inputs such as raw materials and product specifications
o Process elements such as cost, time, skills and training
o Outputs and customer satisfaction
• Outputs and customer satisfaction derive from and are determined by inputs and processes. This relationship is represented as an equation Y=f(X), Y is the output and X represent input and processes. Y is used to meant goal or objective.
Analyse Phase
• Each element of the process may be assessed into one of three categories:
o Value adding
o Necessary support to value adding activities
o Non-value adding.
• Establishing the status of the various aspects of the process will require the use of a range of techniques including statistical analysis, Pareto analysis and the Fishbone Analysis.
• Analysis should produce a list of problem causes and potential areas of improvement.
Improve Phase
• It is appropriate to revisit the project charter at the beginning of this phase, so as to incorporate any implications of the information obtained.
• Improving the process demands creative thought, can be guided by the wider experience of the team and its expert consultants.
• The problems identified in the analysis phase will indicate fruitful areas for consideration.
• People closely involved with the operation of a process usually develop ideas for improvement. There is often value in these ideas because of the great intimacy their authors have with the details of the process and its organizational setting.
• It is, however, important that all proposals for improvement are subjected to a rational review so that their implications may be considered in as much detail as possible. Cost and resource consequences are of particular importance.
• Implementation will require careful planning, probably small scale piloting and selling to stakeholders who were not involved in the project.
Control Phase
• Control process is a routine and continuing part of the management role.
• When a process has been improved, it is necessary to maintain some of the measurement process used during the improvement effort in order to exercise control.
• The cost of monitoring must be considered, so that the extent of measurement will be minimized.
• Some processes can be monitored automatically, with control systems that generate exception reports automatically.
(source: BPP Learning Media)
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The Essence of Six Sigma
The Six Sigma Concept
• Six Sigma is a quality management methodology developed at Motorola in the late 1980s.
• Harmon and Pande and Hopp describe six sigma as the latest development in an evolutionary process that began with Scientific Management and continued through lean manufacturing and TQM.
• The essence of Six Sigma is to improve a process to the extent that there is only the tinniest probability that it will produce Unsatisfactory outputs.
• Probability – because there is no certainties in this sort of work.
• Pande and Hopp identify six themes in Six Sigma:
o Genuine focus on the customer
o Data and Fact driven management
o Processes as the key to success
o Proactive management
o Boundaryless collaboration
o Performance combined with tolerance of failure
(source: BPP Learning Media)
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• Six Sigma is a quality management methodology developed at Motorola in the late 1980s.
• Harmon and Pande and Hopp describe six sigma as the latest development in an evolutionary process that began with Scientific Management and continued through lean manufacturing and TQM.
• The essence of Six Sigma is to improve a process to the extent that there is only the tinniest probability that it will produce Unsatisfactory outputs.
• Probability – because there is no certainties in this sort of work.
• Pande and Hopp identify six themes in Six Sigma:
o Genuine focus on the customer
o Data and Fact driven management
o Processes as the key to success
o Proactive management
o Boundaryless collaboration
o Performance combined with tolerance of failure
(source: BPP Learning Media)
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Tuesday, November 24, 2009
Benchmarking
Benchmarking is the process of gathering data about targets and comparators, that permit current levels of performance to be identified and evaluated against best practice. Adoption of identified best practices should improve performance.
JS&W propose the following categories of benchmarking:
(a) Historical benchmarking
• An internal comparison of current against past performance.
• This is unsatisfactory, since it can induce complacence
• Comparison with competitors is the real test of performance.
(b) Industry/sector benchmarking
• Compares like with like across the industry or similar providers in the public service.
• Limitation of this method is that the whole industry may be under-performing and in danger from substitute products provided by other industries.
(c) Best-in-class benchmarking
• Looks for best practice wherever it can be found.
• This involves making comparison with similar features or processes in other industries.
• JS&W suggest that this approach can have a shock effect on complacent managers and lead to dramatic performance improvements.
The Benchmarking Process
Stage 1 - Ensure senior management commitment to the benchmarking process.
Stage 2 - The areas to be benchmarked should be determined and objectives should be set.
Stage 3 - Key performance measures must be established.
Stage 4 - Select organizations to benchmark against.
Stage 5 - Measure own and others’ performance.
Stage 6 – Compare performance.
Stage 7 – Design and implement improvement programmes
Stage 8 – Monitor improvements
Advantages of Benchmarking
(a) Position audit – benchmarking can assess a firm’s existing position, and provide a basis for establishing standards of performance.
(b) The comparisons are carried out by the managers who have to live with any changes implemented as a result of the exercise.
(c) Benchmarking focuses on improvement in key areas and set targets which are challenging but evidently achievable.
(d) The sharing of information can be a spur to innovation.
(e) The result should be improved performance, particularly in cost control and delivering value.
Drawbacks of Benchmarking
(a) It can cloud perception of strategic purpose by attracting too much attention to the detail of what is measured, since it concentrates on doing things right rather than doing the right thing: the difference between efficiency and effectiveness.
(b) Benchmarking does not identify the reasons why performance at a particular level, whether good or bad.
(c) It is a catching-up exercise rather than the development of anything distinctive. After the benchmarking exercise, the competitor might improve performance in a different way.
(d) It depends on accurate information about comparator companies.
(e) It is not cost-free and can divert management attention.
(f) It can become a hindrance and even a threat, sharing information with other companies can be a burden and a security risk.
(source: BPP Learning Media)
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JS&W propose the following categories of benchmarking:
(a) Historical benchmarking
• An internal comparison of current against past performance.
• This is unsatisfactory, since it can induce complacence
• Comparison with competitors is the real test of performance.
(b) Industry/sector benchmarking
• Compares like with like across the industry or similar providers in the public service.
• Limitation of this method is that the whole industry may be under-performing and in danger from substitute products provided by other industries.
(c) Best-in-class benchmarking
• Looks for best practice wherever it can be found.
• This involves making comparison with similar features or processes in other industries.
• JS&W suggest that this approach can have a shock effect on complacent managers and lead to dramatic performance improvements.
The Benchmarking Process
Stage 1 - Ensure senior management commitment to the benchmarking process.
Stage 2 - The areas to be benchmarked should be determined and objectives should be set.
Stage 3 - Key performance measures must be established.
Stage 4 - Select organizations to benchmark against.
Stage 5 - Measure own and others’ performance.
Stage 6 – Compare performance.
Stage 7 – Design and implement improvement programmes
Stage 8 – Monitor improvements
Advantages of Benchmarking
(a) Position audit – benchmarking can assess a firm’s existing position, and provide a basis for establishing standards of performance.
(b) The comparisons are carried out by the managers who have to live with any changes implemented as a result of the exercise.
(c) Benchmarking focuses on improvement in key areas and set targets which are challenging but evidently achievable.
(d) The sharing of information can be a spur to innovation.
(e) The result should be improved performance, particularly in cost control and delivering value.
Drawbacks of Benchmarking
(a) It can cloud perception of strategic purpose by attracting too much attention to the detail of what is measured, since it concentrates on doing things right rather than doing the right thing: the difference between efficiency and effectiveness.
(b) Benchmarking does not identify the reasons why performance at a particular level, whether good or bad.
(c) It is a catching-up exercise rather than the development of anything distinctive. After the benchmarking exercise, the competitor might improve performance in a different way.
(d) It depends on accurate information about comparator companies.
(e) It is not cost-free and can divert management attention.
(f) It can become a hindrance and even a threat, sharing information with other companies can be a burden and a security risk.
(source: BPP Learning Media)
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Monday, November 23, 2009
Sunday, November 22, 2009
BCG Matrix explained
The Boston Classification classifies Portfolios of Business Units in terms of their capacity for growth within the market and the market’s capacity for growth as a whole.
1. Market Growth High, Market Share High: STARS
2. Market Growth High, Market Share Low: QUESTION MARKS
3. Market Growth Low, Market Share High: CASH COWS
4. Market Growth Low, Market Share Low: DOGS
The portfolios should be balanced, with CASH COWS providing finance for STARS and QUESTION MARKS; and a minimum of DOGS.
(a) In the short term, STARS require capital expenditure in excess of the cash generate, in order to maintain their position in their competitive growth market, but promise high returns in the future. Strategy: build.
(b) In due course, STARS will become CASH COWS. CASH COWS need very little capital expenditure, since mature markets are likely to be quite stable, and they generate high levels of cash income. CASH COWS can be used to finance the STARS. Strategy: hold or harvest if weak.
(c) QUESTION MARKS must be assessed as to whether they justify considerable capital expenditures in the hope of increasing their market share, or should they be allowed to die quietly as they are squeezed out of the expanding market by rival products? Strategy: build or harvest.
(d) DOGS may be ex-CASH COWS that have now fallen on hard times. Although they will show only a modest net cash outflow, or even a modest net cash inflow they are cash traps which tie up funds and provide a poor return on investment. However, they may have a useful role, either to complete a product range or to keep competitors out. There are also many smaller niche businesses in markets that are difficult to consolidate that would count as DOGS but which are quite successful. Strategy: divest or hold.
The BCG Matrix must be used with care.
(a) It may be difficult to define “high” and “low” on both axes of the matrix.
(b) The matrix has been used to assess products rather than SBUs, but JS&W say this should not be done, nor should it be applied to broad markets that include many market segments. They however recommend it for assessing a portfolio of international operations, with three caveats:
a. The permitted forms of activity and ownership vary from country to country.
b. Political risk is not considered.
c. Shared resources are not considered.
(c) the matrix is built around cash flows but innovative capacity may be the critical resource.
(source: BPP Learning Media)
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1. Market Growth High, Market Share High: STARS
2. Market Growth High, Market Share Low: QUESTION MARKS
3. Market Growth Low, Market Share High: CASH COWS
4. Market Growth Low, Market Share Low: DOGS
The portfolios should be balanced, with CASH COWS providing finance for STARS and QUESTION MARKS; and a minimum of DOGS.
(a) In the short term, STARS require capital expenditure in excess of the cash generate, in order to maintain their position in their competitive growth market, but promise high returns in the future. Strategy: build.
(b) In due course, STARS will become CASH COWS. CASH COWS need very little capital expenditure, since mature markets are likely to be quite stable, and they generate high levels of cash income. CASH COWS can be used to finance the STARS. Strategy: hold or harvest if weak.
(c) QUESTION MARKS must be assessed as to whether they justify considerable capital expenditures in the hope of increasing their market share, or should they be allowed to die quietly as they are squeezed out of the expanding market by rival products? Strategy: build or harvest.
(d) DOGS may be ex-CASH COWS that have now fallen on hard times. Although they will show only a modest net cash outflow, or even a modest net cash inflow they are cash traps which tie up funds and provide a poor return on investment. However, they may have a useful role, either to complete a product range or to keep competitors out. There are also many smaller niche businesses in markets that are difficult to consolidate that would count as DOGS but which are quite successful. Strategy: divest or hold.
The BCG Matrix must be used with care.
(a) It may be difficult to define “high” and “low” on both axes of the matrix.
(b) The matrix has been used to assess products rather than SBUs, but JS&W say this should not be done, nor should it be applied to broad markets that include many market segments. They however recommend it for assessing a portfolio of international operations, with three caveats:
a. The permitted forms of activity and ownership vary from country to country.
b. Political risk is not considered.
c. Shared resources are not considered.
(c) the matrix is built around cash flows but innovative capacity may be the critical resource.
(source: BPP Learning Media)
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Marketing Strategy: Product Life Cycle Video
A very well presented video on the above subject matter.
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Product Life Cycle Explained
The Product Life Cycle concept holds that products have a life cycle and that a product demonstrates different characteristics of profit and investment at each stage in its life cycle.
The life cycle concept is a model, not a prediction.
Product life cycle concept enables a firm to examine its portfolio of goods and services as a whole.
The profitability and sales of a product can be expected to change over time. The product life cycle is an attempt to recognize distinct stages in a product’s sales history.
I. Introduction
• New product takes time to find acceptance by would-be buyers and there is a slow growth in sales. Unit costs are high because of low output and expensive sales promotion.
• There may be early teething troubles with production technology.
• The product for the time being is a loss-maker.
II. Growth
• If the new product gains market acceptance, sales will eventually rise more sharply and the product will start to make profits.
• Competitors are attracted. As sales and production rose, unit costs fall.
III. Maturity
• The rate of sales growth slows down and this product reaches a period of maturity which is probably the longest period of a successful product’s life. Most products on the market will be at the mature stage of their life. Profits are good.
IV. Decline
• Eventually sales will begin to decline so that there is over-capacity of production in the industry. Severe competition occurs, profits fall and some producers leave the market. The remaining producers seek means of prolonging the product life by modifying it and searching for new market segments. Many producers are reluctant to leave the market, although some inevitably do because of failing profits.
The relevance of the product life cycle to strategic planning
In reviewing outputs, planners should assess products in three ways:
(a) The stage of its life cycle that any product has reached.
(b) The product’s remaining life, ie how much longer the product will contribute to profits.
(c) How urgent is the need to innovate, to develop new and improved products?
(source: BPP Learning Media)
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The life cycle concept is a model, not a prediction.
Product life cycle concept enables a firm to examine its portfolio of goods and services as a whole.
The profitability and sales of a product can be expected to change over time. The product life cycle is an attempt to recognize distinct stages in a product’s sales history.
I. Introduction
• New product takes time to find acceptance by would-be buyers and there is a slow growth in sales. Unit costs are high because of low output and expensive sales promotion.
• There may be early teething troubles with production technology.
• The product for the time being is a loss-maker.
II. Growth
• If the new product gains market acceptance, sales will eventually rise more sharply and the product will start to make profits.
• Competitors are attracted. As sales and production rose, unit costs fall.
III. Maturity
• The rate of sales growth slows down and this product reaches a period of maturity which is probably the longest period of a successful product’s life. Most products on the market will be at the mature stage of their life. Profits are good.
IV. Decline
• Eventually sales will begin to decline so that there is over-capacity of production in the industry. Severe competition occurs, profits fall and some producers leave the market. The remaining producers seek means of prolonging the product life by modifying it and searching for new market segments. Many producers are reluctant to leave the market, although some inevitably do because of failing profits.
The relevance of the product life cycle to strategic planning
In reviewing outputs, planners should assess products in three ways:
(a) The stage of its life cycle that any product has reached.
(b) The product’s remaining life, ie how much longer the product will contribute to profits.
(c) How urgent is the need to innovate, to develop new and improved products?
(source: BPP Learning Media)
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The Value Network
Activities and linkages that add value do not stop at the organization’s boundaries.
A firm’s value chain is connected to other value chains in what J&S called a Value Network.
The Value Network is the set of inter-organizational links and relationships that are necessary to create a product or service.
Porter used the term Value System, Value Network is a better term since it emphasizes the interconnectedness of separate organizations.
It is possible to capture the benefit of some of the value generated both upstream and downstream in the value network:
(a) By vertical integration through acquisition of supplies and customers.
(b) Large and powerful companies can exercise less formal power over supplies and customers by using their bargaining power to achieve purchase and selling prices that are bias in their favor.
(c) A more subtle advantage is gained by fostering good relationships that can promote innovation and creation of knowledge.
Using the value chain, a firm can secure competitive advantage in several ways:
• Invent new or better ways to do activities.
• Combine activities in new or better ways.
• Manage the linkages in its own value chain.
• Manage the linkages in the value network.
(source: BPP Learning Media)
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A firm’s value chain is connected to other value chains in what J&S called a Value Network.
The Value Network is the set of inter-organizational links and relationships that are necessary to create a product or service.
Porter used the term Value System, Value Network is a better term since it emphasizes the interconnectedness of separate organizations.
It is possible to capture the benefit of some of the value generated both upstream and downstream in the value network:
(a) By vertical integration through acquisition of supplies and customers.
(b) Large and powerful companies can exercise less formal power over supplies and customers by using their bargaining power to achieve purchase and selling prices that are bias in their favor.
(c) A more subtle advantage is gained by fostering good relationships that can promote innovation and creation of knowledge.
Using the value chain, a firm can secure competitive advantage in several ways:
• Invent new or better ways to do activities.
• Combine activities in new or better ways.
• Manage the linkages in its own value chain.
• Manage the linkages in the value network.
(source: BPP Learning Media)
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Friday, November 20, 2009
The Value Chain Model explained
The Value Chain model is an excellent basic description of how an organization works.
(1) Primary Activities are directly related to production, sales, marketing, delivery and service.
(a) Inbound Logistics – Receiving, handling and storing inputs to the production system, warehousing, transport, stock control and so on.
(b) Operations – Converting resource inputs into a final product, resource inputs are not only materials. People are a resource, especially in service industries.
(c) Outbound Logistics – Storing the product and its distribution to customers: packing, testing, delivery and so on, for service industries, this activity may be more concerned with bringing customers to the place where the service is available, (example: front of house management in a theatre)
(d) Marketing and Sales – Inform customers about the product, persuading them to buy it and enabling them to so: advertising, promotion and so on.
(e) After Sales Service – Installing products, repairing them, upgrading them, providing spare parts and so forth.
(2) Support Activities provide purchased inputs, human resources, technology and infrastructural functions to support the primary activities:
(a) Procurement – All of the process involved in acquiring the resource inputs to the primary activities (eg purchases of materials, subcomponents equipment)
(b) Technology Development – Product design, improving processes and resource utilization.
(c) Human resource management – Recruiting, training, managing, developing and rewarding people, this activity takes place in all parts of the organization, not just in HRM department.
(d) Firm Infrastructure – Planning, finance, quality control, the structures and routines that make up the organization’s culture.
Linkages connect the activities of the value chain.
(a) Activities in the value chain affect one another. For example, more costly product design or better quality production might reduce the need for after-sales service.
(b) Linkages require coordination. For example, Just-in-time requires smooth functioning of operations, outbound logistics and service activities such as installation.
The Value Chain Concept is an important tool in analyzing the organization’s strategic capability. There are two important, connected aspects to this analysis:
(a) It enables managers to establish the activities that are particularly important in providing customers with the value they want: this may lead to consideration of where management attention and other resources are best applied, either to improve weakness or to further exploit strength. (for example decision about outsourcing)
(b) This analysis can be extended to include an assessment of the cost and benefits associated with various value activities.
The Value Chain, Core Competences and Outsourcing
The purpose of value chain analysis is to understand how the company creates value.
There is a clear link here with the idea of core competences : a core competence will enable the company to create value in a way that its competitors cannot imitate. These value activities are the basis of the company’s unique offering.
There is a strong case for examining the possibilities of outsourcing non-core activities so that management can concentrate on what company does best.
(source: BPP Learning Media)
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(1) Primary Activities are directly related to production, sales, marketing, delivery and service.
(a) Inbound Logistics – Receiving, handling and storing inputs to the production system, warehousing, transport, stock control and so on.
(b) Operations – Converting resource inputs into a final product, resource inputs are not only materials. People are a resource, especially in service industries.
(c) Outbound Logistics – Storing the product and its distribution to customers: packing, testing, delivery and so on, for service industries, this activity may be more concerned with bringing customers to the place where the service is available, (example: front of house management in a theatre)
(d) Marketing and Sales – Inform customers about the product, persuading them to buy it and enabling them to so: advertising, promotion and so on.
(e) After Sales Service – Installing products, repairing them, upgrading them, providing spare parts and so forth.
(2) Support Activities provide purchased inputs, human resources, technology and infrastructural functions to support the primary activities:
(a) Procurement – All of the process involved in acquiring the resource inputs to the primary activities (eg purchases of materials, subcomponents equipment)
(b) Technology Development – Product design, improving processes and resource utilization.
(c) Human resource management – Recruiting, training, managing, developing and rewarding people, this activity takes place in all parts of the organization, not just in HRM department.
(d) Firm Infrastructure – Planning, finance, quality control, the structures and routines that make up the organization’s culture.
Linkages connect the activities of the value chain.
(a) Activities in the value chain affect one another. For example, more costly product design or better quality production might reduce the need for after-sales service.
(b) Linkages require coordination. For example, Just-in-time requires smooth functioning of operations, outbound logistics and service activities such as installation.
The Value Chain Concept is an important tool in analyzing the organization’s strategic capability. There are two important, connected aspects to this analysis:
(a) It enables managers to establish the activities that are particularly important in providing customers with the value they want: this may lead to consideration of where management attention and other resources are best applied, either to improve weakness or to further exploit strength. (for example decision about outsourcing)
(b) This analysis can be extended to include an assessment of the cost and benefits associated with various value activities.
The Value Chain, Core Competences and Outsourcing
The purpose of value chain analysis is to understand how the company creates value.
There is a clear link here with the idea of core competences : a core competence will enable the company to create value in a way that its competitors cannot imitate. These value activities are the basis of the company’s unique offering.
There is a strong case for examining the possibilities of outsourcing non-core activities so that management can concentrate on what company does best.
(source: BPP Learning Media)
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Porter's Value Chain Model
Business Integration
1. Business integration means that all aspects of the business must be aligned to secure the most efficient use of the organization’s resources so that it can achieve its objectives efficiently.
2. Processes can be viewed as complete entities from initial order to final delivery.
Porter’s Value Chain Model
The value chain model
1. Shows how each activity adds to competitive advantage.
2. Emphasizes critical success factors within activities and for the value chain as a whole.
3. Considers support activities as well as primary activities.
4. Should emphasize linkages between activities.
5. Can be used to set and monitor targets for different activities to enable performance management of the overall process.
(source: BPP Learning Media)
**********************************************
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1. Business integration means that all aspects of the business must be aligned to secure the most efficient use of the organization’s resources so that it can achieve its objectives efficiently.
2. Processes can be viewed as complete entities from initial order to final delivery.
Porter’s Value Chain Model
The value chain model
1. Shows how each activity adds to competitive advantage.
2. Emphasizes critical success factors within activities and for the value chain as a whole.
3. Considers support activities as well as primary activities.
4. Should emphasize linkages between activities.
5. Can be used to set and monitor targets for different activities to enable performance management of the overall process.
(source: BPP Learning Media)
**********************************************
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Wednesday, November 18, 2009
The rivalry amongst current competitors in the industry
The intensity of competitive rivalry can the form of:
• price competition,
• advertising battles,
• sales promotion campaigns,
• introducing new products for the market,
• improving after sales service or
• providing guarantees or warranties.
Competition can stimulate demand, expanding the market or it can leave demand unchanged, in which case individual competitors wil make less money, unless they are able to cut costs.
Factors determining the intensity of competition:
(a) Market growth. Rivalry is intensified when firms are competing for a greater market share in a total market where growth is slow or stagnant.
(b) Cost structure. High fixed costs are a temptation to compete on price, as in the short run any contribution from sales is better than none at all. A perishable product produces the same effect.
(c) Switching. Suppliers will compete if buyers switch easily (eg Coke vs Pepsi)
(d) Capacity. A supplier might need to achieve a substantial increase in output capacity, in order to obtain reductions in unit costs.
(e) Uncertainty. When one firm is not sure what another is up to, there is tendency to respond to the uncertainty by formulating a more competitive strategy.
(f) Strategic importance. If success is a prime strategic objective, firms will be likely to act very competitively to meet their targets.
(g) Exit barriers make it difficult for an existing supplier to leave the industry. These can take many forms:
a. Fixed assets with a low break-up value (eg there may be no other use for them, or they may be too old)
b. The cost of redundancy payments to employees.
c. If the firm is a division or subsidiary of a large enterprise, the effect of withdrawal on the other operations within the group.
d. The reluctance of managers to admit defeat, their loyalty to employees and their fear for their own job.
e. Government pressures on major employers not to shut down operations, especially when competition comes from foreign producers rather than other domestic producers.
(source: BPP Learning Media)
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• price competition,
• advertising battles,
• sales promotion campaigns,
• introducing new products for the market,
• improving after sales service or
• providing guarantees or warranties.
Competition can stimulate demand, expanding the market or it can leave demand unchanged, in which case individual competitors wil make less money, unless they are able to cut costs.
Factors determining the intensity of competition:
(a) Market growth. Rivalry is intensified when firms are competing for a greater market share in a total market where growth is slow or stagnant.
(b) Cost structure. High fixed costs are a temptation to compete on price, as in the short run any contribution from sales is better than none at all. A perishable product produces the same effect.
(c) Switching. Suppliers will compete if buyers switch easily (eg Coke vs Pepsi)
(d) Capacity. A supplier might need to achieve a substantial increase in output capacity, in order to obtain reductions in unit costs.
(e) Uncertainty. When one firm is not sure what another is up to, there is tendency to respond to the uncertainty by formulating a more competitive strategy.
(f) Strategic importance. If success is a prime strategic objective, firms will be likely to act very competitively to meet their targets.
(g) Exit barriers make it difficult for an existing supplier to leave the industry. These can take many forms:
a. Fixed assets with a low break-up value (eg there may be no other use for them, or they may be too old)
b. The cost of redundancy payments to employees.
c. If the firm is a division or subsidiary of a large enterprise, the effect of withdrawal on the other operations within the group.
d. The reluctance of managers to admit defeat, their loyalty to employees and their fear for their own job.
e. Government pressures on major employers not to shut down operations, especially when competition comes from foreign producers rather than other domestic producers.
(source: BPP Learning Media)
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Bargaining Power of Suppliers
Suppliers can exert pressure for higher prices.
The ability of suppliers to get high prices depends on several factors:
(a) Whether there are just one or two dominant suppliers to the industry, able to charge monopoly or oligopoly prices.
(b) The threat of new entrants or substitute products to the supplier’s industry.
(c) Whether the suppliers have other customers outside the industry, and do not rely on the industry for the majority of their sales.
(d) The importance of the supplier’s product to the customer’s business.
(e) Whether the supplier has a differentiated product which buyers need to obtain.
(f) Whether switching costs for customers would be high.
(source: BPP Learning Media)
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The ability of suppliers to get high prices depends on several factors:
(a) Whether there are just one or two dominant suppliers to the industry, able to charge monopoly or oligopoly prices.
(b) The threat of new entrants or substitute products to the supplier’s industry.
(c) Whether the suppliers have other customers outside the industry, and do not rely on the industry for the majority of their sales.
(d) The importance of the supplier’s product to the customer’s business.
(e) Whether the supplier has a differentiated product which buyers need to obtain.
(f) Whether switching costs for customers would be high.
(source: BPP Learning Media)
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Bargaining Power of Customers
Customers want better quality products and services at a lower price. Satisfying this want might force down the profitability of suppliers in the industry?
Factors determining the power of the customers:
(a) How much the customer buys
(b) How many buyers are there – few buyers but each is large relative to the supplier, then the buyers will be powerful.
(c) How critical the product is to the customer’s own business
(d) Switching costs (the cost of switching supplier)
(e) Whether the products are standard items (hence easily copies) or specialized
(f) The customer’s own profitability: a customer who makes low profits will be forced to insist on low prices from suppliers
(g) Customer’s ability to bypass the supplier (or take over the supplier)
(h) The skills of the customer purchasing staff, or the price awareness of consumers
(i) When product quality is important to the customer, the customer is less likely to be price-sensitive, and so the industry might be more profitable as a consequence.
(source: BPP Learning Media)
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Factors determining the power of the customers:
(a) How much the customer buys
(b) How many buyers are there – few buyers but each is large relative to the supplier, then the buyers will be powerful.
(c) How critical the product is to the customer’s own business
(d) Switching costs (the cost of switching supplier)
(e) Whether the products are standard items (hence easily copies) or specialized
(f) The customer’s own profitability: a customer who makes low profits will be forced to insist on low prices from suppliers
(g) Customer’s ability to bypass the supplier (or take over the supplier)
(h) The skills of the customer purchasing staff, or the price awareness of consumers
(i) When product quality is important to the customer, the customer is less likely to be price-sensitive, and so the industry might be more profitable as a consequence.
(source: BPP Learning Media)
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Tuesday, November 17, 2009
Monday, November 16, 2009
Threat from Substitute Products
A substitute product is a good or service produced by another industry which satisfies the same customer needs.
Substitutes are always present but they can be easy to overlook because they may be very different from the industry’s product (example video conferencing could be a substitute for business travel).
When the threat of substitutes is high, industry profitability suffers.
Substitute products or services limit an industry’s profit potential by placing a ceiling on prices (because buyers will switch to the substitute of it offers a better value alternative).
The threat of a substitute is high if:
(a) it offers an attractive alternative to the industry ‘s product in terms of price and performance.
(b) The buyer’s cost of switching to the substitute is low.
(source: BPP Learning Media)
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Substitutes are always present but they can be easy to overlook because they may be very different from the industry’s product (example video conferencing could be a substitute for business travel).
When the threat of substitutes is high, industry profitability suffers.
Substitute products or services limit an industry’s profit potential by placing a ceiling on prices (because buyers will switch to the substitute of it offers a better value alternative).
The threat of a substitute is high if:
(a) it offers an attractive alternative to the industry ‘s product in terms of price and performance.
(b) The buyer’s cost of switching to the substitute is low.
(source: BPP Learning Media)
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Threat of New Entrants
New entrant into an industry will bring extra capacity and more competition.
The strength of this threat varies from industry to industry and depends on two things (barriers to entry):
(a) The strength of the barriers to entry. Barriers to entry discourage new entrants.
(b) The likely response of existing competitors to the new entrant.
Barriers to Entry
(a) Scale economies – high fixed costs implies a high breakeven point, and a high breakeven point depends on a large volume of sales. If the market as a whole is not growing the new entrant has to capture a large slice of the market from existing competitors and this is expensive.
(b) Product differentiation – existing firm in the industry may have built up a good brand image and strong customer loyalty over a long period of time. Promote a large number of brands to crowd out the competition.
(c) Capital requirements – Capital requirement is high is a strong barrier against new entrants, particularly when the investment is possibly high-risk.
(d) Knowledge requirements – Knowledge and know-how are barrier to entry. It is more enter difficult to Industry which requires significant specialist knowledge and skills are required.
(e) Switching costs – Costs (time, money, convenience) that a customer would have to incur by switching from one supplier’s products to another’s. Although it might cost a consumer nothing to switch from one brand of frozen peas to another, the potential costs for the retailer or distributor might be high.
(f) Access to distribution channels – Distribution channels carry a manufacturer’s products to the end buyer. New distribution channels are difficult to establish, and existing distribution channels hard to gain access to.
(g) Cost advantages of existing producers, independent of economies of scales include:
a. Patent rights
b. Experience and know-how
c. Government subsidies and regulations
d. Favoured access to raw materials
Entry barriers might be lowered by the impact of change:
a. Changes in the environmen
b. Technological changes (including the internet)
c. New distribution channels for products or services (including the internet)
(source: BPP Learning Media)
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The strength of this threat varies from industry to industry and depends on two things (barriers to entry):
(a) The strength of the barriers to entry. Barriers to entry discourage new entrants.
(b) The likely response of existing competitors to the new entrant.
Barriers to Entry
(a) Scale economies – high fixed costs implies a high breakeven point, and a high breakeven point depends on a large volume of sales. If the market as a whole is not growing the new entrant has to capture a large slice of the market from existing competitors and this is expensive.
(b) Product differentiation – existing firm in the industry may have built up a good brand image and strong customer loyalty over a long period of time. Promote a large number of brands to crowd out the competition.
(c) Capital requirements – Capital requirement is high is a strong barrier against new entrants, particularly when the investment is possibly high-risk.
(d) Knowledge requirements – Knowledge and know-how are barrier to entry. It is more enter difficult to Industry which requires significant specialist knowledge and skills are required.
(e) Switching costs – Costs (time, money, convenience) that a customer would have to incur by switching from one supplier’s products to another’s. Although it might cost a consumer nothing to switch from one brand of frozen peas to another, the potential costs for the retailer or distributor might be high.
(f) Access to distribution channels – Distribution channels carry a manufacturer’s products to the end buyer. New distribution channels are difficult to establish, and existing distribution channels hard to gain access to.
(g) Cost advantages of existing producers, independent of economies of scales include:
a. Patent rights
b. Experience and know-how
c. Government subsidies and regulations
d. Favoured access to raw materials
Entry barriers might be lowered by the impact of change:
a. Changes in the environmen
b. Technological changes (including the internet)
c. New distribution channels for products or services (including the internet)
(source: BPP Learning Media)
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Saturday, November 14, 2009
Role of Strategic Management Accounting
Strategic management accounting is the full range of management accounting practices used to provide a guide to the strategic direction of an organization.
Roles:
(1) Provides information:
** on the financial aspects of strategic plans and
** on planning financial aspects of their implementation.
(2) Support managers in the task of managing the organization in the interests of all its stakeholders
(3) Places an emphasis on using information from a wide variety of internal and external sources in order to evaluate performance, appraise proposed projects and make decision.
(4) Focuses on the external environment as much as on the organization itself.
(5) Monitors performance in line with the strategic objectives in both financial and non-financial terms.
(source: BPP :Learning Media)
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Roles:
(1) Provides information:
** on the financial aspects of strategic plans and
** on planning financial aspects of their implementation.
(2) Support managers in the task of managing the organization in the interests of all its stakeholders
(3) Places an emphasis on using information from a wide variety of internal and external sources in order to evaluate performance, appraise proposed projects and make decision.
(4) Focuses on the external environment as much as on the organization itself.
(5) Monitors performance in line with the strategic objectives in both financial and non-financial terms.
(source: BPP :Learning Media)
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PESTEL (VI) : Environmental Protection
Impact of business activity on the physical environment is a major concern.
Companies are under pressure to incorporate measures to protect environment into their plans.
This present both challenge and opportunity, since some measures will impose costs, but others will allow significant savings.
There is also a new range of markets for goods and services designed to protect or have minimum impact on environment.
Possible issues to consider are:
1. Consumer demand for products that appear to be environmentally friendly.
2. Demand for less pollution from industry
3. Greater regulation by government and EU
4. Demand that businesses be charged with external cost of their activities.
5. Scarcity of non-renewable resources
6. Opportunity to develop products and technologies that are environmentally friendly.
7. Taxes (landfill tax)
Ways in which business and environmental benefits can be achieved:
1. Integrating the environment into capital expenditure decisions.
2. Understanding and managing environmental costs.
3. Introducing waste minimisation schemes
4. Understanding and managing life cycle costs. For many products, the greatest environmental impact occurs upstream ( mining raw materials) or downstream ( energy to operate equipment). Organisations therefore need to identify, control and make provision for environmental life cycle costs and work with suppliers and customers to identify environmental cost reduction opportunities.
5. Measuring environmental performance, both for statutory disclosure reasons and due to demands form customers.
6. Involving management accountant in a strategic approach to environment-related management accounting and performance evaluation.
Sustainability
It means that resources consumed are replaced in some ways (example tree)
Some resources are inherently non-renewable. (example oil)
Sustainability now embraces not only environmental and economic questions, but also social and ethical dimensions.
Business people must increasingly recognise that the challenge now is to help deliver simultaneously:
1. Economic prosperity
2. Environmental quality
3. Social equity.
(source: BPP Learning Media)
********************
Companies are under pressure to incorporate measures to protect environment into their plans.
This present both challenge and opportunity, since some measures will impose costs, but others will allow significant savings.
There is also a new range of markets for goods and services designed to protect or have minimum impact on environment.
Possible issues to consider are:
1. Consumer demand for products that appear to be environmentally friendly.
2. Demand for less pollution from industry
3. Greater regulation by government and EU
4. Demand that businesses be charged with external cost of their activities.
5. Scarcity of non-renewable resources
6. Opportunity to develop products and technologies that are environmentally friendly.
7. Taxes (landfill tax)
Ways in which business and environmental benefits can be achieved:
1. Integrating the environment into capital expenditure decisions.
2. Understanding and managing environmental costs.
3. Introducing waste minimisation schemes
4. Understanding and managing life cycle costs. For many products, the greatest environmental impact occurs upstream ( mining raw materials) or downstream ( energy to operate equipment). Organisations therefore need to identify, control and make provision for environmental life cycle costs and work with suppliers and customers to identify environmental cost reduction opportunities.
5. Measuring environmental performance, both for statutory disclosure reasons and due to demands form customers.
6. Involving management accountant in a strategic approach to environment-related management accounting and performance evaluation.
Sustainability
It means that resources consumed are replaced in some ways (example tree)
Some resources are inherently non-renewable. (example oil)
Sustainability now embraces not only environmental and economic questions, but also social and ethical dimensions.
Business people must increasingly recognise that the challenge now is to help deliver simultaneously:
1. Economic prosperity
2. Environmental quality
3. Social equity.
(source: BPP Learning Media)
********************
PESTEL (V) : Legal Environment
Laws come from common law, parliamentary legislation and government regulations derived from it and obligations under EU membership and other treaties.
Legal factors affecting all companies:
1. General legal framework: contract, tort, agency (way of doing business)
2. Criminal law (theft, insider dealing, deception, industrial espionage)
3. Company law (directors, reporting requirements, takeover proceedings, shareholders’ right, insolvency)
4, Employment law (trade union, social chapter provision, minimum wage, unfair dismissal, redundancy, maternity, equal opportunities)
5. Health and safety (fire precaution, safety procedures)
6. Data protection (use of information about employees and customers)
7. Marketing and sales (customer protection law, what is or isn’t allowed in advertising)
8. Environment (Pollution control, waste disposal)
9. Tax Law (corporate tax, PAYE, National insurance contribution, VAT)
10. Competition law ( general illegality of cartels)
(source: BPP Learning Media)
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Legal factors affecting all companies:
1. General legal framework: contract, tort, agency (way of doing business)
2. Criminal law (theft, insider dealing, deception, industrial espionage)
3. Company law (directors, reporting requirements, takeover proceedings, shareholders’ right, insolvency)
4, Employment law (trade union, social chapter provision, minimum wage, unfair dismissal, redundancy, maternity, equal opportunities)
5. Health and safety (fire precaution, safety procedures)
6. Data protection (use of information about employees and customers)
7. Marketing and sales (customer protection law, what is or isn’t allowed in advertising)
8. Environment (Pollution control, waste disposal)
9. Tax Law (corporate tax, PAYE, National insurance contribution, VAT)
10. Competition law ( general illegality of cartels)
(source: BPP Learning Media)
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PESTEL (IV) : Technological Environment
Technology contributes to overall economic growth.
There are 3 ways in which technology can increase total output:
1. Gains in productivity
2. Reduced costs
3. New types of product.
Effects of technological change in organisations:
1. The type of products or service that are made and sold.
2. The way in which products are made (robots, new raw materials)
3. The way in which goods and services are sold. (internet)
4. The way in which markets are identified. (database system)
5. The way in which firms are managed. (IT encourages delayering of organisational hierachy, homeworking and better communication. Greater integration of buyer and suppliers.
6. The means and extent of communications with external clients. (financial sectors go electronic, PC banking)
Impact of recent technological change has potentially important social consequences, which in turn impact business:
1. Homeworking – once people have to be collected together to work in factory, home working is now becoming more important.
2. Knowledge work – Skills related to interpretation of sta and information processes are likely to become more valued than manual or physical skills.
3. Services – Technology increases manufacturing productivity, releasing human resources for service jobs which require greater interpersonal skills.
(source: BPP Learning Media)
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There are 3 ways in which technology can increase total output:
1. Gains in productivity
2. Reduced costs
3. New types of product.
Effects of technological change in organisations:
1. The type of products or service that are made and sold.
2. The way in which products are made (robots, new raw materials)
3. The way in which goods and services are sold. (internet)
4. The way in which markets are identified. (database system)
5. The way in which firms are managed. (IT encourages delayering of organisational hierachy, homeworking and better communication. Greater integration of buyer and suppliers.
6. The means and extent of communications with external clients. (financial sectors go electronic, PC banking)
Impact of recent technological change has potentially important social consequences, which in turn impact business:
1. Homeworking – once people have to be collected together to work in factory, home working is now becoming more important.
2. Knowledge work – Skills related to interpretation of sta and information processes are likely to become more valued than manual or physical skills.
3. Services – Technology increases manufacturing productivity, releasing human resources for service jobs which require greater interpersonal skills.
(source: BPP Learning Media)
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PESTEL (III) : Sociocultural Environment
Social
1. Demography is the study of human population and population trends.
2. Factors of importance to organisational planners are Growth, Age, Geography, Ethnicity, Household and family structure, Social structure, Employment and Wealth.
3. Implications of demographic change are Changes in pattern of demand, location of demand, recruitment policies, wealth and tax.
Culture
1. Beliefs and values, Customs, Artifacts, Rituals.
2. Knowledge of culture is of value to business because:
****Culture influences tastes and lifestyles
****Marketers can adopt their products accordingly and be fairly sure of a sizeable market.
****Human resource managers may need to tackle cultural differences in recruitment.
(source: BPP Learning Media)
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1. Demography is the study of human population and population trends.
2. Factors of importance to organisational planners are Growth, Age, Geography, Ethnicity, Household and family structure, Social structure, Employment and Wealth.
3. Implications of demographic change are Changes in pattern of demand, location of demand, recruitment policies, wealth and tax.
Culture
1. Beliefs and values, Customs, Artifacts, Rituals.
2. Knowledge of culture is of value to business because:
****Culture influences tastes and lifestyles
****Marketers can adopt their products accordingly and be fairly sure of a sizeable market.
****Human resource managers may need to tackle cultural differences in recruitment.
(source: BPP Learning Media)
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PESTEL (II) : Economic Environment
1. Economic environment is an important influence at local and national level.
2. The forecast state of the economy will influence the planning process.
3. In times of boom and increased demand and consumption, the overall planning problem – to identify the demand.
4. In times of recession, the emphasis will be on cost-effectiveness, continuing profitability, survival and competition.
5. There is a constant and large scale interaction between the government and economy through the various aspects of government economic policy.
6. Local and national economic factors are Overall growth or fall in GDP, Local economic trends, Inflation, Interest rates, Tax levels, Government spending and The business cycle.
7. International economic factors are Exchange rates, Characteristics of overseas markets, International capital markets, Large multinational companies, Government policy on trade/protection.
(source: BPP Learning Media)
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2. The forecast state of the economy will influence the planning process.
3. In times of boom and increased demand and consumption, the overall planning problem – to identify the demand.
4. In times of recession, the emphasis will be on cost-effectiveness, continuing profitability, survival and competition.
5. There is a constant and large scale interaction between the government and economy through the various aspects of government economic policy.
6. Local and national economic factors are Overall growth or fall in GDP, Local economic trends, Inflation, Interest rates, Tax levels, Government spending and The business cycle.
7. International economic factors are Exchange rates, Characteristics of overseas markets, International capital markets, Large multinational companies, Government policy on trade/protection.
(source: BPP Learning Media)
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Friday, November 13, 2009
PESTEL (I) : Political Environment
Macro-environment maybe analysed into 6 segments using the PESTEL framework.
1. Political
2. Economic
3. Socio-cultural
4. Technology
5. Environmental protection
6. Legal
PESTEL analysis is an approach to analysing an organisation's environment.
PESTEL is a strategic analysis tool, it can be used to identify key performance management issues.
Political Environment
(1) Government policy
* Fiscal policy (taxes, borrowing, spending)
* Monetary Policy (interest rates, exchange rates)
* Size and scope of the public sector.
* Political change complicates planning ctivities.
(2) Public Policy on competition
* Monopoly has both economic advantages and economic disadvantages:
(a) In industry where the minimum efficient scale means having to achieve a large share of the total market supply, monopoly may be tolerated because the monopoly achieves economies of scale. Normally government ownership (example: railways, telecomms and power generation).
(b) Monopoly will be detrimental to public interest if cost efficiencies are not achieved. Firms may use the market power opportunity to pursue a variety of other-than-profit objectives.
(3) Anticipating changes in the law
*The governing party’s election manifesto should be a guide to its political priorities
*The government often publishes advance information about its plans for consultation purposes.
(4) Political risk
* Risk that political factors will invalidate the strategy and perhaps severely damage the firm.
* Examples are wars, political chaos, corruption and nationalisation.
(source: BPP Learning Media)
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1. Political
2. Economic
3. Socio-cultural
4. Technology
5. Environmental protection
6. Legal
PESTEL analysis is an approach to analysing an organisation's environment.
PESTEL is a strategic analysis tool, it can be used to identify key performance management issues.
Political Environment
(1) Government policy
* Fiscal policy (taxes, borrowing, spending)
* Monetary Policy (interest rates, exchange rates)
* Size and scope of the public sector.
* Political change complicates planning ctivities.
(2) Public Policy on competition
* Monopoly has both economic advantages and economic disadvantages:
(a) In industry where the minimum efficient scale means having to achieve a large share of the total market supply, monopoly may be tolerated because the monopoly achieves economies of scale. Normally government ownership (example: railways, telecomms and power generation).
(b) Monopoly will be detrimental to public interest if cost efficiencies are not achieved. Firms may use the market power opportunity to pursue a variety of other-than-profit objectives.
(3) Anticipating changes in the law
*The governing party’s election manifesto should be a guide to its political priorities
*The government often publishes advance information about its plans for consultation purposes.
(4) Political risk
* Risk that political factors will invalidate the strategy and perhaps severely damage the firm.
* Examples are wars, political chaos, corruption and nationalisation.
(source: BPP Learning Media)
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