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TitleE3 Enterprise Strategy revision summarise - Acorn Live
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E3 revision summaries

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CIMA

Strategic Level – Paper E3
ENTERPRISE STRATEGY



(REVISION SUMMARIES)






Chapter Topic Page
Number
1 Strategic Management 3

2 Mission, Objectives and Stakeholders 11

3 Environmental Analysis 15

4 The Position Audit and Corporate Appraisal 19

5 Strategic options 25

6 Marketing 33

7 Information Strategy 45

8 Corporate Social Responsibility and Ethics 61

9 Organisations 67

10 Change Management 73

11 Strategic Performance Measurement 85

12 Numerical skills for strategic evaluation 103

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E3 revision summaries

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Organising and managing information systems



Centralisation of IT department or activities

Advantages of a centralised IT function

ü Economies of scale
ü Better integration and compatibility of information systems
ü Higher motivation of IT staff
ü Can avoid duplication of effort
ü Strategic view




Benefits of in house developed information systems

ü Better understanding of information needs
ü Strategic control
ü Less risk to the security
ü More effective support to end users




Decentralisation of IT activities e.g. end user computing

End-user computing is the direct hands on approach that end users have over the
development and use of IT.

Benefits of end user computing

ü Creativity and innovation
ü Increases productivity of information systems
ü End-user satisfaction ‘ownership and motivation’



Limitations of end user computing


Lack of training and experience
Lack of documentation
Incompatibility of different systems

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IT outsourcing (client-vendor relationships)


Examples include the outsourcing of system maintenance, development or data processing
agreements with third party organisations, an entire IT department could be outsourced. IT

outsourcing can allow management to start with a clean sheet and eliminate what they
often see as an internal irritant.




Advantages


ü Save overhead
ü Reduce the complexity
ü Management can focus on its core

competencies
ü Flexibility of using outsourcer


Disadvantages


Loss of strategic control
Over reliance
Loss of competitive advantage
Internal redundancy
Risk to security
Failure of outsourcer






Management of vendors


• Policies, procedures and effective management
• Planned selection criteria
• Tender and visiting process
• References
• Contract agreements
• Penalties and cancellation terms




Characteristics of a good service level agreement


• Terms and conditions
• Exit route for non performance
• Timescale of agreement
• Copyright and ownership
• Procedures for control
• Contact details




Criteria for evaluating suppliers


• Invitation to tender documents
• Warranty and support
• Training assistance
• Cost and composite of cost
• Reliability and solid track record

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Key summary of chapter



Investment appraisal techniques


• Payback
• Accounting rate of return (ARR)
• Net present value (NPV)
• Internal rate of return (IRR)


Sensitivity analysis

Sensitivity measures the percentage change in a key input e.g. cash inflow or outflow
needed, to make a project break even, in other words to have a project with a zero NPV.



Sensitivity = NPV of project ÷ PV of cash inflow or outflow





Expected values

Expected values calculate an ‘average’ return or an average financial calculation of some
kind by the assignment of probabilities to the different returns possible. By doing so it
recognises risk, something that may or may not occur.

Limitations of expected values



Expected values are no use for one off decisions
Expected values calculate an average return not an outcome
Expected values rely heavily on probability estimates



Comparing projects of different time periods

The profitability index

A relative measure for a project of the NPV per £ invested.

Profitability index = Present value of cash inflows = decimal
Present value of cash outflows

Equivalent annual value (EAV)

The EAV is a yearly equivalent undiscounted cash-flow (assumed as an annual constant)
calculated using an annuity factor for the life of the project.


EAV (using the annuity approach) = NPV of project
Annuity for the life of the project

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Real Options as a tool for strategic analysis

Note: Complex numerical questions will not be set.

The technique of real options can be used when projects face a high degree of
uncertainty. Real options analysis (ROA) applies put and call option valuation
techniques to capital budgeting decisions, it is an extension of theory derived from the
Black-Scholes model for valuing options, which won the 1997 Nobel prize for
economics.

When applied to investment appraisal, ROA calculates mathematically ‘real options’ for
such decisions as to contract, abandon, continue, expand or extend the project, it could
also include the decision to switch and divert resources away to other alternative projects
e.g. opportunity cost. ROA is useful for NPV projects because it forces decision makers
to be explicit about the assumptions underlying their projections, it is also increasingly
being applied as a tool for business strategy formulation.

Process by McKinsey & Company


1. Calculate NPV of the project without flexibility.
2. Use scenario planning to identify different ‘parallel’ universes that may occur.
3. Identify different ‘options’ that could be exercised over the life of the project.
4. Apply approaches similar to the Black-Scholes model for valuing each option,



Capital rationing


∑ Soft capital rationing – internal or political reasons why funds capped.
∑ Hard capital rationing – external or real reasons why funds are capped.
∑ Divisible projects – can invest in ‘parts’ of projects.
∑ Non-divisible projects – can only invest in all or none of the projects.





The process of investment decision making

The basic stages are:


∑ Spend forecast
∑ Projects identified
∑ Financially evaluate projects
∑ Consider qualitative factors
∑ Best options are chosen and approved
∑ Monitor and control project
∑ Deal with risk
∑ Post completion audit







http://en.wikipedia.org/wiki/Call_option
http://en.wikipedia.org/wiki/Capital_budgeting
http://en.wikipedia.org/wiki/Business_strategy

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