SBL Notes Hassan Dossani

SBL Notes – JUNE 2020 Attempt
Sir Hasan Dossani – MHA
Chapter 1 -
Strategy
Terminologies
The terminologies relating Strategic Management have multiple definitions which sometimes differ significantly
from each other, depending on the Authors and their School of Thoughts. Following are the most general
descriptions
• Vision (or strategic intent):

Is the desired future state in which the Organization wishes to see it self. Vision is achieved through Mission
• Mission:
Mission is Organization’s overriding purpose of existence and reflects stakeholders’ expectation from the
business. It deals with the question “why” do we exist?
Core Values defines how the organization wishes to operate and guides the organization’ actions, i.e. its
principles. E.g. includes integrity, equal opportunity employer, diversity, etc.
Core Values should be explicitly stated either within the mission statement or through a separate subsidiary
statement.
• Goals:
Goals are smaller targets to achieve the Mission. Goals are generally qualitative in nature. E.g. increase
sales, reduce costs, increase customer satisfaction, new products, etc.
• Objectives:
Objectives are more specific targets to achieve the Mission, i.e. quantitative in nature.
Objectives should be S-M-A-R-T (Specific, Measurable, Achievable, Result-Oriented, Time-Bound). E.g.

increase sales quantity by 10% p.a., reduce production costs by 5% p.a.
Goals and Objectives are developed at the highest level, then filtered down to divisions, departments,
functions, till it reaches down to an individual’s work target level. This cascading concept, known as
Management by Objectives (MbO), was given by Peter Drucker.
Mirchawala College Chapter 1 – Strategy….. Page 1

• Strategy:
Strategies are developed in order to achieve the goals, objectives and hence the Mission of the Organization
• Strategic Management:
How an organization manages its strategies i.e. creating strategies, implementing them, monitoring them
and revising them if strategies are not getting the desired results
Strategic Management - Rational Model by JS&W

3 stages involved in Strategic Management:
1. Strategic Position / Analysis

Review strategic position in light of:
▪ Current position
▪ External environment, e.g.
• Country (PESTEL)
• Industry (Porter 5 Forces: customers, suppliers, competition)
▪ Internal resources, e.g.
• Human resource / Expertise
• Financial resources
• IT resources Strength / Weakness
• Brand / corporate image

• Any unique tangible asset
▪ Mission
▪ Expectation of key stake holders
▪ Clarity of mission or future course of direction
Techniques includes Porter’s 5 Forces Model, PESTEL Analysis, SWOT Analysis, Value Chain
Analysis, Stakeholder Mapping Model, etc.
2. Strategic Choice
▪ Generate all possible options to reach mission
▪ Analyze pros and cons of all options
▪ Select the strategy that best suits you (see strategy selection criteria under next heading)
3. Strategy into Action

▪ Implement selected strategies
▪ Monitor the results
▪ Amend strategies if desired results are not being achieved

External Environment
External Environment
Environment means external factors that surrounds or affects the business. E.g. Economy, laws, customers,
competitors, etc.
Types of External Environment

▪ General (macro) environment: pertains to the entire country
▪ Immediate (micro) environment: pertains to the industry in which we operate
Prediction
▪ As environment is uncertain, prediction is required in order to plan ahead
▪ The better the prediction, the more successful the strategy will be
▪ Tools used in predictions:
▪ Forecasting
Forecasting is based on historic trend, e.g. average sales growth for last 5 years. However, it is not
necessary that historic trend will also continue in future.
▪ Scenario building
Various scenarios are prepared based on key assumptions, i.e. what-if scenarios are build, e.g. US$
rate, petrol price, economic growth %, customer demand, etc. Key assumptions are called drivers
for change.
Scenarios can be built at macro / country level (known macro scenarios) as well as can be built at
micro / industry level (knows as micro scenarios).
Multiple scenarios are built in conditions of high uncertainties, so that all possible outcomes are
reviewed.

Environmental Analysis
Every business has to analyze its environment, in order to prepare strategies. As there are two types of
environment, BOTH environments have to be analyzed. Following two models are used to analyze the
environment:
▪ General environment: PESTEL
▪ Immediate environment: PORTER’S 5 FORCES
PESTEL (Macro Environment)

PESTEL:
P: Political T: Technology
E: Economic E: Ecological
S: Social L: Legal
• Political
▪ Stable business environment ▪ Law and order situation

▪ Government policies (e.g. liberal, investment friendly) ▪ Political situation
Example: Government is supporting Professional Education industry through tax incentives.
• Economic
▪ Disposable income (necessity vs luxury) ▪ Rate of returns
▪ Economic growth / recession ▪ Exchange rates
▪ Inflation ▪ Interest rates
▪ Tax implications ▪ Financing options
Example: The economy is going through recession.
• Social
▪ Demographics (study of population) ▪ Age / gender groups
▪ Believes / Religious systems ▪ Literacy levels
▪ Standard of living ▪ Unemployment
Example: A lot of people go for higher Professional Education, i.e. highly educated society

• Technology
▪ Availability of technology ▪ Internet / online
▪ Tech Infrastructure of the country ▪ Availability / shortage of skilled labour

Example: IT and communication infrastructure are available, hence E or Distance Learning programs can be
offered through internet and website
• Ecological
▪ Protection of Earth and its environment
▪ Talks about pollution, global warming, ozone layer, harmful waste material, carbon footprint, green
products, etc.
▪ Ecological factors are getting important and more and more customers are becoming ‘green’
conscious
▪ Several Green Groups or Pressure Groups have been formed (e.g. Green Cross, Green Peace, Earth
First, etc.)
▪ Environment audits are now being conducted (e.g. Valdez Principles Framework)
▪ Ecological issues covers:
• Products: Your product should not harm the environment, it should be recyclable
• Manufacturing process: Eco friendly machineries are used, waste materials / chemicals are
properly disposed off, no smoke or noise pollutions, etc.
• Office / Buildings: Environmentally friendly buildings, e.g. solar powered, energy
preservation, etc.
Example: Reduce use of papers in educational institutes and move to paperless environment, as paper is
manufactured by cutting trees.
• Legal
▪ Company Law ▪ Employment / Labour Laws
▪ Health and Safety Law ▪ Data Protection Act
▪ Environmental laws ▪ Tax Law
▪ Competition / monopoly Acts ▪ Marketing and Sales (warranty, damage)

Example: Student’s personal and educational data is to be kept confidential (data privacy / protection)

Porter 5 Forces (Micro Environment)
1. The bargaining powers of Customers

Customers want to buy high quality product at low price. On the other hand, business wants to sell low
quality product at high price. This “tug of war” directly affects the profitability of the business.
Now, who will win, the customer or the business? This depends on the following factors:
▪ How critical is the product to the customer (e.g. medicine vs chocolates)
▪ Size of customer vs size of business
▪ Number of vendors of the same product available in the market
▪ Whether the product is standard or unique/branded/customized
▪ Is there any switching cost
▪ Customer affordability
▪ Customer’s own knowledge and bargaining skills
2. The bargaining powers of Suppliers

Suppliers want to sell low quality product at high price. On the other hand, you (business) wants to buy
high quality product at low price. This “tug of war” directly affects the profitability of the business.
Now, who will win, the supplier or you (business)? This depends on the following factors:
▪ {Principally the same factors mentioned above under bargaining powers of Customers but with opposite
angle}
3. Threats of new- entrants (and barriers)

New entrants directly reduce the market share of existing companies and hence the profits. That is why it is
important that some ‘entry’ barriers are created so that new companies do not enter the industry.
How can we create barriers to entry in any industry? Examples to barriers are:
▪ License / Government approval required

▪ Trademarks / patents
▪ High capital or investment required
▪ Strong brand, corporate image or goodwill
▪ Switching cost involved (e.g. customized product)

4. Current competition / rivalry

Competition directly affects market share and profitability. The more the number of competitors, the more
intense the level of competition will be. Intense competition has several forms, such as price cutting,
advertising battles, sales promotions / deals, introducing new products, improving after sales service,
guarantees / warranties, etc.
Factors affecting intensity of competition:

▪ Number of competitors
▪ Market share %
▪ Lifecycle stage of the industry (growth, maturity or decline phase?)
5. Threats of substitute products

(A substitute product is manufactured by another industry, but satisfies the same customer needs, e.g.
petrol vs CNG, planes vs trains, etc.).
The availability of substitute produces directly affects the profitability of the Organization. Options to deal
with substitute products includes:
▪ Start dealing with substitute products yourself (e.g. petrol pumps now offer CNG as well)
▪ Innovation of cheaper or better products, so that the customer does not have to look for cheaper or
better ‘substitute’ products
Strategic Drift
• Strategic drift occurs when
▪ Changes to the external environment of the organization is faster and
▪ Changes in organization’s strategies are slower
• Due to this, organization’s strategies become misaligned with the external environment
• E.g. includes Apple (1980s), IBM (1990s), Nokia (2000s)
• Strategic drift should be tackled quickly before the gap increases
• Strategic drift normally happens in those organizations where employees are not willing to change and
adopt the changing environment
• In a “Learning Organization”, chances of strategic drift is lower as all employees are continuously acquiring
new knowledge and skills and updating themselves with the changes in the environment

Porter Diamond Model

Germany is famous for car production. France is famous for wine. Japan is famous for electronic items. How
countries achieve international reputation in particular fields?
Michael Porter identified four principal determinants of national competitive advantage (drawn in a diamond
shape). Its primary purpose is to analyze the competitiveness of a nation:
1. Factor Conditions
Factor conditions means the resources which are required to do business in that country are easily
available, such as skilled labour, land, machinery, raw materials, roads, infrastructure,
communication/internet, technical expertise, etc.
For e.g. Germany has abundant supply of iron. France has best climate and soil for grapes.
2. Demand Condition
Demand condition means that there is a large demand for the products in which you plan to operate.
For e.g. people of Germany likes to drive luxurious cars, people of France likes to drink a lot of wine.
3. Related and Supporting Industries

The main industry always benefits if related and supporting industries are present nearby. This leads to
specialization and cost efficiencies.
For e.g. in Germany, tyres, paint and leather industries are also present around the car manufacturing
factories. Also auto engineering universities and institutes are present.
4. Firm Strategy, Structure and Rivalry

It includes:
• Government’s role / attitude towards your industry (political factors)
• Existing level of competition in your industry
• How companies are incorporated, capital markets, corporate structures, nationalized / privatized
structure, etc.
Example, German Govt is supporting auto mobile industry and encouraging healthy competition.

Strategy Evaluation Criteria - SFA Framework by J&S
SFA Framework is used to evaluate a “proposed” strategy
1. Suitability
▪ Evaluates whether the proposed strategy will solve the current problem or achieve the objectives
▪ In other words, it means whether the proposed strategy makes ‘sense’ keeping in mind the current
issues
▪ Normally it covers advantages and disadvantages (opportunity and threats)
2. Feasibility
▪ Evaluates whether the organization has the internal resources and competencies to implement the
proposed strategy
▪ Internal resources include:
▪ Human resource / expertise
▪ Financial resource
• Ratio analysis of “our existing” company to be done if financial data is provided
▪ IT resources
▪ Brand / corporate image
▪ Any unique tangible asset
3. Acceptability
▪ Evaluates whether the proposed strategy will be acceptable by our shareholders, particularly from
risk and return point of view (risk averse vs risk seeker shareholders)
▪ If it is a private limited / family company with shareholders directly managing the company, then
the proposed strategy will be normally acceptable
▪ In case of proposed acquisition, the ratio analysis of the “target” company is to be done in this
section if financial data is provided
▪ Also covers culture differences

SWOT / TOWS Model

▪ SWOT: Strength, Weakness, Opportunities, Threats
▪ S and W pertains to INTERNAL factors (e.g. motivated staff, weak accounting software)
▪ O and T pertains to EXTERNAL factors (e.g. growing industry, tough competition)
▪ SWOT Analysis combines results of:
▪ Environment (Opportunity and Threat)
▪ Strategic Capability (Strength and Weakness)
TOWS Model
Threat S-T W-T
Opportunities S-O W-O

Strength Weakness
▪ SO: Use Your Strength To Avail Opportunities

- Example 1: You have inhouse IT expertise. -You use your inhouse IT dept to develop a fully functional
website to take advantage of increasing E-Business
- Example 2: You already have a successful eco-friendly product. You aggressively advertise your existing
eco-friendly product to take advantage of eco conscious customer segment
▪ WO: Overcome Your Weakness To Avail Opportunities

- Example 1: you have old machineries. Get rid of the old machineries and replace it with latest energy
efficient machineries and also take advantage of tax rebates on new investments recently announced
by Govt
- Example 2: You don’t have a R&D Dept. Create a R&D department in order to innovate an eco-friendly
product to take advantage of eco conscious customer segment

▪ ST: Use your Strength To Avoid or Counter Threats

- Example: you have a R&D Dept. Increase your R&D to innovate new products in order to minimize
threat of competitive products or substitute products
▪ WT: Minimizes Weaknesses and Avoid Threats

- Example: In case your cost of production is very high as compared importers from cheap labour
countries, then you choose those customer segments who are willing to pay premium pricing by
adopting a niche strategy
Market Segmentation
Market Segmentation
• Break the market into smaller sections, based on similar needs,
• e.g. in commerce teaching, you can further segment into ACCA, MBA, CA, BCOM, etc.
• e.g. in TV channels, you can further segment into news, sports, dramas, cooking, documentary
• Reasons for segmentation:

▪ Each customer segment has different needs, though being in the same industry
▪ You can design specific marketing mix for each segment
Target Market
• Target segment means selecting segments in which you want to operate
• Target segment is selected based on:
▪ Segment size
▪ Segment growth potential
▪ Customers, suppliers, competitors, etc. (i.e. Porter 5 forces)
▪ Your own expertise and resources

Marketing
• Marketing?
Marketing aims to satisfy customer needs profitably through an appropriate Marketing Mix
• Marketing Mix (4 P plus 3 Extended P for services)

Whenever a new product is launched, FIRST we have to decide the 4Ps of that product. These are also
referred to as marketing strategies.
1. Product (means satisfying customer needs):

▪ Core design / features of the product
▪ Quality aspects
▪ Availability of choices e.g. colours, sizes, flavours, timings, etc.
▪ After sale services
Branding:
▪ Branding means to give the product a brand name
▪ Advantages / importance of Branding:
▪ distinguishes the product from competitors’ products
▪ makes customer feel familiar, confidence in quality, association
▪ helps in recurring purchases
2. Promotion (means marketing):

▪ Advertising: mass marketing to general public (TV, newspapers, billboards, internet, radio, fliers)
▪ Direct marketing: one to one marketing (e.g. tele-sales, emails, SMS)
▪ Sales promotion: activities to convert customer’s interest into sales (e.g. discounts, loyalty
schemes, free trials, free gifts, twin packs, buy 1 get 1 free, group discount, free demo)
3. Place (means how the product reaches the customers):

▪ Channel: sales outlets (e.g. supermarkets, pan wala)
▪ Logistics: location of warehouse (speed of delivery, damages, cost of transportation)
▪ Distribution system (self, wholesaler, distributor, agent)

4. Pricing (means setting the right price for the product):

▪ Costs
▪ Required profit margin
▪ Premium for any uniqueness, brand or goodwill
▪ Competitors’ price
▪ Value for money (from customer’s point of view)
▪ Customer affordability
EXTENDED Ps FOR SERVICES:

5. Processes: efficient and fast processing directly affects the quality of service, e.g. long and slow
moving line in a bank for utility bills
6. People: front line staff interacting with the customer plays a very important part, e.g. rude staff at the
bank for utility bills
7. Physical evidence: as money has been spent on a non-physical item, having physical symbols helps,
e.g. a training certificate after completion of training, receipts

Pricing Process & Strategies

Determining the ‘right’ price for the product is a complex decision. You cannot charge an abnormally high price
as it would discourage or scare-off the customers. Similarly, you cannot charge abnormally low price as it
would give wrong signal to the customer regarding the quality of the product as well as it will reduce your
profit levels, which you could have earned easily.
Below are certain steps involved to help determine the right price for the product, known as PRICING
PROCESS. The sequence of these steps are inter changeable:
1. Pricing Objectives
Pricing objectives should be consistent with the overall competitive strategy of the organization, such as:
▪ Cost leadership strategy
▪ Differentiation strategy
▪ Other possible objectives: volume increase, market share increase, cash flow generation, etc.
2. Costing and Profitability Analysis

▪ Analyze cost of the product
▪ Add appropriate profit margin
▪ Contribution Margin & Breakeven analysis
3. Analyzing Customer Demand and Affordability

▪ How much customers are willing to pay
▪ Are customers price sensitive or quality sensitive
▪ Assess the demand of the product with relation to various price range
4. Evaluate Competitors’ Price

▪ Benchmark proposed price with competitor’s price
▪ However, there might be ‘qualitative’ differences between our product and competitor’s product,
which will have to be considered in the pricing

5. Selecting Pricing Strategies

▪ Price Penetration:
Charge lower price in order to enter market and increase market share. Initial focus is to get sales
volume and not profit margin
▪ Price Skimming:
Charge a higher price as premium for a unique or a new product. Focus is on earning high profit margin
and not sales volume. In order to do price skimming, it is important that your product must have some
brand image or uniqueness.
▪ Discriminate Pricing:
Charge different price to different customer groups. Options include different timings (e.g. day and
night), different country, different age, different currency, early bird discounts, etc.

CSF & KPI

Customers’ Critical Success Factors
▪ Customers’ CSF are those features of your product due to which the customer buys your product (and
leaves the competitors’ product)
▪ E.g. what do you expect from a good airline?
▪ Punctuality
▪ Safety
▪ Comfort
▪ Organization should understand customers’ CSFs and then excel in those areas to beat competition
Key Performance Indicators (KPI)

▪ CSF are measured through KPI
▪ KPIs are quantifiable targets that organization has to achieve in order to excel
▪ E.g. what can be the KPI to measure the above mentioned CSFs of a good airline?
▪ Punctuality: % of flights departing on time
▪ Safety: # of accidents in a year
▪ Comfort: # of complaints

Product Lifecycle (PLC)

PLC is based on the sales volume of a product over time and has got 5 stages:
1. Development:
▪ R&D
▪ Product designing
▪ Cost will be very high with no immediate revenue
2. Introduction:
▪ Launch
▪ Advertising and marketing
▪ Losses (due to low volumes and high marketing costs)
▪ Few competitors
▪ Cost will be high mainly due to marketing expenses with minor sale revenue
3. Growth:
▪ Sharp growth
▪ More competitors
▪ Sale revenue will start increasing and product will first break even and then start making profit
4. Maturity:
▪ Growth slow down / saturation
▪ Competition at peak
▪ Cost will be low due to economies of scale and expertise with maximum sale revenue
5. Decline:
▪ Falling sales
▪ Consider exit
▪ Revenue will decrease and exit / long-tail costs will be incurred, including servicing, spare parts,
warranties, etc.

Innovation
▪ Innovation: designing new products
▪ High revenue but also high cost / risk
▪ Advantages of innovation:
▪ High revenue / market share (first-mover advantage)
▪ Price skimming strategy
▪ Disadvantages of innovation:
▪ Uncertainty
▪ High R&D costs
▪ Followers learns from your mistake
▪ Two strategies for new product development
▪ Leader strategy (earns early rewards but high risks / costs)
▪ Follower strategy (sacrifices early rewards but avoids risks)

Competition Dynamics
Industry Life Cycle for Competition
Industry lifecycle Nature of Competition
1. Inception None to few
2. Growth Many new entrants, competition is increasing
3. Maturity Competition is at its peak, weak players exit
4. Decline Few left, majority exits
-
Strategic Group Analysis
▪ Competitors can be analyzed industry wide, but it is too broad
▪ Strategic group analysis reduces the list to organizations having similar strategic characteristics
▪ Strategic characteristics could be based on range of product, geographical coverage, quality levels,
branding, customer segment, etc.
Purpose of Competitor Analysis

▪ Insight into competitors’ strategies
▪ Compare your competitive position with competitor
▪ Assist in developing your competitive strategies
Areas Covered under Competitor Analysis:

Understand / assess competitor’s:
▪ Objectives / Profile
▪ Strengths
▪ Weaknesses
▪ Strategies
▪ Response to your strategies

Strategic Capability
• Strategic Capability:
Adequacy of resources AND competence for the Organization, i.e. deals with internal factors
• Resources:
Tangible and non-tangible assets of the Organization
• Competence:
How effectively the organization uses its resources
• Threshold resources and competence:

The minimum quantity of resources and competence required to ‘survive’
• Unique resources and competence:

Resources and competences which are better than the competitors and hence give comp edge. These are
difficult for competitors to imitate or obtain. E.g. can include:
 Highly loyal / motivated staff
 Goodwill
 Innovations
 IT / technology
• Limiting Factors:
▪ Every Organization operates under resource constraints
▪ A limiting factor means that a shortage of a particular resource is limiting the business activity of the
Organization
▪ Examples of limiting factors:
 Production capacity
 Skilled / technical staff
 Restricted distribution network
 Limited finances / budgets

Knowledge Management
• Data and Information:
Data are simple facts which are organized in a way to produce information
• Knowledge:
Pattern resulting from information, which is strategically used
• Explicit knowledge:
Information already known to the Organization
• Tacit knowledge:
Information not yet know to the Organization, i.e. still in people’s mind
• Knowledge management:
The entire process of collecting, storing and using knowledge in the Organization
• Knowledge Management Systems:

Software specializing in knowledge management
Knowledge Management Systems

• Office Automation Systems:
Automates routine manual tasks, e.g. MS Word, Excel, Emails
• Groupware:
▪ For working of teams
▪ Features include email, conferencing, scheduling, document / project management
▪ E.g. MS Outlook, Lotus Notes
• Intranet / Extranet:
▪ Internal website of an organization, which only employees can use
▪ Used for sharing information, policies and procedures, company news, etc.
▪ Extranet is intranet plus few authorized outsiders, e.g. key suppliers or customers

• Expert Systems:
▪ Artificially intelligent systems, in which knowledge and human expertise are fed, due to which it is able
to suggest decisions.
▪ E.g. normally used in investment decisions, law, medicine
• Data Warehouse:
▪ A large data base in which data from various operating databases are stored over a long period of time
▪ Data warehouse helps in analyzing data trends over time as well as helps in data mining
• Data Mining:
▪ Specialized software which looks for ‘hidden’ pattern / relationships in a large pool of data, such as
data warehouse
▪ The hidden relationship / pattern is knowledge which is can be used for marketing strategies, pricing
strategies, etc.
▪ E.g. Nappies and beer in Wallmart Store
Porter Value Chain

• Value:
An feature for which the customer is willing to pay the price
• Value Activity:
An activity which adds “value” to the product
• Value Chain:
Entire chain of value activities which collectively adds value to the product
• 5 Primary Activities:
1. Inbound Logistics
2. Operations
3. Outbound Logistics
4. Marketing
5. Sales, After Sales Service

• 4 Support Activities:
1. Procurement
2. Technology Development
3. Human Resource
4. Firm Infrastructure
▪ Definitions of each value activity

▪ Inbound logistics:
▪ Physical transportation of raw materials from suppliers premises to your premises
▪ Warehousing of raw materials in your premises
▪ E.g. of IT system includes inventory management softwares, JIT concept, etc.
▪ Operations:
▪ Manufacturing process, i.e. converting raw materials into finished goods
▪ Includes manufacturing, packing, testing, etc.
▪ E.g. of IT system includes Computer Aided Manufacturing software (CAMs), Robotics, etc.

▪ Outbound logistics:
▪ Warehousing of finished goods in your premises
▪ Physical transportation of finished goods from your premises to final consumer
▪ Order placing process (e.g. telephone, website, etc)
▪ E.g. of IT system includes inventory management systems, Electronic Point of Sale (EPOS)/
barcoding, delivery scheduling systems, route planning systems for delivery vans, etc
▪ Marketing and Sales:

▪ Marketing activities to increase demand of your products
▪ E.g. of IT system includes E-Marketing, Customer Relationship Management software (CRMs),
Cookies, etc.
▪ After Sales Service:

▪ Includes activities such as repairs, warranties, guaranties, etc.
▪ E.g. of IT system includes complaints management software, etc.
▪ Procurement:
▪ Purchasing activities, such as inviting quotations from various vendors, evaluation,
negotiation and then placing firm orders with the vendors
▪ E.g. of IT system includes E-procurement, E-auction, Supplier Databases, Extranets, integrated
procurement systems through extranet, emails, etc.
▪ Technology:
▪ Use of technology in all areas of business
▪ E.g. of IT systems include programming software, CADs (computer aided designing software),
R&D software
▪ HR:
▪ Finding the right people for the right job
▪ E.g. of IT system includes Intranet, Human Resource Management Systems, E- Training, E
Attendance, etc.

▪ Firm Infrastructure:
▪ Includes senior management / governance of the organization who makes strategies and
decisions
▪ Plus all other departments which are not directly covered above e.g. finance, audit, legal,
health & safety, security, etc.
▪ E.g. of IT system includes Groupware, MIS, expert systems, data warehousing and mining
• Upstream / Downstream Supply Chain

▪ Upstream: flow of materials from suppliers into the organization (purchasing, inbound logistics,
operations)
▪ Downstream: flow of materials from organization to customers (outbound logistics, marketing & sales,
after sales service)
Corporate Parenting &Portfolio
Corporate Parenting means how corporate parent manages its business units
Factors to look at when comparing SBUs performance with one another

1. Industry growth status
2. Your market share trend
3. Net profit margin trend
4. BCG assessment
5. Strength / weakness / primary reason for acquisition

BOSTON CONSULTATIVE GROUP: BCG MATRIX (Also known as BOSTON BOX)

BCG Matrix / Boston Box is used to analyze the current position of the various business units within the Group
and what future course of action should be taken for each business unit
Potential cash inflow / outflow are plotted
Question Marks Stars

Industry High
(Harvest) (Build)
Growth
Dogs Cash Cows
Low
(Divest) (Hold)
Low High
Market Share
1. Star: Star business unit has a high market share in a growing industry, which means that there
is still a lot of growth potential in future. ‘Build’ strategy is used for Stars, i.e. more money is
invested now in order to seek long term gain
2. Cash Cow: Cash Cow business unit has a high market share in a declining industry, which
means that there is limited growth potential in future. The industry has reached the maturity
stage now. ‘Hold’ strategy is used for Cash Cows, i.e. maintain or extend the current position
as much as possible
3. Dog: Dog business unit has a low market share in a declining industry, which means that there
is no growth potential in future. The industry has reached the maturity stage or decline stage.
‘Divest’ strategy is used for Dogs, i.e. close down the business unit and use resources
somewhere else
4. Question Mark: Question Mark business unit has a low market share in a growing industry,
which means that there is growth potential in future. However it is a decision point as the
Parent needs to decide whether it is willing to take the risk and invest for future gains?
‘Harvest’ strategy is used for Question Marks, i.e. whether some money should be invested or
not?

Product-Market Strategies
Ansoff’s Growth Vector Matrix:
Market
New Diversification
Market Development
Market Product
Existing
Penetration Development
Existing New
Product
▪ Market penetration: Increase market share

▪ Product Development: Heavy R&D, customer needs, marketing
▪ Market development: New geographical markets, distribution channels
▪ Diversification: New product and new market simultaneously
Diversification
Diversification means going for new products and markets
Diversification
Related Unrelated
Horizontal Vertical
Advantages of diversification:
▪ Higher profits
▪ Risk spreading
▪ Economies of Scale
▪ Synergies with sister companies

Disadvantages of diversification:
▪ Lack of experience
▪ High risk
▪ Management problems (time, resources, lack of concentration)
Related Diversification
▪ Developing new products and markets but within the existing capabilities and supply chain
International Diversification (Globalization)

Market Selection Criteria
▪ Market attractiveness (size, growth, culture,)
▪ Competitive advantage (Organization’s own experience in similar products/markets)
▪ Risks (e.g. political, govt policies, currency risks)
Reasons (and advantages) for Globalization

▪ More customers
▪ Higher profits
▪ Economies of scale
▪ Cheap resources and labour (country advantage)
▪ Favorable laws and government policies (e.g. low taxes)
▪ Risk spreading
Problems of Globalization
▪ Managing issues (vast operations, lack of local experience)
▪ Legal differences / complexities
▪ Cultural issues

Growth Strategies
ORGANIC GROWTH / INTERNAL DEVELOPMENT
▪ Grow by building or expanding your own products and markets with your own efforts
▪ Advantages:
▪ Less funds required than acquisition
▪ Less risky than acquisition (no hidden issues)
▪ No management or cultural issues
▪ Slow but ‘steady’ strategy
▪ Problems:
▪ Growth is slow – time consuming
▪ Slow economies of scale

ACQUISITIONS & MERGERS

▪ Acquisition is the purchase of a controlling interest in another company
▪ Merger is joining of two separate companies to form one single company
▪ Advantages:
▪ Quick growth
▪ Quick economies of scale
▪ Increase in market share by elimination competition
▪ Good strategy to enter foreign countries
▪ May gain access to new customer segment, new geographical areas, new distribution channels or
any proprietary asset or trade mark / brands of the target company
▪ Synergies in marketing, technology, financial resources
▪ Problems:
▪ Costly – high funds required as compared to organic growth
▪ Risky
▪ expected results not achieved post M&A
▪ hidden issues not identified at the time of M&A
▪ Difference in management style or culture between the two companies
▪ Duplication of departments, processes and human resources which needs to be sorted out
▪ M&A activity is also a time consuming exercise
▪ No seller / right company available for sale
JOINT VENTURES
▪ Company ‘A’ and Company ‘B’ forms a new Company ‘C’ under partnership, sharing equity as well as
management
▪ Advantages:
▪ Advantages of acquisition / merger PLUS
▪ Sharing of expertise
▪ Sharing of costs
▪ Sharing of risks
▪ Sharing of learning and research
▪ Sharing costs of expensive activities / investments

▪ Problems:
▪ Disadvantages of acquisition / merger PLUS
▪ Conflict of interest
▪ Chances of disputes
STRATEGIC ALLIANCES
▪ Two or more firms agree to work together to exploit common advantages, without forming a separate
company.
▪ Examples:
▪ ATM machines shared between all banks globally
▪ Easy Paisa (telecom industry with banking industry)
▪ Mobile companies giving ‘international’ roaming options
▪ Alliances can be with suppliers or customers (e.g. JIT) or with competitors (e.g. to create barriers to entry)
▪ Advantages:
▪ Advantages of acquisition / merger PLUS
▪ Sharing of expertise
▪ Sharing of costs and risk
▪ Sharing of learning and research
▪ Sharing costs of expensive activities / investments
▪ Additional advantages of international alliances:
▪ Access to international market
▪ Getting new ideas and technology from international markets
▪ Less risky strategy to pursue a globalization strategy
▪ Problems:
▪ Non-availability of appropriate strategic partner
▪ Alliances may not be ‘equally’ beneficial for both partners
▪ Chances of disputes

FRANCHISE / LICENSES
▪ Company ‘A’ (Franchisor) gives license to Company ‘B’ (Franchisee) to use the brand name of the
Franchisor and conduct business according to the process and techniques instructed by the Franchisor
▪ Franchisor defines core products, qualities, manufacturing processes, recipes and provides guidance
▪ Franchisee responsible for initial capital investment and day to day operations of the business
▪ Advantages to Franchisor:
▪ Quick geographical growth without having any local experience
▪ Less capital requirement
▪ Availability of local expertise
▪ Low risk
▪ No local cultural issues
▪ High motivation / interest for Franchisee as he invests capital
▪ Disadvantage to Franchisor:
▪ High dependence on Franchisee
▪ Loses direct control over product and quality
▪ Limited control over Franchisee for operating matters
▪ Has to share secret / recipe with the franchisee
▪ Reputational risk if franchisee does not manage properly
▪ Conflict of interest / disputes
▪ Franchisee may eventually set-up his own product and become competitor
▪ Advantages to Franchisee:
▪ Association with a well know brand / product from first day
▪ Investment in a proven business format / product which eliminates risk of establishing a completely
new business / product
▪ Guidance and technical expertise is provided by the Franchisor
▪ Initial management, training and strategic planning is provided by the Franchisor
▪ Can take advantage of global / regional synergies, such as advertising campaigns, group purchases,
research, staff training, etc
▪ Disadvantage to Franchisee:
▪ All investment to be made by franchisee, i.e. all risk is taken by franchisee
▪ Has to follow strict procedures and rules, i.e. no flexibility or room for innovation
▪ Restricted geographical territory
▪ Has to pay high royalty which is normally based on sales revenue and not profit

▪ Franchisor may cancel the agreement and enter the market himself if he sees that his brand is
performing well
▪ Lack of guidance and support from uninterested franchisors
▪ All investment to be made by franchisee, i.e. all risk is taken by franchisee
▪ Salient Contents of a Franchising Agreement:

▪ Details of product
▪ Business operating model
▪ Geographical area
▪ Sales targets with key strategies
▪ Marketing and Advertising activities
▪ Human resources support
▪ Financing / Investment details
▪ Technological support
▪ Tenure of the agreement
▪ Remuneration arrangement (royalty, fees, etc.)
▪ Roles and responsibilities of Franchisor and Franchisee
▪ Non-competition clause
▪ Dispute solving procedures
▪ License:
Franchise is when the right includes product / trademark as well as the business operating model.
For e.g. MacDonald’s, Subway, Pizza Hut, Marriott, etc.
Licensing is when the right includes the use of the product / trade mark or intellectual property only and
not the business operating model. The word license is mostly used for software, manufacturing process or
technology, intellectual property, etc.
For Microsoft User License, or a right to print Disney Cartoon Characters on Tshirts

Generic Competitive Strategies

Porter’s four generic strategies for competitive advantage
1. Cost leadership (across the industry, i.e. all segments)
2. Differentiation (across the industry, i.e. all segments)
3. Focused / Niche strategy (on a particular segment):
Cost leadership
▪ Reduced cost in order to sell cheaper (targeting higher volumes)
▪ Options through which cost leadership could be achieved:
▪ Control over raw material cost (bargaining power with suppliers)
▪ Economies of scale (high volumes)
▪ Design of products and process (value engineering)
▪ Experience / learning curve
▪ Automation / Technologies
▪ Continuous cost reductions initiatives
▪ Outsourcing
▪ ‘No Frill’ cost strategy

▪ Lowest price / minimum benefit
▪ Zero brand loyalty
▪ Appropriate where:
▪ Customers do not value differentiation / quality / service
▪ Customers are very price sensitive

Differentiation
▪ Focusing on quality or uniqueness.
▪ Reinvesting portion of profit into R&D and product improvement
▪ Creating switching cost for the customers
▪ Options through which differentiation could be achieved:
▪ Continuous research and innovation
▪ Brand image / goodwill
▪ Heavy marketing
Focus / Niche
▪ Concentrate on one particular segment of the entire market
▪ Can adopt a “cost focus” strategy OR “differentiation focus” strategy
▪ Advantages of a niche strategy:
▪ Specialization
▪ Identify segment too small to attract major competitors
▪ Easier to create customer goodwill, loyalty and barriers to entry
▪ Ability to charge higher prices

Benchmarking
▪ Benchmarking is establishment of targets against which to compare our performance.
▪ Types of benchmarking:
▪ Internal (own historic performance)
▪ Industry (market leader or other comparable competitors)
▪ Best-in-class (global leader). Also means that you just benchmark certain function or activity instead
of benchmarking with the whole organization
▪ Benchmarking process:
1. Senior management commitment
2. Areas to be benchmarked
3. Select Organization to benchmark against
4. Compare key performance measures
5. Design and implement improvement plans
6. Monitor improvement plans
▪ Advantages / Reasons for benchmarking:
▪ Asses Organization’s existing position
▪ Focuses on improvement and best practices
▪ Improved performance
▪ Problems with benchmarking:
▪ Organization’s may not be comparable
▪ Organization may not share their information
▪ Requires time and cost
▪ Does not identify the root cause

Divestment Strategies
▪ Divestment: Selling off full or part of the business
▪ Reasons for divestment:
▪ Objectives not being achieved (e.g. losses)
▪ Concentrate on core activities (undo diversification)
▪ Need funds to finance more profitable option (liquidity)
▪ Exit barriers
▪ Factors that causes difficulties in exiting, such as:
▪ Lack of buyer / right offer price
▪ Low disposal value of assets
▪ Heavy redundancy payments
▪ Legal issues / contracts
▪ Methods of divestment:
▪ Sell as a running business to another entity (mostly competitor)
▪ Sell as a running entity to management/employee group
▪ Sell as a running entity to existing shareholders / partners
▪ Liquidation: wind up the business by selling all assets and paying liabilities
▪ Management / Employee Buyouts:
▪ Business is sold to the management or employee group as a running entity
▪ Reasons (and advantages):
▪ Expertise is retained internally
▪ Continuity of business (no management hiccups)
▪ Support available from ex-corporate / parent

Turnaround Strategies
▪ ‘Turnaround’ strategies are used when the business is continuously making major losses and if things are
not controlled immediately, business might close down
▪ Turn around strategies are implemented quickly as time and speed is important
▪ Steps for turnaround strategies:

▪ Change senior management (preferable those with turnaround expertise)
▪ Focus on short term cost reductions and revenue boost
▪ Focus on root cause of the problems and fix it urgently
▪ Gain support of key stake holders, such as key staff, financers, banks, customers
▪ Financial restructuring, e.g. reschedule loan repayment arrangements and markup rates
▪ Try to maximize synergies with other sister companies within the group
▪ Close down unprofitable branches / produces

Organizational Culture
Culture means the overall believes values, norms, attitude, etc. prevailing in a place.
Organizational Culture is the believes, values, norms, attitude, etc. prevailing within an Organization. In
other words, “the way we do things around here”. The culture prevailing in any organization is influenced by
the national culture and the founder / leader of the organization
Why is Organizational Culture Important?

▪ It affects the way we do business
▪ It affects our strategies
▪ It affects our employees
▪ It affects our customers
The Culture Web by Johnson & Scholes

The Culture Web Model is used to gain an understanding of Organization’s culture. The word ‘paradigm’ is used
to mean culture and summarizes the overall culture of an organization.
Symbols
Stories
(History) (Values)
Power
The Structures
Rituals & Paradigm
Routines
Org
Control Structures
(Mgt Style)
Systems
(Processes)
▪ Power Structures
▪ Study of the leader or the organization
▪ What is the leader like? His believes attitude, approach, etc.
▪ Who has the real power and is it used / misused
▪ Management style (e.g. strict or friendly)

▪ Organizational Structures
▪ Formal structure or informal structure
▪ Tall or flat structure
▪ Control systems
▪ Cost focus or quality focus
▪ Are employees controlled through reward style or punishment style?
▪ Look for words like ‘budgets’ or ‘overheads’
▪ Rituals & Routines

▪ Daily routine in the organization
▪ Practice and norms
▪ E.g. office timings, punctuality, strictness, late sitting, long lunch hours, leaves, etc.
▪ Stories
▪ Past events or history of the organization
▪ Heroes and Villains
▪ Symbols
▪ External appearance of the organization
▪ Logos, staff titles, office premises, dress code, language, cars, etc.
Ideal Steps to Bring a Major Cultural Change

▪ Understand the existing culture (using culture web model)
▪ Win confidence of Power Structure people
▪ Consult the proposed changes with Power Structure people and get their support
▪ Implement proposed changes slowly / step-by-step over a passage of time
Other terminologies
Financial culture
▪ All decisions based on cost-benefit analysis / financials / ROI
▪ Tight budget and strict cost control
▪ Accountants play a key role

Excellence / Service culture

▪ All decisions based on customer need and satisfaction
▪ Focus on differentiation / innovation / quality
▪ Accountants don’t play a key role
Role culture
▪ More focus on roles
▪ Common in large / government organizations
▪ Leads to bureaucracies and inflexibility
Task culture
▪ Focus on getting tasks done
▪ This is the modern type of environment
▪ Encourages high teamwork, flexibility and motivation
Practice Questions
P3 – Pilot Paper Q1: Pestel | Porter 5 Forces (NMS)
P3 – Dec 2009 Q2: Value Chain (Independent Living)
P3 – Jun 2010 Q2: SFA Framework | Porter Diamond Model (Swift)
P3 – Dec 2010 Q1: Corp Portfolio | Turnaround Strategy (Shoal plc)
P3 – Dec 2010 Q3A: Culture Web (Frigate)
..P3 – Dec 2012 Q3: Franchise | Strategic Alliance | Financial Evaluation (Grafetti)
P3 – Jun 2014 Q2: Pricing Process | Marketing Mix (AQT)

Chapter 2
Technology & Data Analytics
Introduction to E-Business
E Business means doing business through internet technologies, which ranges from basic emails to fully
automated web sites.
E Commerce is when a financial transaction is involved through E Business, e.g. online ordering, online payment,
Electronic Fund Transfer
M Commerce (mobile commerce) is when E Commerce is done through wireless device (e.g. cell phone or laptops
in WiFi networks)
Advantages of E Business:
▪ Increased revenue due to globalization
▪ Lower costs (e.g. no need to have physical offices / branches / lower staff)
▪ Better availability of information
▪ Improved marketing
▪ Customer convenience (e.g. 24/7 availability, easy communication, FAQs)
▪ Flexibility / no physical limitation for customers or company
Disadvantages of E Business:
▪ Not all customers use internet
▪ One-time setup cost:
 Hardware cost
 S/W license cost
 Increasing technical staff in your IT dept
 Website development
 Integration with current systems
Mirchawala College Chp 2 – Tech & Data Analytics….. Page 1

▪ Security risks (cybercrimes, hacking, virus, data privacy, frauds, etc.)

▪ Lack of technical capability or resources or culture issue
▪ Legal complexity due to globalization
▪ Redundancy costs
Strategy for E Business:

Why all business are not using E Business? Use of E Business depends on:
▪ Nature of product (e.g. is your product sellable on internet)
▪ Nature of customers (e.g. are your customers high tech, internet culture)
▪ Internal factors (IT structure, cost)
Also, E Business strategy can be assessed using the SFA approach for selecting strategies (chapter C):
▪ Suitability: Will E Business help in achieving organizational objectives particularly related to sales growth
▪ Feasibility: Does organization has technical and financial resources to implement and manage E Business
▪ Acceptability: will key stake holders accept the strategy, e.g. your suppliers might be reluctant to accept
as they are not hi-tech or comfortable with E Business
Varieties of E Commerce:
▪ B2B: Business to Business
▪ B2C: Business to Consumer (e.g. amazon.com)
▪ C2B: Consumer to business (e.g. priceline.com)
▪ C2C: Consumer to Consumer (e.g. ebay.com)

E Marketing
E Marketing means using internet technologies to achieve marketing objectives (i.e. sell goods and services).
Basic marketing principles remains same in E Marketing, only more options become available
Advantages:
▪ Global reach
▪ Lower cost
▪ 24-hour marketing
▪ Personalized marketing
▪ More interesting / interactive campaigns (using music, graphics, videos)
▪ Cheap way of collecting customer data
▪ Cross selling becomes easier
Disadvantages:
▪ Limited customers using internet
6 I’s of E-Business by McDonald & Wilson

(6 differences between traditional marketing and e-marketing)
▪ Independence: The geographical location of the company does not matter as customers can do entire
shopping / transaction through the website sitting at home. Independence increases the geographical
reach of the company.
This is unlike traditional marketing where customers are restricted to geographical location of the
company.
▪ Interactivity: Develop two-way communication or relationship with customer, such as customer can email
inquiries, specify their requirements, give feedbacks / complaints, place order, make payments, blogs,
forums, threads, communities, etc.
This is unlike traditional marketing where there is only one-way communication (e.g. news paper)

▪ Individualization: Tailoring marketing information for each individual keeping in mind their interests, i.e.
‘personalization’. Personalization helps in building relationships and improving customer services. Other
areas include personalized screens, providing after sales service / reminders, favourites, upgrades, etc.
This is unlike traditional marketing where same marketing / product information is sent to all customers
alike.
▪ Intelligence: Finding out what the customer is interested in? For e.g which products or which price range?
Website keeps track of activities which a user does on our website, such as web logs, # of visits, visit
patterns, most visited pages, etc. This help companies in gathering market research data and current
‘customer’ needs and interests.
This is unlike traditional marketing where the customer needs are not investigated on a regular basis.
▪ Integration: The website (front-end) is fully integrated with the transaction processing systems (back-end)
such that customer orders / payments are processed quickly and accurately.
This is unlike traditional marketing where the customer has to physically come to the shop to purchase
the product and make the payment.
▪ Industry: New industries have been created due to internet and communication technology such as MP3
downloads, skype, social networking softwares, Apps, etc.
E Procurement
E Procurement means B2B purchases through internet. Done through emails, websites, extranets, etc.
Advantages:
▪ Global options
▪ Faster
▪ Reduced stock levels
▪ Cheaper
Disadvantages:
▪ Limited suppliers using internet
▪ Risk of unauthorized purchase
▪ Data security
▪ Privacy, fraud, unreliable

Supply Chain Management

Supply Chain encompasses all activities necessary for transformation of goods from raw materials till its
consumption by final consumers
Push model of supply chain:

▪ Production based on sales forecasting
▪ Leads to over stocking or shortage
▪ High product obsolescence
▪ Low reliance on IT support
Pull model of supply chain:

▪ Production based on customer’s request (e.g. JIT)
▪ Reduced over stocking or shortage
▪ Reduced product obsolescence
▪ Focus on customer service (e.g. tailor made products)
▪ High reliance on IT (e.g. integration, communication)
Virtual Supply Chain

▪ Traditional practices were paper-based, e.g. a purchase order sent to the supplier or invoice sent to the
customer
▪ Virtual supply chain is based on communication links (internet / extranet) through which the supplier as
well as the customers are online with the Organizations systems

E Business & 7 Ps
Product:
▪ Better product displays / visuals
▪ Customized products
▪ Find out customer needs
▪ Customer feedback and complaints
▪ Make product virtual (if possible) e.g. e-university, e-book, e-music, etc.
Promotion:
▪ Websites
▪ Forums / communities
▪ Social networking sites such as face book, twitter, etc.
▪ E mails
▪ Search engines
▪ Online discounts
▪ Links on related websites
▪ News letters
Place:
▪ Counter-mediation (have both physical and online options simultaneously)
▪ Dis-intermediation & Re-intermediation (completely eliminate physical channel and only operate online)
Price:
▪ Differential pricing (e.g. for different countries, different customer groups, different timing/months, etc)
▪ Dynamic pricing (based on customer demand and product availability, e.g. air tickets)
▪ Online discounts
▪ Payment modes (credit card, pay pals, etc.)
▪ Should be secured
People:
▪ Website is acting as company’s representative
▪ The website should be of high quality (see below)

Qualities of a good website:

 Complete up to date
 User friendly
 Members’ login
 Search options
 Subscribe us option
 Multi language options
 Place order
 Secured payment options
 FAQs
 Links to useful / related sites
 Site maps
 Complaint / feedback option
 Contact us details (email, address, telephone, etc.)
Processes:
▪ Transaction procession systems are linked with the website
▪ Orders / payments can be processed real time 24/7
Physical evidence:
▪ Peep through facilities
▪ Downloads and printouts
▪ Confirmation / Response to emails

Customer Relationship Management

Customer Relationship Management helps in building one-to-one relationship with customers using internet
technologies. There are two broad stages of relationships:
Customer Acquisition:
Includes marketing activities to acquire new customers through:
▪ Collect email data
▪ Interaction / marketing
 Sending relevant mails and articles
 Demos / videos
Customer Retention:
Includes activities to retain existing customers through:
▪ Order placing and tracking
▪ Reminders / notifications
▪ Auto payments
▪ Reports and summaries
Features of a good CRM Application

▪ Multiple communication options (e.g. email, sms, social media, google, etc.)
▪ Integration with back office / transaction systems
▪ Maintaining customer history and database
▪ Privacy and security
Four Benefits of CRM Application

▪ Marketing and relationship building (emails, notifications, individualization)
▪ Sales management (inquiries, order placing, order tracking, auto payments)
▪ After sales service (feedbacks, complaints, reminders, FAQs)
▪ Analysis (trend analysis, data mining, intelligence, big data)

Big Data & Analytics

Introduction
Traditionally, organizations collected data of transactional nature (i.e. structured information), e.g. customer
orders, payments, transaction history, etc. however now, there is significant data available relating to non-
transactional data (i.e. unstructured information) such as browsing history, data from social network, youtubes,
contact lists, discussion forums, etc.
Big data refers to extremely large collections of data (mostly unstructured data) that may be analyzed to reveal
trends and patterns, especially relating to customer habits and behavior. The data size is so big that it is measured
in peta bytes. For e.g. imagine the amount of data held by Google, Amazon, Facebook, Wallmart, cell phone
companies, financial institutions etc. The size of the data of these organizations is so large that it would require
10-20 million PCs to store data of each organization.
Big data is becoming important as organizations are able to extract valuable information about customers, based
on which important strategic decisions can be made. Hence big data is now an important tool for strategic
planning and organizations are now investing in Big Data.
Characteristics of Big Data – 3Vs model
1. Volume
▪ The data size has to be really big
▪ The bigger the data, the better the analysis and findings of trends and patters
2. Variety
▪ The data contains ALL sort of information (i.e. variety), and not only financial transactions
▪ Variety of data includes:
o Browsing activities
o Buying habits and interests
o Financial transactions
o Geographical information
o Social and business contacts
o Reaction to advertisements
o Comments and discussions

3. Velocity
▪ Velocity means speed
▪ Information needs to be obtained, analysed and actioned upon processed quickly, as information is
changing every hour
▪ Timing is important as there is no point in sending marketing information to a customer after he
has made a purchase
Advantages (Opportunities) of Big Data

▪ Deeper insight into data
▪ Better marketing and pricing strategies
▪ Improved customer service and relationship
▪ Increased competitiveness
▪ Development of bespoke products
▪ New sources of revenue
Disadvantages (Threats) of Big Data

▪ Data security / leakage
▪ Data storage and management issues (hardware and software)
▪ Costly
▪ Legal issues / regulations

Cloud Computing
Introduction
Traditionally, IT activities (hardware, software, servers, databases, website hoisting, etc.) were done locally, i.e.
companies used to own physical servers & software, store data and manage entire IT themselves.
Cloud computing is delivery of computing services over the internet. Companies offering these services are called
cloud providers and charge based on usage. For e.g. you can store your data online on google (onedrive). When
organizations opt for cloud computing, they eliminate capital expenditure of buying hardware / servers,
eliminate maintaining onsite data centers and eliminates the need of having a large IT department. This leads to
significant savings in costs (e.g. space, staff, overheads, etc.).
Advantages of Cloud / Mobile Computing

▪ Flexibility i.e. staff can access data from anywhere
▪ Higher level of storage capacity
▪ High technical standards (e.g. higher security, regular backups, etc.)
▪ Eliminate heavy investment in IT equipment
▪ Significant savings in IT operation cost
▪ Small firms can benefit a lot as they cannot afford to invest in fixed IT infrastructure
Disadvantages of Cloud / Mobile Computing

▪ High reliance on internet connectivity
▪ High reliance on cloud provider
▪ Loss of direct control
▪ Cloud provider has access to all your data
▪ Regulatory requirements for privacy of data may not be complied with
▪ High risk of hacking as Cloud providers are main targets by hackers

Information Technology & Information Systems

Introduction to IT & IS and Cyber
Information Technology refers to the physical hardware side, i.e. PCs, servers, networking, etc.
Information System refers to the intangible aspects, such as software, data, website, etc,
IT / IS Infrastructure refers to collective use of hardware and software to support the overall IT/IS operations of
the organization including the data / information management.
Risks to Hardware
E.g. of Hardware E.g. of Risks to Hardware

▪ PCs (desktop, laptop, handheld) ▪ Damage / malfunction
▪ Printers ▪ Poor operating conditions
▪ Networking and communication ▪ Fire
infrastructure (LAN/WAN) ▪ Natural calamities (earthquake, flood)
▪ Servers and mainframes ▪ Power failure
▪ Data storage devices ▪ Lost or theft (e.g. USB, laptop, tab)
▪ Unauthorized access

Risks to Software
E.g. of Software E.g. of Risks to Software / Data
▪ Operating system ▪ Unauthorized access / transactions
▪ Application software (e.g. accounting ▪ Hacking
software, inventory software etc.) ▪ Virus
▪ Development software (Java, VB, C++) ▪ Cybercrime / frauds
▪ Utility software (backups, anti-virus) ▪ Security of data is breached
▪ Database ▪ Data loss
▪ Software malfunction / errors / bugs
▪ High dependency of IT service providers (e.g.
cloud computing, internet provider, software
vendor, etc.)
▪ Violation of personal data / Data Protection Act
▪ Accidental mistakes in data entry or processing
▪ IT staff misusing their access rights
▪ Unhappy employee deliberately destroy data

IS/IT Security
Importance of IS/IT Security
It is very important to protect business data as well customer / personal data so that it is not leaked or hacked,
etc. Data breaches have severe business consequences, including:
▪ Business disruption
▪ Legal cases by customers
▪ Regulatory fines (e.g. breach of Data Protection Act)
▪ Reputational issues
▪ Loss of customers / market share
▪ Incorrect decision making based on erroneous data
IT controls includes the following broad categories:

1. Physical access controls
2. General controls
3. Application controls
Physical Access Controls

Physical access controls focus on preventing unauthorized access to physical assets, such as computers, laptops,
server room, etc. It also includes safeguarding IT assets and infrastructure from other hazards such as fire, earth
quake, terrorist activities, accidents, etc. E.g. of physical access controls includes:
▪ Physical safeguarding of data centre through:

 Security guards
 Numeric Locks
 Swipe cards
 Biometrics (finger prints, eye)
 CC TVs / cameras
▪ Control over laptops, USB, Tabs
▪ Fire protection
▪ Earthquake / flood resistant measures
▪ All USB or printouts to be kept inside under lock and key

General Controls
General controls are policies and procedures relating to the overall IT environment and are applicable to all
softwares running in the organization. The objective is to ensure smooth and continued running of the IT
function. E.g. of general controls includes:
▪ Logical access control (passwords) ▪ Firewalls

▪ Backups ▪ S/W acquisition, change and maintenance
▪ Anti-virus ▪ Vendor assessment criteria
▪ Audit trails ▪ Segregation of duties
▪ Disaster recovery plans ▪ Employee hiring controls / screening
▪ Data encryption
Good Password Controls include:

▪ Should be alpha numeric character, upper case and lower case
▪ Should be atleast 8 characters long
▪ Mandatory password change periodically
▪ Should not be disclosed or written anywhere
▪ Should not be shared with anyone
▪ Should not be guessable
▪ Same password not to be used for multiple user IDs
▪ System lockout after 3 incorrect attempts
▪ Two factor verification / One Time Code through mobile phone or email

Application Controls
Application controls focuses on individual softwares. The objective is to ensure that transactions are accurately
entered, processed, complete, authorized, etc. They ensure that the data is valid, accurate and complete. E.g.
of application controls includes:
▪ Input controls:
 Completeness check
 Format check
 Sequence check
 Validity check
▪ Processing controls (batch totals)
▪ Drop down menus
▪ Authorization check
Cyber Crime & Cyber Security

Cyber crimes are criminal activities carried out using computers and internet. Cyber crimes include online frauds,
hacking, identity theft, credit card thefts, scams, piracy, dark web, child pornography, drug dealing, etc.
Cyber Security Measures:

▪ Strong passwords management
 Mandatory password change periodically
 Two factor verification / One Time Code through mobile phone or email
 System lockout after 3 incorrect attempts
 Infact all points regarding good password management mentioned earlier
▪ Firewalls

Bespoke & Off The Shelf Software

Bespoke software means a software which has been specially designed / developed for your organization only
(i.e. tailor made)
Off the Shelf (OTS) software is designed / developed in general and every organization can use it (i.e. ready made).
Also known as Software Package Solution.
‘Customized’ off the shelf software are basically off the shelf software in which slight alterations are made in
order to fulfill all your requirements.
Advantages of bespoke software

▪ Fulfils 100% of your requirements
▪ Will give you comp edge
▪ Future alternation / modification is easy
▪ No dependency on external vendors
Disadvantages of bespoke software:

▪ Takes a lot of time to develop
▪ Costly
▪ Automatic updates or new versions are not available
▪ Free ‘Trial’ or ‘Demo’ not possible
▪ Chances of bugs / errors are higher as it is a new software
Enterprise Resource Planning Software (ERPs)

ERPs are integrated software covering major functions of the Organization, such as purchases, inventory
management, accounting, HR, customer and marketing, etc. ERPs are basically off-the-shelf packages, keeping
in mind a wide range of experience, with some options for limited customization.
Advantages:
▪ Cheaper
▪ Quicker
▪ Quality
▪ Documentation and training
▪ Maintenance support
*

Disadvantages:
▪ May not meet all requirement
▪ No comp edge
▪ Dependency on the supplier
Software Evaluation, Selection &Implementation Process

STEPS:
1. Decide bespoke or Off the shelf
2. Business case / feasibility study / cost benefit analysis
3. Send Invitation to Tender – ITT

▪ Company background
▪ IT background
▪ User requirements
▪ Technical requirements
▪ Tender deadline and details
4. Evaluation of the software
▪ Functionality: meeting user requirements

▪ Usability: should be user friendly
▪ Technical Review: Compatibility, programming language, data conversion, security, backups are
reviewed by IT dept to see whether the S/W is technically strong
▪ Supplier evaluation: Experience, reliability, goodwill and going concern of supplier is thoroughly
checked as S/W will require supplier support on a long term basis
▪ Cost: Cost of S/W

▪ Selection: select the most appropriate option based on above criteria

5. Implementation
▪ Contract review and negotiation (specially support and maintenance clauses)
▪ Testing
▪ Functionality
▪ Usability
▪ Load and stress testing
▪ Training of users
▪ Data migration from old software
▪ Change over
▪ Direct changeover
▪ Parallel
If dealing with new or risky S/W Vendor

▪ Obtain financial statements regularly and review to identify any going concern issue (ideally every 6
months)
▪ Acquire source code or the software house (this option is not available most of the time)
▪ Both parties enter into an Escrow Agreement with a 3rd party
Practice Questions
P3 – Dec 2010 Q2: Adv of E-Business | E-Marketing & 7Ps (TMP)
P3 – Jun 2011 Q4: 6I | E-Procurement (Cronin Auto Retail)
P3 – Jun 2014 Q3: S/W selection | Bespoke & Off The Shelf (Bridge Co)
P3 – Mar/Jun 2016 Q2: IT Controls | Ethical Dilemmas (Shop Reviewers Online)

Chapter 3 -
Innovation, Performance & Change Mgt
Process Improvement & Strategy
Terminologies
Business Process Automation: Manual tasks are automated using machinery or IT
Business Process Rationalization: Already automated tasks are further improved by using latest machinery
or IT. This is part of continuous improvement strategy
Business Process Re-Engineering: Fundamental rethinking and radical redesigning of processes in order to
achieve dramatic results. BPR adopts a ‘clean sheet’ approach whereby the entire process is redesigned
from scratch.
Common Problems in Processes
Problems Solutions
▪ Lengthy ▪ Removing unnecessary activities

▪ Some activities unnecessary ▪ Combining activities or roles
▪ Duplication ▪ Changing order of activities in logical flow
▪ Some activities missing ▪ Allocating activities to right department or
▪ Activities in wrong order person
▪ Activities being performed by a wrong ▪ Outsourcing

department or person ▪ Automation
Mirchawala College Chp 3 – Innov, Perf & Change Mgt….. Page 1

Harmon’s Process Strategy Matrix
Process High B D
Complexity
Low A C
Low High
Strategic Importance
A: Simple / straight forward process but not contributing to company’s core strategy
Strategy: Simple automation using off-the-shelf softwares or outsource (e.g. payroll, office cleaning)
B: Complex process but not contributing to company’s core strategy. Hard to automate.
Strategy: Outsource to a specialist vendor (e.g. taxes, legal)
C: Simple process but important to company’s core strategy

Strategy: Automate or Rationalize in order to increase quality, efficiency and reduce cost (e.g. order
processing system)
D: Complex, high value process which generates competitive advantage for the organization
Strategy: Careful process designing, employee best experts, best IT solution, etc. (e.g. research and
product development, marketing)

Projects
▪ Project: a one-off non-routine activity that has a
 Beginning and end
 Clear objectives
 Within time, cost and quality
▪ Project Management: Structure, responsibilities, activities, resources used to control projects
▪ Triple Constraints in Project (PROJECT TRIANGLE)

A project has to the following three aspects at all times:
 Quality
 Timeline
 Cost
▪ Project Stakeholders: people, departments or external parties either involved in the project OR effected
by the project. It includes internal as well as external stakeholders such as:
 Project sponsor
 Project manager
 Project team
 Users / concerned department (s)
 Customers
 Suppliers
 Government
 Society / community

Project Lifecycle
Project lifecycle is all the stages through which a project passes from start till end.
1. PROJECT INITIATION
This stage covers basic information to enable the Board to approve or reject the proposed project. It
includes the following:
▪ Scope and objective
APPROVAL PHASE
▪ Cost and benefit analysis
▪ Key stakeholders (e.g. project sponsor, project manager, project team, users, etc.)
▪ Project duration / timelines
▪ Risks and constraints
▪ Feasibility, investment appraisal techniques, etc.
▪ Documents used in this phase:
 Project Initiation Document / Business Case
 Project charter
 Benefit realization plan
Project Initiation Document (PID) / Business Case

A PID is a document which details the justification of the project. It documents all the aspects mentioned in the
Project Initiation phase (mentioned in above section) and serves as a formal document for senior management
/ Board to assess the merits and demerits of the proposed project and take a decision.
Advantages / Importance of a PID

▪ Projects involves initial costs / investments, hence a detailed analysis is important
▪ Enables the Board to review the proposal and decide whether project is beneficial for Organization
▪ It helps in monitoring the progress of the project
▪ It helps is measuring the success of the project once it is completed
▪ Forces sponsor to “think hard” and be realistic as he/she would be held accountable
▪ In case of limited funds, enables comparison with other project options

Contents of a PID
▪ Current situation or problem
▪ Project scope and objective
▪ Cost and Benefit Analysis
▪ Key stakeholders:
 Project sponsor  Customers

 Project manager  Suppliers
 Project team  Government
 User or concerned department(s)  Society / community
▪ Project duration / timelines

▪ Risks (e.g. quality, timeline, costs)
▪ Constraints (e.g. human resource / expertise, financial resource, technical resource)
▪ Feasibilities, investment appraisals, etc.
▪ Major assumptions made
▪ Project monitoring and reporting procedures
Project Charter
A Project Charter is a formal approval of the business case and gives authorization for the work to be started
and allocation of funds and resources to be made. It is signed-off by all key stake holders of the project, based
on the Project Initiation Document.
Benefit Realization Plan

The Project Initiation Document contains cost and benefits analysis of the project. It is relatively easier to
predict costs by very difficult to predict benefits. Benefit Realization Plan shows how the benefits have been
calculated, including all major assumptions. It is a supporting document to the CBA and attached as Annexure
to PID. Benefit Realization Plan is the key document which will be used to measure the actual benefits, once
the project is completed.

2. PLANNING
Once the project is approved by the Board, detailed / technical planning is done in order to execute the
project. It includes the following:
DETAILED PLANNING
▪ Detailed planning for all activities within the project
▪ Project is broken down into many tasks and then detailed planning is done for each task, covering
resources, costs, quality, risks, timing, duration, etc.
▪ Document used in this phase: PROJECT PLAN
Project Plan
A project plan is a document which contains detailed planning about the project, covering resources, timing,
costs, risks, duration, etc. The project is broken down into many tasks and then detailed planning is done for
each task. Detailed project planning is normally done once the Business case is approved.
Importance of a Project Plan

▪ Analyzes in detail what needs to be done
▪ Responsibilities, timelines and budgets are allocated to each person
▪ Acts as a communication and controlling tool
▪ Helps in overall coordination of the project
▪ Focuses on action and outcomes
▪ Sets targets and KPIs at each stage so that actual progress can be monitored
Contents of a Project Plan

▪ Overview of the project (summarized from the business case)
▪ Project management and resources (how proj will be monitored, team, reports, committees, etc)
▪ Detailed plan
▪ Targets and milestones alongwith evaluation KPIs to monitor progress
▪ Risk management
▪ Post project exit plans

3. EXECUTION & CONTROL

This stage is the execution or implementation phase of the project, based on Project Plan:
▪ Regular meetings are held

EXECUTION PHASE
▪ Work progress is monitored against Project Plan
▪ Project delays and issues are addressed timely
▪ Document used in this phase: PROGRESS REPORT
4. COMPLETION
This stage covers the handing over process, user feedbacks as well as assessment whether the project
objectives were met or not. It includes:
▪ Training of users
▪ Testing by users
▪ Formal handing over / sign off procedures
▪ Taking feedback from users
▪ Assessment whether project objectives are met or not
▪ Documents used in this phase:
 Post Project Review
 Post Implementation Review
 Benefit Realization Review (covered above)
Post-Project Review (PPR)

A PPR is conducted immediately after the project is finished. It focuses on how the project was managed (and
not on the product or outcome from the project). It reviews the performance of the project manager and the
project team. It covers mistakes made in the project management process, which will then be rectified in
future projects. E.g. includes poor cost estimation, project delays, lack of resources etc.
Post Implementation Review (PIR)

A PIR is conducted after few weeks or months of implementation and analyzes the end product or outcome of
the project. It assesses whether the desired product or outcome has been achieved or not. It covers errors in
the ultimate product or outcome, which will then be rectified in future projects of similar nature. E.g. the new
website is working fine.

Difference between a PIR and a Benefit Realization Review is that a PIR focuses on the product or outcome of
the project whereas Benefit Realization Review focuses more on the financial benefits as a result of that
project. E.g. if the project was to design and implement an online e-commerce website, a successful launch of a
good quality website will be covered under PIR and whether the increases sales revenue are achieved or not
will be covered under Benefit Realization Plan.
Benefit Realization Review

▪ Benefit Realization Review (or Analysis) is done after the project has been completed and actual benefits
have started to realize.
▪ It compares the actual benefits with the expected benefits mentioned in the Project Initiation Document
▪ One of the primary advantages of a Benefit Realization Review is that it will force the project sponsor to
be very careful when quantifying the benefits in the Project Initiation Document, as actual benefits will
be compared with the expected benefits
Cost Benefit Analysis

Benefits
▪ ALL possible benefits should be considered in the business case
▪ Each benefit should be converted into financial terms so that accurate return on investment can be
analyzed
▪ Some benefits may not be quantifiable in financial terms. However, they should be quantified and
measured in some way.
Types of Benefits
▪ Observable Benefits:
These are intangible benefits which cannot be quantified in financial terms, e.g. improvement in staff
morale. These should not be part of cost benefit analysis and can only be included under ‘qualitative’
benefits if important.
▪ Measurable Benefits:
These benefits are measurable but it is difficult to predict by how much they will increase once the
project is completed. For e.g. by how much market share will increase if company implements an online
ecommerce website? These benefits involve high degree of assumptions or estimations.

▪ Quantifiable Benefits:
These benefits are relatively easy to predict by how much they will increase once the project is
completed. For e.g. by how much wastages will reduce if a new machine is installed.
▪ Financial Benefits:
Once the measurable and quantifiable benefits are quantified, it becomes easy to convert them into
financials. (e.g. increase in sales revenue as a result of increase in sales volume)
Costs
ALL direct and relevant costs should be considered in the business case, including:
▪ Capital / one-time costs

▪ Operational / recurring costs
However sunk costs should not be included.
Investment Appraisals
Once all costs and benefits of the project have been listed, then these are compared to see if the investment in
project is financially beneficial (investment appraisal). In a typical project, there would be substantial cash
outflow in the start in anticipation of long-term cash inflows. Hence careful investment appraisal is done as
huge amounts are involved and it becomes difficult to pull out in the middle.
Following are commonly used investment appraisal techniques:

▪ Payback period
▪ Accounting Rate of Return
▪ Discounted Cash Flows:
 Net Present Value (NPV)
 Internal Rate of Return (IRR)

Steps for a Successful Project

▪ Formal Project Initiation Document duly approved by the Board
▪ Detailed planning for each task:
 Quality
 Timeline
 Cost
▪ Execution and timely problem solving
▪ Regular project monitoring and reporting
▪ User testing and acceptance
▪ Post project review
▪ Post implementation review
Project Stakeholders
Project Sponsor
Project sponsor is normally a senior person from the management team, responsible for the successful
outcomes of the project. He is the person who will gain the most from the success of the project and who will
lose the most if the project is a failure. He is the person who had initially requested the Board to approve the
project.
Role of a Project Sponsor:

▪ Provide strategic leadership
▪ Arrange all resources required by the project
▪ Monitor the progress of the project
▪ Review the performance of the project manager
▪ Take key decisions
▪ Address issues and constraints which project faces
▪ Report to the Board
Project Manager
Project manager is the person responsible for the entire project and all its activities. i.e. it is his job to ensure
that the project is completed on time, budget and quality

Role of a Project Manager:

Planning, resources, team building, communication, coordination, monitoring and control, problem solving,
etc.
Skills require from a Project Manager:

Technical skills, leadership skills, team management skills, monitoring skills, personal qualities, problem solving
skills, communication skills, etc.
Project Management Software

▪ Project management softwares automates all the manual tasks of the project manager, such as planning,
graphs, budget monitoring, progress report, etc.
▪ It can be used in planning, estimating, monitoring and reporting aspects
▪ Advantages: Speed, accuracy, documentation, analysis, faster modifications, reporting
▪ E.g. Microsoft Project
Dealing with project slippage / delays

▪ Add more resources (e.g. add one extra labour shift)
▪ Work faster (e.g. existing team works extra, such as overtime / weekends or we can use automation and
technology to speed up things)
▪ Reschedule the deadline (e.g. revise the go-live date)
▪ Change design specification (e.g. implement in phases, important items are delivered on time and rest of
the items are delivered later)
▪ Do nothing (might result in penalty or loss of market goodwill)

Context of Change - Balogun & Hope Hailey

▪ Scope:
What is the size of the change – is it a small change (realignment) or a big change (transformation) in light
of the organization culture, current business model or core business strategy
▪ Reason: The reason / justification for bringing a change should be clear, i.e. why the change is being made
and what will be the benefits
▪ Time: How quickly the change is needed? How much time is available to implement the change? Is there
any urgency to implement this change (Big Bang) or can it be implemented gradually (Incremental)
▪ Capacity / Resources: What kind of resources is required to implement the change. It includes financial
resources, manpower, technology, etc.
▪ Capability: Do we have expertise for ‘change management’, i.e. expertise to manage and implement the
change, e.g. past experience of various change projects, change agent
▪ Preservation: Strengths from ‘existing environment’ needs to be retained in future as well
▪ Power: How much power does the change leader has. It also involves in identifying people in the
organization who has the ‘real’ power to affect to the change
▪ Diversification: is there diversity (variety) of experience or strategy in the ‘current environment’? Change
will be difficult to implement (hampered) if the organization has been perusing the same strategy for years
▪ Readiness: Are the employees ready to accept the change or will there be significant resistance
▪ Resistance: Who will be the people or stake holders who will resist the change, reason for resistance, how
you would handle those people / stake holders

Types of Change – JS&W Model
Nature of
Incremental Adaptation Evolution
change
(Speed Of
Change)
Big Bang Reconstruction Revolution
Realignment Transformational
Scope of Change
(Size Of Change)
As compared to existing culture, business model or
core business strategy)
▪ Adaptation: most common, step-by-step

▪ Evolution: new mindset, re-engineering, step-by-step
▪ Reconstruction: rapid and extensive
▪ Revolution: in case of extreme crisis, very obvious
3 Stage Change Model – Kurt Lewin

1. UNFREEZE: convince staff and create motivation
2. CHANGE: implement the new system or process or new change

3. REFREEZE: ensuring that new system or process or new change is now part of the routine through
reinforcement techniques, such as rewards, appreciation, monitoring, etc.

Organizational Structures
Types of Structure
▪ Functional structure (departments)
 Disadvantage: creates “Silo” effect i.e. each department focuses on their own performance /
objectives and does not coordinate with other departments
▪ Divisional structure (divisions and then departments)
▪ Tall / Flat structure (span of control, i.e. number of subordinates reporting to you)
▪ Matrix / Transnational (see below)
Matrix Structure
▪ Used where there are multiple branches / offices (either in same country or across countries i.e.
multinationals)
▪ Matrix structure develops cross functional coordination
▪ Matrix structure means an employee has two bosses (dual reporting)
▪ Primary reporting (e.g. to functional head such as CFO)
▪ Secondary / dotted reporting (e.g. to administrative head such as branch manager)
▪ Advantages:
▪ Availability of functional expertise and guidance at branches
▪ Cross functional coordination and communication between multiple branches / offices
▪ Disadvantages:
▪ Dual bosses / chain of command
▪ Conflict between bosses
▪ Slow decision making
Choosing appropriate structure depends on

▪ Level of control required
▪ Quality of the team
▪ Speed of decision making required
▪ Accountability
▪ Flexibility

Internal Relationships
▪ Centralization
▪ Advantages: control, standardization, lower overheads, strong leadership
▪ De-centralization
▪ Advantages: local knowledge, flexibility, speed, higher accountability, reduces workload at
corporate level
Stereological Configurations - Mintzberg

Simple / Entrepreneurial Structure
▪ Structure with one man show (normally owner managed business)
▪ Direct supervision by owner who manages almost all aspects of the business
▪ Informal structure with few staff
▪ No significant middle line hierarchy
▪ Suitable for small organization
Machine Bureaucracy
▪ Formal procedures
▪ Strict hierarchy
▪ Standardized work processes through technology
▪ Suitable for simple and repetitive task environment
Professional Bureaucracy
▪ Standardized skills of individuals (e.g. doctors, lawyers)
▪ Suitable for service-oriented organizations
Divisional Form
▪ Standardized outputs (of divisions)
▪ Gives autonomy (i.e. independence) to middle level management to run their own divisions

Adhocracy
▪ No standardized processes
▪ Complex and disorderly
▪ E.g. project based teams, etc.
▪ Suitable for research and innovations
Missionary Organizations
▪ Standardized ideology
▪ E.g. NGOs
Talent Management
Talent management means to identify, recruit, engage, retain, and develop the most talented and superior
employees within by the organisation. Key elements of talent management include:
▪ Human resources are seen as a unique resource providing competitive advantage

▪ Recruitment
▪ Effective performance management and appraisal systems are in place
▪ Reward management
▪ High performers are appreciated and rewarded handsomely
▪ Training and development is seen as an investment, not a cost
▪ Retention strategies are in place
▪ Career path and succession planning is done
▪ International growth and exposure are provided

Working Models for Organizations

Outsourcing
Outsourcing means getting things done through 3rd party supplier, instead of doing it yourself
Advantages Disadvantages
▪ Getting specialized expertise ▪ Dependency on 3rd party
▪ Org can focus on its core activities ▪ Loss of direct control
▪ Cheaper ▪ Confidentiality issues
▪ Ease of budgeting ▪ Poor service / quality
▪ Reduces fixed overheads ▪ Chances of disputes
Shared Services
Shared services refer to the centralization of back office / support functions at one location, which were
previously carried out by each business unit independently. Common shared services functions includes IT,
finance, admin, procurement, HR, legal, etc.
Unlike outsourcing, shared services are carried out within the organization and will not require the use of a
third party. The shared service is treated as a separate business unit and its services are charged to other
business units at arm’s length prices. It will have its own targets to achieve and will be expected to produce
continuous improvements.
▪ Cost savings / economies of scale ▪ High resistance by individual business units
▪ Better quality and standardization ▪ Redundancies
▪ All talent under one roof ▪ Difficult to standardized all business units
▪ Easier to implement any change ▪ Local requirements and laws still needs to be
complied with

Collaborative Working / Boundaryless Organizations / Business Partnerships

Collaborative working is an extension of the idea of outsourcing. Due to internet / online technologies,
organizations are now able to work together more than ever before for e.g. organizations are working more
closely with their customers and suppliers.
Collaborative working is when two or more organizations work together in a variety of ways, such as JIT,
strategic alliance, joint ventures, networking, joint projects, sharing of resources, etc. It could be a one-off
arrangement or it could be a long-term permanent arrangement.
For e.g. Amazon.com: it only manages online website and e-marketing and heavily relies on various vendors,
courier companies, credit card company, etc. to deliver rest of the customer experience. The customer feels
that he/she is dealing with one organization but in reality, several organization are collaborating behind the
scene.
▪ Sharing of expertise and resources ▪ High dependency on each other
▪ Synergies ▪ Conflict of interest
▪ One stop solution for customers ▪ Weak partner may affect all
Disruptive Technologies
Disruptive technology means when technology is used to create a new market or value network and ‘disrupt’
the existing / traditional / physical business model in an Industry, displacing the established market leaders and
alliances. E.g. includes Uber, Netflix, Airbnb, Block Chain, Crypto currencies, etc.
FINTECH: one of the fastest growth sector in disruptive is financial services. Financial Technology (known as
Fintech) is disrupting the traditional banking industry dominated by giant banks. Fintech provides investment
advices, portfolio management, mortgages, exchange currencies, make payments.
Advantages of Disruptive Technologies:

▪ Seamless customer experience
▪ Better use of data
▪ More personalized products and services
▪ Cheaper
▪ Global reach

POPIT – Four View Model

In the past, many change initiatives have failed as they only focused on technical aspects of the project. POP-IT
model suggests that for any change project to be successful, the following four elements needs to be
considered. The use of POP-IT model forces the project team to take a more holistic (wider) view of the
business change, identifying those issues which may hinder the success of the project.
Organization: Information & Technology:

- Existing Business model - Hardware & software systems
- Existing organizational structure - Technological infrastructure
- Resources required - Information management (MIS)
Process: People:
- Existing business processes - Culture
- What changes are required - Skills and competencies of employees
- Value chain - Change in roles and job descriptions
- Process automation, rationalization and BPR - Training needs
- Communication
Multi Dimensional Performance Analysis

Balance Scorecard – Kaplan and Nortan
The balance scorecard suggests that organization should analyse performance from four perspectives:
▪ Financial: whether org is achieving its financial targets and shareholder needs e.g. ROCE, ROI
▪ Customer: whether org is meeting customer needs e.g. customer satisfaction, feedbacks, complaints
▪ Innovation: whether org is continuing to improve and develop e.g. research, innovation, training
▪ Business Process: whether internal processes are efficient and employees are motivated

Performance Excellence Model – Baldrige

The Baldrige model assesses and organisation across seven categories:
▪ Leadership: how organization’s leadership governs and motivates
▪ Strategy: how strategies are made, implemented and monitored
▪ Customers: building long lasting relationships with customers and meeting their expectations
▪ Workforce: how organization enables and empowers its employees, skilled, motivated, high
performance
▪ Operations: effectiveness and efficiency of processes and its continuous improvement
▪ Measurement, Analysis & Knowledge Management: how performance is monitored, data is

analyzed, knowledge is shared
▪ Results: performance of the organization relative to its competitors
Practice Questions
P3 – Dec 2009 Q3: Project Management | Harmon Process Strategy (Lowland Bank)
P3 – Dec 2010 Q1B: Contextual Features of Change (Shoal Plc)
P3 – Dec 2011 Q3: Post Project Review and Post Implementation Review (Home Deliver)
P3 – Mar/Jun 2017 Q4: Harmon | Off the Shelf S/W (Deeland Housing)

Sir Hasan Dossani – VIFHE
Chapter 4
Finance in Planning & Decision Making
Funding Strategies
Funding strategies may vary from business to business. BCG Matrix can be used to decide the funding strategy
for each business unit within the group (Star, Cash Cow, Dog, Question Mark). Cash flow projections are
prepared to see whether there is a funding deficit or surplus:
Sources of Funds / Options in Case of Shortfall

▪ Equity:
 Ordinary share capital (IPO or right shares)
 Retained earnings
 Reserves
▪ Debt:
 Debentures
 Preference shares
 Leasing
 Bank loans
 Bank overdrafts or running finance
 Trade credit
 Term Finance Certificates (TFC)
▪ Others:
 Sell short-term investments
 Tighter working capital management (e.g. leading and lagging)
Factors to Consider When Deciding Funding Sources

▪ Purpose and amount
▪ Duration of requirement (short term or long term)
▪ Legal status of the company (e.g. sole proprietor, partnership or company)
▪ Debt / loan financing:
o High cost
o Interest not linked with business performance
o Availability of collaterals
o Current gearing level
Mirchawala College Chp 4 - Finance in Planning & DM….. Page 1

▪ Equity financing:
o Cost linked with profitability
o Dilutes existing shareholding pattern
o Outside shareholders / institutional investor involvement
▪ Business risk vs financing risks
 Business risk: the chances that business will not make profit
 Financing risk: chances that business will have to pay interest on borrowed funds, despite the
fact that it is in a loss (e.g. debentures)
 When business risk is high, financing risk should be kept low (e.g. by taking equity financing and
not debentures / loans)
Options in Case of Surplus

▪ Interest bearing bank accounts
▪ Short term investment
▪ Treasury Bills
▪ Term deposits
▪ Long term investments
Changing Role of Finance and Accountants

Traditionally, finance function focused on three key roles: collections, payments and financial reporting.
However, these tasks have now become automated and hence the traditional roles of finance function as well
as accountants has transformed. Modern organizations now expect finance function to be strategic, forward
looking, proactive and focusing on creating value for the business.
Current roles for finance function (and accountants) focus more on:
▪ Support in strategic management, i.e. analyzing options, implementing and monitoring of strategies
▪ Providing in-depth analysis to business
▪ Long term business planning and scenario building
▪ Support complex decision making
▪ Performance measurement of the organization
▪ Finding areas of cost efficiency
▪ Funding sources & working capital management
▪ Managing financial risks
▪ Legal compliance
▪ Accounting and reporting

Modern Structure of Finance Function

Several working models have evolved in recent years to increase efficiencies of Finance function. These
working models are possible due to IT advancements such as internet, cloud computing, etc.
Outsourcing
Non-core tasks can be outsourced to a specialist vendor to avail economies of scale and cost savings. Common
tasks include invoicing, payment processing, bookkeeping, payroll, collections, etc. Harmon’s Process Strategy
Matric can be used in deciding which tasks can be outsourced.
Shared Services Model

In global organizations with multiple business units / locations, finance function can be centralized under a
shared service model, whereby it will provide support to all business units. This leads to significant cost savings
as well as better and standardization across the globe (covered in detail in next Chapter 5).
Ratio Analysis
Ratio analysis is used for comparison, analysis and performance measurement purposes. Limitations of ratio
analysis includes:
▪ Non-availability of comparable information
▪ Difference in accounting policies
▪ Lack of standard formula
Selected Ratios to be used in Exams:

P&L Ratios
▪ Sales trend
▪ Gross profit margin %
▪ Net profit margin %
▪ ROCE
Balance Sheet Ratios

▪ Current asset ratio
▪ Gearing
▪ Interest cover
Efficiency Ratio
▪ Revenue per employees

Long Term Decision Making –

Investment Appraisal Techniques
Once all costs and benefits of the project have been listed, then these are compared to see if the investment in
project is financially beneficial (investment appraisal). In a typical project, there would be substantial cash
outflow in the start in anticipation of long term cash inflows. Hence careful investment appraisal is done as
huge amounts are involved and it becomes difficult to pull out in the middle.
Following are commonly used investment appraisal techniques:
Payback Period
Determines the time (e.g. number of years) the company can recover its initial investment in the project. This
method is based on the cash flows. The lower the payback period, the better
Advantage:
▪ Easy to calculate and understand
▪ Emphasis on cash liquidity of a project, I.e. earlier the recovery of initial investment, the better
▪ Can be used for preliminary screening of options
Disadvantage:
▪ Ignores cash flows after the payback period (i.e. ignores the profitability of the project
▪ Ignores the amounts involved and only focuses on the time period (years)
▪ Ignores inflation aspects
Accounting Rate of Return (ARR)

Determines the % return on investment (based on accounting numbers and not cash flows). There are
numerous formulae to calculate ARR. The formula adopted by a company to calculate ARR should be
consistently applied to all projects, in order to enable correct comparison. The higher the ARR, the better.
Advantage:
▪ Easy to calculate and understand
Disadvantage:
▪ Ignores the timing of cash flows
▪ Ignores the 'amount' of the return
▪ Ignores inflation aspects

Discounted Cash Flows - Net Present Value (NPV)& Internal Rate of Return (IRR)
▪ DCF 'discounts' the cash flows of the project by using an appropriate ‘hurdle rate %’
▪ ‘Hurdle rate %’ takes into account:

 time value of money (inflation)
 cost of funds (if money is borrowed)
 Interest foregone / opportunity cost
 level of risk
▪ DCF is based on cash flow basis (I.e. relevant costing)
▪ There are two methods of investment appraisal using DCF

 Net present value (NPV) - gives the final profit / loss of the project in AMOUNT
 Internal Rate of Return (IRR) - gives the final profit / loss of the project as a PERCENTAGE
▪ Some characteristics of NPV

 A positive NPV means profit
 The higher the NPV, the better
▪ Some characteristics of IRR

 It is the % rate at which the NPV is zero
 The higher the IRR, the better
 If the IRR is higher than your target rate of return, you will accept the project
 NPV is more preferred than IRR, especially if the scale of investment is same / similar
▪ Advantage:
 Focuses on cash flows
 Considers the time value of money, cost of funds, desired profitability and risks
▪ Disadvantage:
 Difficult to ‘reliably’ estimate long-term cash inflows and outflows
 Does not consider ‘qualitative’ or ‘non-quantifiable’ benefits
 Difficult to calculate and understand

EXAM TIP FOR FINANCIAL PROJECTIONS GIVEN IN THE SCENARIO

In the case study, make sure that below 3 things are covered for any financial projection data. In case any step
is missing, then identify that step in your answer / analysis:
▪ The projections is based on cash flow (and not accounting flow)

▪ The cash flow is discounted (if over one year)
▪ Sensitivity / what-if analysis is done
Expected Values and Decision Trees

Expected Values
Expected Values (EV) is the weighted average value based on probabilities. E.g.:
Say, a new product research will cost $150 M and it is expected that if the product becomes successful, the
income would be $200 M (80% chance) and if the product is not successful, then the income would $30 M (20 %
chance). Hence the expected value would be ($200 M X 80%) + ($ 30 M X 20%) = $166 M (i.e. weighted
average).

Decision Trees
Decision trees are diagrams which shows possible outcomes (probabilities) along with their monetary outcome
and Expected Values.
Short coming of a decision tree:

▪ It uses probabilities, which by nature are subjective and difficult to determine.
▪ The costs/benefits are also estimated, so too much estimation / subjectivity involved
▪ Just considers quantitative aspects and ignores qualitative aspects

Short Term Decision Making –

Marginal / Relevant Costing Techniques
Breakeven Analysis / Cost-Volume-Profit Analysis (CVP)
▪ Breakeven means where sales revenue equals total costs, i.e. no profit no loss position
▪ Contribution Margin = Sales Price per unit – Variable Cost per unit
▪ Breakeven volume / quantity is calculated by:
Fixed costs
Contribution Margin per Unit
Marginal Analysis / Relevant Costing

When decision making is done between two options, only “incremental” revenue and “incremental” costs
should be considered, i.e. existing fixed costs should not be considered, if it is not changing. This is known as
marginal analysis or relevant costing. This technique is useful in four key areas of decision making
1. Accepting / Rejecting Special Contracts

ABC Ltd manufactures photo frames. The fixed cost for operating the workshop is $ 600 per month. Each
frame requires material of $ 2. Each frame requires one hour to make and labour is paid $ 12 per hour. The
frames are sold for $ 17.
The labour currently has some spare time available and an overseas retail chain has requested an order of
400 frames at a price of $ 15. Should the business accept the order?
2. Efficient Use of Scarce Resources

When the resources are scarce or limited (e.g. production capacity), then those products are manufactured
first which have the “highest contribution margin per limiting factor”
A business makes three different products, as follows:
Product A Product B Product C

Selling price per unit ($) 25 20 23
Variable cost per unit ($) 9 5 11
Contribution margin 16 15 12
Machine time per unit (hours) 4 3 4
Weekly demand (units) 25 20 30

Fixed costs are not affected by the choice of product. Machine time is limited to 148 hours per week.
Which combination of products should be manufactured if the business is to produce the highest profit?
3. Make or Buy Decisions

Shark Ltd needs a component for one of its product. It can purchase the components from Ray Ltd for $ 20
each, or it can produce them internally for total variable cost of $ 15 per component. Should the
component produced internally or purchased from Ray, IF:
A- If Shark Ltd has spare capacity available

B- Is Shark has no spare capacity and could only produce the component internally by reducing its
output of another of its products, whose contribution margin is $ 6.
4. Closing or Continuation Decisions

Mog Town Ltd is a retail shop with 3 departments all located on the same premises, occupying similar
space. Below is the annual P&L of the 3 departments along with total for the company as a whole:
Cat Food Cat Toys Cat House TOTAL
Sales revenue 254 183 97 534

Variable cost 167 117 60 344
Contribution margin 87 66 37 190
Fixed cost (rent) 46 46 46 138
Profit / (loss) 41 20 (9) 52
Should we close Cat House department as it is incurring losses, so that our profits can increase by $ 9000?
Decision Making, Financial Reporting & Tax

Decision Making and Financial Reporting
Decision making techniques are generally based on ‘cash flows’ rather than accounting profit. This is because
using cash flows are more objective and harder to manipulate than profits. However, shareholders focus on
profitability, which is based on accrual basis for accounting. In long term, the cash impact and profit impact of
the decision would be same, but in short term, the profit and cash flow is likely to be different from each other,
due to timing differences between cash flow accounting and accrual based accounting, e.g. capital expenditure
/ depreciation, working capital, etc.

Shareholders tend to react more on profitability rather than change in cash flows. If a decision adversely affects
current profitability it will reduce the EPS and the share prices in short term. Hence decision makers need to
consider the impact of major decisions on short term profitability / financial statements so that appropriate
disclosures could be made in the financial statements in order to give shareholders the long term perspective.
Decision Making and Tax Implications

Another factor may be the tax implications of the decision. In addition to the normal tax rate being applied on
the project, the decision may have “more than normal” tax impact on the overall organization, such as
▪ The decision may move the organization into another tax bracket
▪ The decision may change organization’s eligibility of tax relieve (either favorable or unfavorable)
▪ The decision may impact the timing of tax payments as tax is based on profits and not cash
These factors become further factors for decision makers to consider over and above the simple outcomes
from relevant costing or investment appraisal analysis.
Budgetary Process
Introduction
Budgets are plans expressed in financial terms. It converts strategic plans into specific financial targets. Once
prepared, budgets should be closely monitored against actuals (i.e. variance analysis) to ensure that planned
activities actually take place. Budgets are important to control the organization as they provide a yardstick
against which actual performance is assessed.
▪ Period Budget is prepared for one year – e.g. January to December 2011
▪ Rolling Budget is budgets which is continuously updated for the next 12 months
Master Budgets
Budgets are prepared for each department and then summarized in Master Budget. Usually, Sales Budget is
prepared first and then other budgets are prepared on the basis of Sales Budget, such as production budget,
raw material / purchase budgets, cash flows, etc.
Flexed Budgets
Flexi budgets are revised budgets based on actual sales trend. In case the budgeted sales is not achieved, then
production and expenses budget are revised based on actual sales volume. This helps in analyzing the
performance of all departments in light of the lower sales

Advantages of Budgets
▪ Promotes forward thinking
▪ Helps to coordinate various functions of the Organization
▪ Having defined targets can motivate managers
▪ Control and performance measurement tool
Limitations of Budgets
▪ Unrealistic targets
▪ Short term focus
▪ May encourage Malpractice or Unethical practice
Effective Budgetary Controls Depends On

▪ Senior management takes the budgetary process seriously
▪ Targets should be realistic and achievable
▪ Clear responsibility and accountability should be affixed
▪ Regular comparison of budget versus actuals along with investigation of the variances, reasons and
corrective measures. Usually this activity is done monthly or quarterly
Standard Costing
Introduction
▪ Standard Costing:
Standard costing means estimating total costs based on pre-determined unit cost
▪ Variance:
Difference between total estimated costs and total actual costs
▪ Variance Analysis:
Analyzing and investigating the variances
Sales Variances
▪ Sales Price Variance:
(Actual Selling Price – Standard Selling Price) X Actual Quantity
Possible Reasons for Unfavourable Sales Price Variances:

Selling price has been lowered due to tough market conditions or due to increase market share (price
penetration strategy)

▪ Sales Volume Variance:

(Actual Sale Quantity – Standard Sale Quantity) X Standard Selling Price
Possible Reasons for Unfavourable Sales Volume Variances:

Poor performance by sales staff, poor quality of our product leading to lower customer demand,
competitor has launched a new or better product, etc.
Material Variances
▪ Material Price Variance:
(Actual Unit Cost – Standard Unit Cost) X Actual Quantity
Possible Reasons for Unfavourable Material Price Variances:

Increase in prices of materials due to shortage, better quality raw material is being is used, poor
performance by purchase department staff, etc.
▪ Material Usage Variance:

(Actual Usage Quantity – Standard Usage Quantity) X Standard Unit Cost
Possible Reasons for Unfavourable Material Usage Variances:

Poor performance of production staff, substandard raw materials, faulty machinery or production process
Direct Labour Variances

▪ Labour Rate Variance:
(Actual Labour Rate – Standard Labour Rate) X Actual Labour Hours
Possible Reasons for Unfavourable Labour Rate Variances:

Increase in labour prices due to shortage of labour, better quality / high-skill labour is being is used, poor
performance by HR staff in negotiating prices, etc.
▪ Labour Efficiency Variance:

(Actual Labour Hours – Standard Labour Hours) X Standard Labour Rate
Possible Reasons for Unfavourable Labour Efficiency Variances:

Poor supervision, untrained / low-skill labour, poor quality raw materials is being used, faulty machinery or
production process, delay in supply of raw materials, etc.

Fixed Overheads Variances

▪ Fixed Overhead Variances
Actual Fixed Overheads – Flexed Fixed Overheads
Flexed means that the budgeted overheads are recalculated based on actual production volume and then
compared to the Actual Fixed Overheads (in order to have apple to apple comparison). Here the concept of
fixed and semi-fixed costs are considered.
Possible Reasons for Unfavourable Fixed Overheads Variances:

Poor supervision of overheads, general increase in costs not considered in the budget.
Advantages of Standard Costing

▪ Helps in accurate budgeting
▪ Provides a yardstick to measure actual costs
▪ Having defined standards improves performance as staff will make efforts to achieve the standards
Limitations of Standard Costing

▪ Can only be used for routine or repetitive processes
▪ Standards can quickly become outdated, hence regular monitoring and updation is required

Forecasting Techniques
QUALITATIVE TECHNIQUES:
▪ Delphi Technique:
Panels of experts are selected and each of them produces an independent forecast. Then the forecasts
are shared and then revised forecast is produced. The process continues until they are all in agreement
with one set of forecast
▪ Sales Force Opinions:

Input is gathered from the sales force based on their market knowledge and then converted into an
aggregate forecast
▪ Executive Opinions:
Input is gathered from various high executives based on their own knowledge and then converted into
an aggregate forecast
▪ Market Research:
Involves use of customer surveys to evaluate potential demand
QUANTITATIVE TECHNIQUES:
Least Square or Linear Regression Analysis

It uses the ‘line of best fit’ approach to find out the relationship / trend between two variables. One variable is
independent (X) and other variable is dependent (Y). For e.g. in sales data, X can be the quarter (on X axis) and
Y can be the Amount of Sales (on Y axis). Least square Analysis is based on an equation Y = a + bX, where:
X = independent variable
Y = dependent variable
a = where the line intercepts Y axis on the graph
b = the gradient of the line
The above equation is used to predict the sales value for next quarter

Correlation Coefficient (R)

The correlation coefficient (R) shows strength of relationship between the two variables, i.e. how much
Y is dependent on X. The value of correlation coefficient (R) ranges from -1 to 1 and will be given in the
question. For e.g. the correlation coefficient can be 0.3. The coefficient of determination (R2) shows
that only 9% (0.32) of the variation in sales (Y) is due to passage of time (X).
If correlation coefficient (and determination) is low (say <0.7), then it means that Y is not highly
dependent on X and there is a lot of seasonality factor involved in the sales trend. If correlation
coefficient (and determination) is high (say >0.7), then it means that Y is highly dependent on X and it
will be easy to predict Y based on X.
Least Square Analysis Is Appropriate Where

▪ Correlation coefficient is high (say >0.7)
▪ There is low seasonality affect in the sales trend
▪ Large pool of historic data is required e.g. annual sales data
Time Series Analysis
A Time Series Analysis uses moving average to define a trend. It identifies the seasonal variations from data in
order to determine the underlying / actual trend. In time series, X-axis will always represent time (e.g. years,
quarters, months, weeks, etc.). Example of Moving Average Method to remove seasonalization:

Time Series Analysis Is Appropriate Where

▪ Correlation coefficient is high (say >0.7)
▪ There is high seasonality affect in the sales trend
Practice Questions
P3 – Pilot Paper Q3: Forecasting | Budget (Cool Freeze)
P3 – Dec 2012 Q4: Decision Tree | Risk Management (World Engines)

Chapter 5
Leadership
Leadership
Leadership means leading a group of people in an organization to achieve organizational goals. A leader can
be ‘transformational’ leader or a ‘transactional’ leader
Transformational Leader Transactional Leader (Manager)

Establishing mission & strategies Achieving mission & strategies
Innovation and growth Managing and controlling
Long term view Medium / short term view
Roles of Effective Leader

▪ Create inspiring vision and mission ▪ Empowerment and accountability
▪ Lead by example ▪ Communicate
▪ Result oriented ▪ Teamwork
▪ Manage change ▪ Coach and mentor
▪ Motivate ▪ Problem solving
Leadership Theories
Trait Theories
▪ Focuses on qualities of a good leader
▪ E.g. visionary, energy, communication skills, motivator, etc.
Style / Behavioral Theories

▪ Focuses on influencing style of the leader
▪ E.g. Ashridge: Tell, Sell, Consult, Join
Contingency Theories
▪ No ‘one right way’ of leading, that will serve all situations
▪ Leadership styles varies with the situation (contingent)
▪ Appropriate leadership style depends on the team and the nature of task
▪ E.g. Feilder: Psychologically Distant Managers, Psychologically Close Managers
Mirchawala College Chp 5 - Leadership….. Page 1

McGregor - Theory X and Theory Y:

Theory X Manager:
▪ Manager feels that the team lacks expertise and responsibility
▪ Hence the manager dictates what needs to be done and the team is closely monitored
▪ The manager gets heavily involved in routine tasks and minor decision making as well
▪ The team is not accountable as they just follow orders
▪ This approach works for simple repetitive tasks
Theory Y Manager:
▪ Manager feels that the team has the expertise and willing to take responsibility
▪ The manager allows the team to do self-planning and decision making
▪ The manager does not gets involved in routine tasks and minor decision making
▪ The team is accountable as they are responsible for their decision making
▪ This approach works for complex tasks
Entrepreneurship & Intrapreneurship

Entrepreneurship
A person who takes risks and setups up his own business with a new idea or concept
Intrapreneurship
▪ An employee who promotes innovation and new ideas within his existing organization
▪ Intrapreneurs bears less risk compared to entrepreneurs as investment is made by the Organization
▪ Many organizations are now encouraging Intrapreneurship within the organization as it leads to
innovation by encouraging sharing of new ideas
Professional Code of Ethics

Professional
A professional is a person having specialist knowledge through intense education and experience, e.g. doctor,
accountant, etc.
Professional Code of Ethics for Accountants

The ACCA Professional Code of Ethics and Conduct is based on the IFAC’s Professional Code of Ethics for
Accountants, of the International Ethics Standards Board of Accountants (IESBA). If a matter is not resolved by
this Code, then legal advice should be obtained. All professional accountants are required to follow this Code of
Ethics.

Principles of Professional Ethics (IESBA / IFAC)
▪ Integrity: Honest, straight forward, truthfulness, do not conceal any wrong thing, fair dealing
▪ Objectivity: Fact based, no bias, no conflict of interest, no undue influence
▪ Professional competence and due care: Maintain professional knowledge and skills, up-to-date with all
laws, diligent in work, act with due care
▪ Confidentiality: Should not disclose confidential information unless there is legal or professional duty, do
not use confidential information for personal advantage
▪ Professional behavior: Avoid actions which discredits the profession / members, for e.g. not following
company policies or procedures
Threats to Professional Ethics / Conflict of Interest

Ethical threat is a situation where a person is tempted not to follow the principles of Professional Ethics.
Following are examples of possible ethical threats (from external Auditor point of view):
▪ Self Interest
 Financial interest in the company (e.g. owning shares)
 Close business relationship (e.g. high dependency on income from particular client)
 Close family or personal relationship
 Valuable gifts or hospitality
 Loans and terms outside normal course of business
 Overdue fees for earlier assignments
 Contingent fees (e.g. high fee for good report, low fee for bad report)
 Fee based on % age (e.g. % age of profit)
 Low-balling (quoting abnormally lower quote affecting the quality of audit)
▪ Self Review Threat

 Auditing your own work
 E.g. preparing financial statements and then auditing it yourself
 Audit firms do variety of work for a client, hence proper segregation / Chinese walls should exist
between teams

▪ Advocacy Threat
 Means when the auditor promotes a client to the point where auditor’s subsequent objectivity is
compromised
 E.g. the auditor is representing a client in a litigation
▪ Familiarity Threat
 Long association with the client to the extent which affects objectivity and independence
 For e.g. you have known the Finance Director for many years
▪ Intimidation Threat
 When the auditor is stopped from acting objectively by threats from directors or employees
 E.g. could be blackmail, bad feedback, physical or family treat, litigation, etc.
Safeguards Against Threats to Professional Ethics

Ethical safeguards protect a professional from threats to professional ethics. It also helps in maintaining
confidence in the profession as well as upholding public interest.
Following safeguards are implemented to protect against threats to professional ethics:

▪ Adopting Professional Code of Ethics
▪ Policies and procedures
▪ Risk assessment
▪ Strong internal controls (e.g. quality control procedures, peer reviews, etc.)
▪ Training
▪ Referring matters to Organization’s Audit Committee
▪ Disciplinary procedures
▪ Regular rotations of audit partners and audit teams
▪ Chinese walls between departments (e.g. audits, tax, consultancy, etc.)
▪ Monitoring and improvement
Contents of a Professional Code of Ethics Document

1. Introduction (background, enforceability, disciplinary procedures)
2. Fundamental principles (integrity, objectivity, professional competence, confidentiality,
professional behavior)
3. Conceptual framework (explains how ‘spirit’ of principles is applied rather than ‘form’)
4. Detailed application (practical application of the codes, specific situations and examples)

Benefits of a Professional Code of Ethics

▪ Establishes ethical values and guidelines for members
▪ Clear communication to members and stakeholders
▪ Directs and control behaviors of members
▪ Consistent and transparent framework for issue resolution and disciplinary action
▪ Enhances reputation of the profession
Public Interest
Public Interest
▪ Public interest is one of the key themes in professionalism
▪ Public interest means working in the interest and well-being of the society, in addition to serving the
interest of the shareholders
▪ Professionals (including professional accountants) have a duty to protect public interest and have to
demonstrate high social values (integrity, fairness, no corruption, etc.)
Role Expected from of Professional Accountants in Society (Social Responsibilities)

▪ High Professional Ethics:
 Integrity
 Objectivity
 Professional competence and due care
 Confidentiality
 Professional behavior
▪ Factual and transparent reporting
▪ Fair dealing with all stakeholders
▪ Independent and reliable audits
▪ Stopping, highlighting and reporting fraud and corruption

Fraud
Definition
Fraud is an ‘intentional’ act of dishonesty to gain unjust or illegal advantage. There are two types of fraud:
▪ Misappropriation of assets (e.g. cash or inventory)

▪ Fraudulent financial reporting (e.g. overstating of profits)
Common types of frauds include fictitious employees, collusion with suppliers to inflate prices, fictitious
expense claims, stealing or misusing company assets, manipulation of financial statements, etc.
Conditions Required for Fraud - The Fraud Triangle

The Fraud Triangle identifies three fundamental conditions necessary for a fraud to be committed:
▪ Incentive (e.g. greed, financial pressure, affecting share prices, etc.)

▪ Opportunity (e.g. poor internal control, weak supervision, poor corporate governance)
▪ Rationalization (e.g. personal justification for committing fraud)
Organizations can only control the ‘opportunity’ factor in order to prevent fraud.
Measures to Reduce Chances of Frauds

Three stages approach is required to reduce chances of frauds:
▪ Prevention
 Commitment by top management / governance
 Create a right culture
 Implement policies and procedures
 Risk assessment
 Strong internal controls
 Segregation of duties
 Tight screening at the time employees are recruited
 Regular staff rotation
 Monitoring
▪ Detection
 Surprise checks
 Internal audits
 Whistle blowing procedures (see below)

▪ Response
 Strict disciplinary actions
 Legal prosecution
Whistle Blowing
A whistle blower is a person who provides any kind of information to senior management regarding fraud (or
suspected fraud) or illegal activity within an organization. Whistle blower can be internal (e.g. employee) or can
by an outsider (customer or supplier).
Sometimes whistle blowers are scared to highlight any fraud due to fear or later consequences. In UK, whistle
blowers are protected by law if they report something relating to public interest.
Effective whistle blowing program includes:
▪ Strong encouragement by governance (e.g. whistle blowing policy)

▪ Confidential reporting mechanism (e.g. whistle blowing number)
▪ Protection (e.g. job protection, physical protection, no biasness or revenge later on)
Bribery & Corruption

Corruption
Corruption is deviation from honest behaviour. Examples of corruption include bribery, misuse of authority, bid
rigging, cartels, etc. It is a serious breach of the principle of Integrity and is a illegal offence as it damages the
society.
Bribery
Bribery is offering, giving, demanding or receiving a financial or other advantage to act or perform an activity
improperly

Why Corruption Exists

▪ Culture or norm
▪ Low pay scale as compared to authority and power
▪ No check and balance / weak internal controls
▪ Weak enforceability of law i.e. no fear or punishment
Why Organization Should Avoid Corruption & Bribery

▪ Socially unethical in most societies
▪ It is against the Corporate Governance principle of ‘PROBITY’
▪ For professional accountants, it is against the IFAC’s Professional Code of Ethics principles of ‘Integrity’
and ‘Professional Behavior’
▪ It is against public interest principle
▪ Loss of reputation
▪ Legal prosecution / penalties
Measures to Control Bribery & Corruption in an Organization

▪ Commitment by top management / Governance
▪ Establish right culture
▪ Implement policies and procedures, Code of Ethics, etc.
▪ Risk assessment (i.e. focusing more on risky areas)
▪ Strong internal controls
▪ Training
▪ Reporting and whistle blowing
▪ Monitoring and improvement
Some “Red Flags” Indicating Possible Bribery & Corruption Risk

▪ Excessive or unusual payments to a third party in foreign bank accounts
▪ Refusal or hesitance by third party to sign Anti-Corruption Undertakings
▪ Lavish life style not matching with the salary
▪ Excessive cash payments or excessive commission percentages
▪ Contingent commissions
▪ Weak or no bidding process for tenders

UK Bribery Act 2010

▪ This Act targets both bribery and corruption
▪ Four offences under the Act:

 Offering or giving bribe whether directly or through third party
 Demanding or receiving bribe whether directly or through third party
 Offering or giving bribes to Foreign Public Officials (i.e. outside UK)
 Commercial organization failing to prevent bribery due to inadequate procedures and controls
(See below section)
▪ The Act sets out 6 principles that help organization assess whether adequate procedures and controls
are in place to prevent bribery and corruption:
 Commitment by management
 Risk assessment (assess the size and nature of risk of bribery and corruption)
 Internal - procedures (procedures to be proportionate to the size and nature of risk)
 Due diligence (extra cautious with employees who are at greater risk for bribery and
corruption)
 Communication (regular training and education of all employees)
 Monitoring and review (procedures should be regularly reviewed and improved)
▪ Penalties:
 Guilty individual faces imprisonment upto 10 years
 Guilty organization is liable to unlimited fine
 The above is in addition to any civil claims and reputational loss

Corporate Code of Ethics

Corporate Ethics
‘Ethics’ are moral opinions about right and wrongs.
‘Corporate ethics’ means application of ethical values to business dealings. E.g. of unethical behaviours
includes:
▪ Providing bad quality / injurious ▪ Child labour

products to customers ▪ Government lobbying / using political connections
▪ Employee discrimination ▪ Social and environmental responsibilities
▪ Bribery and corruption
Corporate Code of Ethics

Corporate Codes of Ethics are written guidelines issued by an organization to its employees to help them
conduct their actions in accordance with organization’s ethics and values. The Corporate Code of Ethics must
be fully supported by top management and regular staff training should be conducted.
Contents of Corporate Code of Ethics Document

▪ Overall ethical principles and values of the organization
▪ Customers values (quality, safety, disclosure, data privacy)
▪ Suppliers values (fair dealing, no dealing with unethical suppliers)
▪ Treatment of employees (discrimination, health and safety)
▪ Community and wider stakeholders (social, environmental, CSR)
Benefits (Purpose) of Corporate Code of Ethics

▪ Establishes ethical values
▪ Clear communication to employees and stakeholders
▪ Directs and control behaviors of employees
▪ Consistent and transparent framework for issue resolution and disciplinary action
▪ Risk reduction / avoidance of fine and penalties
▪ Enhanced reputation / competitive edge
Exercise: Google for Corporate Code of Ethics for Amazon

How Ethical Problem Can Be Handled and Resolved

▪ Refer to Professional Code of Ethics
▪ Refer to organization’s Corporate Code of Ethics document
▪ Apply Tucker 5 Question Model (covered below)
▪ Assess how general public will think if they find out:
 How would this look in newspaper
 How would my family feel?
 Can we defend if a legal action is taken?
Ethical Decision-Making Framework – Tucker’s 5 Question Model

Many business decisions have ethical elements. We can use Tucker’s 5 Question Model to help assess decisions
from ethical aspects. Not all criteria might be relevant in every situation:
▪ Is it profitable?
▪ Is it legal?
▪ Is it fair to all stakeholders?
▪ Is it right ethically?
▪ Is it sustainable and environmentally friendly?
Practice Questions
P1 - Dec 2013 Q4: Director Leaving | Technology Risk | Professional Ethics (Lobo Co)

Chapter 6
Governance
(Shareholders Portion)
Organization
Share Holders (B1) Stake Holders (B2)

Agency Theory Introduction
Board of Directors Stakeholder Mapping Model by Mendelow
Corporate Governance CSR
Reporting to Stakeholders:
Integrated Reporting
Environment and Social Reporting
EMAS & ISO 14000
Public Sector Governance
Agency Theory
Agency Theory
‘Agency’ occurs when one party (Principal) employs another party (Agent) to perform a task on their behalf. In
most companies, there is separation of ownership and control. Shareholders own the company and directors run
the company on behalf of the shareholders.
▪ Principal: Shareholders (as they are owners of the company)
▪ Agent: Directors (as they run the company on behalf of the shareholders)
Mirchawala College Chp 6 – Governance: Shareholders….. Page 1

Problems With Agency Arrangement

▪ Conflict of interest (covered below)
▪ Oversight (e.g. directors maybe negligent or miss something)
▪ Lack of integrity and honesty (e.g. directors doing frauds)
▪ Lack of transparency (e.g. inaccurate reporting)
▪ Ethical violations (e.g. directors may deviate from the values and ethics of the shareholders)
Conflict of Interest
Directors have a fiduciary duty to act in the best interests of shareholders. ‘Conflict of interest’ means that
director’s ‘personal’ interest surpasses the interest of the shareholders, i.e. directors lose their independence,
integrity and objectivity. Directors must solely work for the best interest of shareholders and avoid their personal
interest at all times (or disclose).
E.g. of conflict of interest include:
▪ Sub-contracting company’s work to close family members

▪ Focusing on short term profit to maximize their own bonus for the year
▪ Negotiating high / unjustified remunerations
▪ Accepting any personal benefit from third party
Fiduciary Duty and Accountability

Fiduciary Duty: Fiduciary duty means duty of utmost good faith towards the principal. This means that directors
should act in the best interest of shareholders and avoid any conflict of interest (or disclose). This duty can be
legal or ethical.
Accountability: The agent is fully accountable to the principal. Directors, individually and collectively, have a duty
under corporate governance to run the company in the best interest of the shareholders and to be held
accountable of the results and outcomes. . Directors can be held accountable in following ways:
▪ Scrutiny of their performance by NEDs
▪ Linking directors’ remuneration with performance
▪ Non-appointment of director upon completion of tenure

Costs of Agency
Agency cost is a cost incurred by the Principal (shareholders) to monitor the Agents (directors). Agency cost can
be classified in two categories:
▪ Monitoring cost (e.g. remuneration of directors, cost of monitoring, audits, attending AGMs, NEDs, etc.)
▪ Residual loss (cost beyond remuneration of directors, e.g. where there is conflict of interest by directors
leading to a loss to business / shareholders)
Board of Directors
Introduction
Every company is led by a Board of Directors, which is collectively responsible for achieving the objectives and
long-term success of the company. The board should have appropriate
▪ Size
▪ Knowledge, Skills and Experience KISSE(D)
▪ Independence
Executive Directors are full time employees of the company.
Non-Executive Directors (NED) are part-time outside directors ‘independent’ of the company i.e. they are not
employee of the company.
Functions of the Board of Directors

Overall the Board has to act in the best interest of the shareholders, which includes:
▪ Maximize shareholder wealth
▪ Provide entrepreneurial leadership and strategic management
▪ Monitor business performance
▪ Monitor performance of CEO and management team
▪ Establish effective risk management process
▪ Ensure that effective internal controls and financial accounting / reporting systems are in place
▪ Safeguard company assets
▪ Ensuring legal compliance
▪ Communication with shareholders and stakeholders
▪ Take major decisions such as borrowing, lending, fixed assets, financing, major projects, etc.

Duties of Individual Directors

▪ Fiduciary duty and accountability
▪ Avoid conflict of interest
▪ Remain within the powers given by the Board & Articles of Association
▪ Treat all shareholders equally
▪ Principles of professional ethics
 Integrity
 Objectivity
 Professional competence and due care
 Confidentiality
 Professional behavior
Communication & Disclosure with Shareholders

Following are the general principles which the Board of Directors should follow in communication and disclosures
to their shareholders:
▪ Completeness: Provide complete picture, disclosures should meet minimum statutory obligations
▪ Accuracy: Correct facts and figures, no errors, inspire confidence
▪ Regularly: Regular, timely communication CART
▪ Transparency: Open and fair disclosure of information, no concealment
Composition & Balance of the Board

Composition of the Board
The Board should consist of:
▪ Chairman
▪ CEO
▪ Executive directors
▪ Non-executive directors

Balance of the Board

▪ Board Size should be appropriate
▪ Board should have right amount of Knowledge, Skills and Experience
▪ Balanced between Executive and NEDs (Independence)
▪ Any one person should not be able to Dominate the Board
KISSED+SD
▪ Split role between Chairman and CEO
▪ Diversity in the board (covered below)
Board Meetings
▪ Meeting should be held regularly
▪ Minimum quorum to be present
▪ Agenda:
 Decided by Chairman
 Include both short-term and long-term issues
 Circulate in advance so that Directors can prepare
▪ Chairman to direct meetings and encourage debates
Chairman & CEO

Role & Responsibilities of Chairman
Main role: Running the Board
▪ Link between company and shareholders / stakeholders
▪ Communication with shareholders (e.g. Annual Report)
▪ Protect shareholder interests and increase long term shareholder wealth
▪ Lead board of directors and ensure smooth running of board, such as:
 Appropriate size, knowledge, skills, experience, and independence of directors
 Balance between executive and non-executive directors
 Effective functioning of Board Committees
 Regular meetings
 Directors’ nomination, performance and remuneration

Role & Responsibilities of CEO

Main role: Running the Company
▪ Propose strategies to the board
▪ Implement decisions of the Board
▪ Monitor day to day running of business and all departments
▪ Manage resources effectively and efficiently
▪ Risk management and internal control systems
▪ Timely and accurate reporting
▪ Legal and regulatory compliance
▪ Interact with external parties, such as Government, key customers, key suppliers, Stock Exchanges
Splitting of Roles Between Chairman & CEO

The Chairman runs the Board. The CEO runs the company. The running of the Board should be separate from
the running of the Company. Hence the role of Chairman and the role of CEO should not be performed by one
person, as this concentrate excessive power in the hand of one person. The Chairman should be independent
just like a NED.
Advantages of Splitting the Role:

▪ Segregation of duty leading to improved governance
▪ Higher shareholder confidence as Chairman is normally a NED
▪ Able to challenge CEOs views and performance
▪ Directors can communicate with Chairman if they have concerns relating to CEO
▪ CEO can concentrate on running the business without spending time to manage board activities
Disadvantages of Splitting the Role:

▪ Separation creates two leaders rather than unity provided by one leader
▪ Chances of disagreement or clash between Chairman and CEO
▪ Chairman may not have in-depth knowledge of business

Non-executive directors (NEDs)

NEDs are part-time outside directors who are ‘independent’ i.e. they are not employee of the company. They
bring independence, external perspective and scrutiny. They add to the confidence to shareholders by occupying
key positions in various Board Committees. They get a fixed fee for being NEDs and are not entitled to any bonus
or share options as it will create conflict of interest and threaten their independence.
Role of NEDs
▪ Strategy: discuss strategies, bring external experience and leadership
▪ Performance: scrutinize the performance of Executive directors
▪ Risk: ensuring effective internal control and risk management systems are in place and financial
reporting is accurate and reliable
▪ People: nomination, remuneration and succession planning of executive directors and senior
executives, providing added comfort to shareholders
Advantages of NEDs
▪ Brings independence to the Board (i.e. no conflict of interest)
▪ Adds confidence to shareholders
▪ Have external experience and wider perspective
▪ Scrutinize / challenge performance of executive directors and the company
▪ Employees can discuss confidential or sensitive matter with NED directly (whistle-blowing)
▪ Company can comply with Regulatory / Listing requirements
Disadvantages of NEDs
▪ Difficult in finding an appropriate NED with relevant experience and willing to work at a small fee
▪ May lack independence
▪ May face resistance from executive directors
▪ May find it hard to enforce their views
▪ May not give sufficient time to business
▪ Smaller remuneration as compared to executive directors

Independence of NEDs
▪ No business or financial relationship with the company for last 3 years
▪ Not an employee of the company for last 5 years
▪ Not an NED in same company for more than 9 years
▪ Not have close family ties or friendship with executive directors
▪ Not a significant customer or supplier of the company for last 3 years
▪ No family members working in the company in senior position
▪ Not an auditor of the company for last 3 years
▪ Not have a cross-directorship with another executive director
▪ No share in profit or having share options of the company
▪ NEDs should be allowed to seek independent expert advice on any professional matter, if required
Number of NEDs
There is no fixed number of NEDs. Different jurisdictions have different rules:
▪ UK: Sufficient number of NEDs so that their views carry significant weight
▪ NY Stock Exchange: NEDs should be > 50% of the total board size (i.e. in majority)
▪ Singapore: Atleast one third of the board
Exercise – Independent or Not?

▪ Most of the NEDs have been in their present role since the company was listed 12 years ago
▪ One of the NEDs run a specialist consultancy company. She has received separate fees from her
consultancy company for providing consultancy advice to the company in which she is NED
▪ Two of the NEDs have permanently retired and use the income they get from being NEDs to
supplement their living

Board Committees
Key Board Committees
1- Nomination Committee: Recommends appointments of new directors
2- Remuneration Committee: Recommends remuneration policy for executive directors
3- Audit Committee: Reviewing accounts and internal controls, liasoning with external auditors and
supervising internal audit function
4- Risk Committee: Overseeing risk management process
Advantages (Importance) of Having Board Committees

▪ More focused and specialized
▪ More time can be spent by committees as full board has limited time
▪ Higher involvement by NEDs (e.g. in audit or remuneration committees)
▪ Board can focus more on strategic and business matters
▪ Increases shareholder confidence
Nomination Committee (Majority NEDs)

The Nomination Committee makes recommendation of appointments of directors to the Board, with the
objective of maintaining balance. This Committee consists of majority of NEDs. The procedures for nominating
directors should be formal, rigorous and transparent.
Roles of the Nomination Committee:

▪ Determine right Size of the board
▪ Ensure board contains the required Knowledge, Skill and Experience
▪ Balance between executive directors and NEDs (Independence)
KISSED
▪ Diversity in the board (covered below)
▪ Identify and attract competent directors to fill any vacancy
▪ Induction training and continued professional development (covered below)
▪ Succession planning of directors

How to Recruit New Director

▪ Personal connection / word of mouth of directors and senior management
▪ Executive search companies
▪ Advertisement
▪ Professional forums and networks
Remuneration Committee (100% NEDs)

The Remuneration Committee recommends remuneration policy for the directors with the purpose of attracting,
retaining and motivating directors to achieve long-term returns for the shareholders. Committee comprises of
100% NEDs so that committee can be independent while determining the remuneration of CEO and executive
directors. An appropriate portion of the package should be linked with performance.
Roles of the Remuneration Committee:

▪ Determine remuneration policy in order to attract, retain and motivate
▪ Ensure that a portion of the package is linked with performance as well as linked with long term
▪ Decide remuneration for CEO and all Executive Directors
▪ Report remuneration policy and packages to shareholders (through Remuneration Report)
Audit Committee (100% NEDs)

The Audit Committee is responsible to ensure that financial reporting is accurate, internal audit function is
effective and external auditors remain independent. All members are NEDs with atleast one NED having recent
expertise in financial reporting and audit. This is to ensure that shareholders receive independent and accurate
financial information of the company.
Roles of the Audit Committee:

Financial statements and reporting:
▪ Ensuring accuracy and integrity of financial statements and regulatory filings
▪ Review accounting policies
▪ Review internal controls relating to financial reporting
▪ Compliance with relevant laws and regulations

Monitoring internal audit function:

▪ Ensure independence and objectivity of internal audit
▪ Appoint internal auditor and monitor his/her performance
▪ Approve annual internal audit plan
▪ Ensure effectiveness and efficiency of internal audit function
▪ Ensure that internal audit recommendations are implemented timely
Managing External Auditors:

▪ Recommendation appointment, re-appointment or removal of external auditor
▪ Approve terms of engagement / audit scope
▪ Approve auditor’s remuneration
▪ Ensuring independence and objectivity of external auditor
▪ Review any non-audit services provided by external auditors (e.g. tax consultancy)
▪ Audit closure meetings, including discussing issues and weaknesses identified during audit
Provide Whistleblowing arrangements to prevent fraud and mis-reporting
(Covered in more detail in Section F – Organizational Control & Audit)
Risk Committee
The Risk Committee is responsible for oversight of the risks which the company faces and ensuring that a sound
system of risk management and internal controls exists to deal with those risks. Risk Committee comprises of
majority of NEDs with some Executive directors, as specialist expertise of Executive directors can benefit the
committee.
Roles of the Risk Committee:

Relating to Risk Management Process
▪ Implement formal risk management process / ERM framework
▪ Advice board on risk appetite and ALARP levels
▪ Embed risk management in organization culture
▪ Identify key risks and recommend risk management procedures and controls
▪ Monitor overall risk exposure of the company and ensure it remains within limits set by the board
▪ Ensure risk management procedures and controls are effective
▪ Informing board and shareholders of any significant change to company’s risk profile
▪ Monitor performance of Risk Manager

Relating to Internal Controls

▪ Review and implement internal control systems, policies and procedures
▪ Assess effectiveness of internal controls
▪ Review Internal Controls Report sent to Shareholders
▪ Provide early warning to the board of emerging weakness in the internal control system
(Covered in more detail in Section D – Risk Management)
Remuneration & Rewards of Directors

General Principles
▪ Remuneration should be sufficient to attract, retain and motivate competent directors
▪ Remuneration to be in line with market rates, industry norms and close competitors
▪ Remuneration should have following components:
 Fixed pay
 Variable / Performance based incentives:
▪ Short term incentives (e.g. bonus)
▪ Long term incentives (e.g. share options)
▪ Consider difference in experience levels of directors
▪ Director cannot approve his own remuneration – to be done by Remuneration Committee (NEDs)
▪ Full transparency to shareholders (e.g. disclosures in annual accounts)
Components of a Remuneration Package

▪ Basic salary – should be comparable to market and salaries of other similar directors in the company
▪ Benefits / perks – comparable with market practices (e.g. car, club membership)
▪ Retirement benefits / Pensions – only basic salary pensionable, has to be in line with the law
▪ Performance Related Pay: helps to ensure that directors’ actions are aligned with shareholders’ interests:
 Short term incentive: e.g. annual bonus
 Long term incentive: e.g. share options (covered below), long term bonus
 Bonus payout is based on financial performance of the company, mainly profitability. Non-
financial targets can also be there, e.g. customer satisfaction, market sharer, etc.

▪ Retention options:
 Attractive package
 Loyalty bonus (e.g. if you stay with Company for 5 years, you will get Rs XXX bonus)
 Long term bonus (performance based)
 Share options
Share options are long term incentives scheme whereby directors are allotted company shares which they can
only sell after 3-5 years (exercise date). Share prices should increase over time due to growth and profitability of
the company. This motivates directors to stay with the company and focus on creating long term shareholder
wealth.
Factors Influencing Level of Reward of CEO and Directors

▪ Size of company (small company normally pays less)
▪ Pubic sector or private sector (public sector pays less)
▪ Profile and experience of the CEO and directos
▪ Commercial organization or not-for-profit organization
▪ Company’s performance and target achievement
▪ Market rates: Benchmarking with similar companies / competitors in the industry
Board Structures: Unitary and Two-Tier Board

Having a single board have some problems, especially if the CEO is dominating and powerful and NEDs are
suppressed. Hence there are two approaches to structure the Board.
Two Tier Board:

In this approach, there are two boards in a company:
1- Supervisory Board
▪ It is appointed by Shareholders and led by a Chairman
▪ Consists of mostly NEDs and senior directors
▪ Focuses more on long term strategies
▪ Responsible for legal and regulatory compliance
▪ All voting rights vested in this board
▪ Supervises the Management Board (see below)

2- Management Board
▪ It is appointed by Supervisory Board and lead by the CEO
▪ Consists of CEO and executive directors
▪ Responsible to implement strategies approved by Supervisory Board
▪ Focuses more on operational and day-to-day management
▪ Management board does not have any voting rights
Unitary Board:
In this approach, there is just one board in the company:
▪ Single board having Executive directors as well as Non-Executive directors
▪ Executive directors focus more on day to day management (similar to Management Board under Two
Tier approach)
▪ Non-Executive directors focus more on advice and protecting shareholder interests (similar to
Supervisory Board under Two Tier approach)
▪ However, all directors have equal voting rights
Advantages & Disadvantages of a Two-Tier Board:
Advantage Disadvantage
▪ Separation between strategic and operational roles ▪ Slower decision making

▪ Greater independence leading to higher investor ▪ Isolation of supervisory board from operational
confidence matters
▪ Voting rights in hand of NEDs and senior ▪ Management board demotivated due to limited
involvement in strategic matters
directors
▪ Information sharing by management board
▪ CEO cannot dominate the board
might be poor

Induction of New Directors

Induction is a process of orientation and familiarisation of new directors with the company, so that the new
director has some know-how about the company. This will help the new director in settling down and becoming
productive quickly. The Chairman has to ensure that new directors receive formal induction on joining the board.
If a NED joins, the company should invite major shareholders to meet the new NED.
What Aspects Are Covered In Induction

▪ Introduction to company and its operations
▪ Role & responsibilities of directors
▪ Professional, legal and ethical values which a director must follow
▪ Board procedures and committees
▪ Details of all directors, major shareholders and key employees
▪ Strategies and business plans
▪ Organizational values, culture and structure
▪ Key customers, suppliers, banks, auditors, stakeholders, etc.
Advantages (& Importance / Purpose) of Induction

▪ Makes new director familiar with the company, its operations and core strategies
▪ Helps in understanding the norms and culture of the organization
▪ Build working relationships with fellow directors and key executives
▪ Reduces settling in time and speeds up the productivity and learning curve
Continued Professional Development of Directors

CPD is systematic maintenance and improvement of knowledge and skills necessary for execution of duties
throughout an individual’s professional career. The Chairman has to ensure that all directors undertake regular
CPD in order to fulfil their duties.
Methods of CPD
▪ External trainings
▪ In-house trainings
▪ Attending conferences and seminars
▪ Professional courses and certifications
▪ Reading / writing relevant books
▪ Mentoring and coaching

Advantage of CPD
▪ Maintain professional knowledge and skills of directors
▪ Keeps directors up to date with latest topics and developments
▪ Enhance director’s competence
▪ Improves board’s effectiveness
▪ Demonstrate director’s commitment to their profession and company
ACCA’s Processional Development Matrix (Features of Effective CPD Planning)

▪ Planning: Individual should identify competencies required in the current role and develop CPD plan
▪ Action: Undertake actual CPD
▪ Results: Assess whether CPD achieved the objectives and desired competency level
▪ Reflection: Examine evolving nature of the role and continuously plan CPD for future needs
Diversity in the Board

Diversity means having variety of people in the board, normally based on demographics prevailing in that society.
Diversity is based on age, gender, educational / professional background, experience, ethnicity, etc.
Advantages of Diversity
▪ Wider pool of talent
▪ Broader range of ideas and knowledge
▪ More representative of the community
▪ Enhanced reputation and outlook of organization
▪ Compliance with listing regulations
Issues of Diversity
▪ May lead to sub-groupings within the board
▪ Board may ignore the views of diversified members
▪ Diversified members may not feel motivated to contribute
How Regulators Encourage Diversity

▪ By specifying in law minimum diversity requirements, e.g. 40% of board to be females
▪ By mandatory disclosures in Annual Accounts relating to diversity measures taken by the company
Appointment of Directors
Directors can be appointed in the following manner:
▪ By resolution from Shareholders – usually in Annual General Meeting (AGM)
▪ By resolution from Directors (temporary appointment)– the Article of Association of a company

empowers Board to appoint a director to fill an unexpected vacancy in the board. This normally happens
if any director leaves in between or becomes disqualified. But this appointment is only valid until the
next AGM, when the shareholders will appoint / approve the new Board.
▪ By resolution following directions from Govt / State – intervention under certain circumstances
Leaving of Directors
Following are the circumstances in which directors leave office
▪ Retirement at the end of the term
▪ Removal:
 Resignation anytime during the term
 Disqualification anytime during the term
 Removal by shareholders anytime during the term
Retirement by Rotation
Directors contract are limited to a specific time period, after which he / she automatically retires by default. Then
the director offers himself / herself for re-election (retire by rotation). In UK, director’s contract is for 1 year for
large listed companies and 3 years for other companies.
Importance / Benefits of Retirement by Rotation

▪ Directors need to perform well in case they want to get re-elected
▪ Gives an opportunity to shareholders to get rid of directors who are not performing
▪ Reduces cost of termination of non-performing directors
▪ Opportunity to replace the Board over a period of time whilst maintaining continuity and stability

Service contracts is the director’s employment contract which covers the terms and conditions of director’s
employment with the company. In UK, a service contract is for 1 year for large listed company and for 3 years for
all other companies.
Removal of Directors
A director may leave or maybe removed from office before his / her term expires. There are many possible
reasons:
▪ Resignation by director – a director can resign on his own by giving formal notice period
▪ Disqualification of Director
 Disciplinary offence
 Fraud
 Absent for more than 6 months
 Disability / Death
 Bankruptcy
▪ Removal by Shareholders – usually through a general meeting giving 28 days’ notice
Performance Appraisal of the Board

The performance of the Board should be reviewed on an annual basis. The performance of the Board as a whole,
Committees and individual directors are reviewed. The performance evaluation is led by the Chairman and
Chairman’s performance is evaluated by NEDs.
Board’s & Committees’ performance is assessed against:

▪ Maximizing long-term shareholder’s wealth
▪ Achievement of financial and non-financial targets
▪ Risk management, internal controls and financial reporting
▪ Compliance with regulations
▪ Communications with shareholders and stakeholders and problem solving
▪ Corporate governance and management of board (conduct of meetings, working of the committees,
quality of documentation)

Individual director’s performance is assessed against:

▪ Achieving of individual performance targets
▪ Contribution to the strategies and problem solving
▪ Principles of professional ethics (integrity, honesty, professional competence and due care,
confidentiality and professional behavior)
▪ Active participation in board activities (meetings, preparedness, committees, etc.)
▪ Any unethical behaviour (insider trading, , unfair dealing, conflict of interest)
▪ CPD
Advantage of Performance Evaluation

▪ Enforces high performance
▪ Identifies low performing directors
▪ Identifies training needs
▪ Forms basis for bonus payouts
Insider Trading / Dealing

Insider trading / dealing means buying or selling of company shares by its own directors or senior executives
based on information which is not publicly available as yet. Directors often have access to market-sensitive
information beforehand and they can benefit significantly if they buy or sell company shares based on
confidential information.
Why Insider Trading is Unethical / Illegal

▪ Directors have to act in the primary interest of shareholders and not to make personal gains
▪ Directors have to maximize ‘long’ term value of the organization. If insider trading is allowed, then it is
likely that directors would be tempted to take short term decisions to make personal gains
▪ Insider trading can damage the reputation and integrity of the capital markets of the country
▪ Cost of capital might increase as investors would expect a higher return to cover higher risk if insider
trading prevails

Corporate Governance
Corporate Governance
▪ Is a system by which companies are configured, coordinated and controlled in the interest of the
shareholders and other stakeholders? Agency relationship is the foundation of corporate governance as
there is separation between the ownership and control
▪ The objective of a corporate governance is to improve corporate performance and accountability in order
to create long term shareholder value
▪ Corporate governance is less of an issue in small companies or partnership business where the business
is managed directly by the shareholders / owners
Principles of Corporate Governance
1. Independence (no conflict of interest, no wrong motives, fact based, no bias, no undue influence)
2. Probity (integrity, honesty, straight forward, truthfulness, not conceal anything wrong)
3. Transparency (disclose all material matters to shareholders, open relationship with shareholders)
4. Fairness (even dealings with all stakeholders)

AIR-DRIFTS
5. Reputation (board carries a reputation, moral stance, must enjoy
confidence of key stakeholders)
6. Responsibility (clear roles)
7. Accountability (answerable for results)
8. Judgment (ability to make sound decision)
9. Skepticism (questioning mind, critical evaluation)

Features of Strong Corporate Governance Environment

▪ Role of Chairman and CEO is segregated
▪ Sufficient NEDs on the Board
▪ Formal board committees
▪ Risk management framework
▪ Focus on strong internal controls
▪ Transparent and factual reporting
▪ Rewards linked with performance
▪ Internal and external audits
▪ Focus on integrity, objectivity and avoidance of conflict of interest by directors
Institutional Investors
Definition
Shares in listed companies are held by a range of individuals and institutions. Institutional shareholders are
organizations which have large amount of money to invest. They include pension funds, insurance companies,
investment & unit trusts, mutual funds, etc. Accordingly, the number of shares held is much higher than
number of shares held by an individual shareholder. Hence institutional shareholders have a much higher
influence than an individual shareholder. Institutional investors employ Fund Managers to manage the
investment portfolio with the aim to benefit the individual member of the funds.
Exercise: Identify the differences between individual investor and institutional investor

Characteristics of Institutional Investors

▪ Higher dominance as power is concentrated in few hands
▪ Higher ‘Shareholder Activism’:
 Active participation in key strategies and decisions
 Paying attention to the Board composition, Committees and NEDs
 Making active use of voting rights
 Critical review of remuneration policy and perks
 Dictating risk appetite
Problems of Institutional Investors

▪ Tend to focus on short term profits
▪ Higher interference in business due to dominance of power
▪ Minority / individual shareholder interests may be ignored
Institutional Investor Intervention

Institutional investor may intervene in the affairs of an organization under following circumstances:
▪ Concerns about business strategies ▪ Major acquisition or disposal

▪ Deteriorating performance & results ▪ Excessive directors’ remuneration
▪ Non-compliance with laws and codes ▪ Weak NEDs
▪ Major internal control failure ▪ Unethical issue
Agency Complication in Institutional Shareholders

Agency problems are more complex in institutional shareholders. Institutional shareholders gather a large
pool of funds from members (e.g. pension fund or mutual funds) and then employ Fund Managers to invest
these funds into numerous listed companies on the stock exchange. As the Fund owns shares on behalf of its
members, the final shareholders are the members. Hence there is the added layer of middleman (i.e. Fund
Manager) between the members and the listed company. Hence no individual member has a direct voice or
communication with the listed company.

Insider And Outsider Dominated Business

Definitions
Insider Dominated Business is one in which the controlling shareholding is held by a small number of
dominant individuals. Mostly these are family owned businesses and are generally not listed on stock
exchange. Hence, they are subject to lessor level of regulations / corporate governance requirements.
Outsider Dominated Business is one in which the controlling shareholding is held by a large number of
shareholders, e.g. a listed company. Shares could also be held by Institutional Investors. Since these are listed
companies, they are subject to higher regulations / corporate governance requirements.
Difference Between Family Owned and Public / Listed Companies
Family Owned Business Public / Listed Companies
▪ Owned by family members ▪ Owned by individuals or institutional investors
▪ Mostly private limited ▪ Mostly public limited / listed company
▪ Lessor regulations and CG requirements ▪ Stringent regulations and CG requirements
▪ Freedom of taking decisions ▪ Decisions based on majority shareholder or voting
▪ None or few NEDs with weak position ▪ Significant NEDs having strong position
▪ No Board Committees ▪ Formal Board Committees
▪ Focus on long term returns ▪ Focus on short / medium term returns
▪ Less focus on internal audit and risk ▪ High focus on internal audits & risk management
management
▪ Lower agency problems and cost (as family is ▪ Higher agency problems and cost (as directors run
running the business directly) the business on behalf of the shareholders)
▪ Generation change leads to problems ▪ Good succession planning in place

Advantages and Disadvantages of Family Owned Business
Benefit Problem
▪ Greater involvement in management ▪ Discrimination against minority shareholders

▪ Lower agency problems and cost ▪ High chances of dispute between major
shareholder groups
▪ Focus on long term strategies
▪ Higher level of ethical behavior due to
reputational risk ▪ Weak corporate governance / NEDs
▪ Improved communication and coordination
between shareholders
EXTRA / STRONGER INTERNAL CONTROLS IN A

LISTED COMPANY
▪ Chairman and CEO roles are split
▪ NEDs
▪ Board Committees / Risk committee
▪ Internal Audit
▪ Whistle blowing arrangement
Corporate Governance Scope & Approaches

Rule Based Approach Vs Principle Based Approach
Rule Based Approach
Rule based approach focus on clear cut regulations and controls. Full compliance is expected by all companies
at all times without any exception. Any non-compliance is a legal offence and organization will be prosecuted
and punished. This approach is adopted in USA, e.g. Sarbanes Oxley Act.
Principle Based Approach

It’s a framework-based approach setting out guiding principles aiming to create a culture of responsible and
ethical behavior. If the reason for noncompliance is justified, then it may not be deemed as a legal offence.
This approach is taken in UK and other European countries.

Based on the concept of “comply OR explain” whereby the directors explain to shareholders the reasons for
not complying with any particular code and if the shareholders are not satisfied, they can hold the directors
accountable. Hence the decision regarding degree of compliance is in the hands of the shareholders rather
than the regulators.
Example
Which one is rule based approach and which one is principle based approach?
Advantage and Disadvantage
Rule Based Principle Based
Advantage: Advantage:
▪ Clear regulations – no subjectivity ▪ Shareholders decide to what extent compliance
▪ Standard rules across the board needs to be done
▪ Punishment acts a deterrent ▪ Flexible / Can be adopted according to industry,

company size and nature of risk
▪ Provides a level playing field for all industries
and companies ▪ Able to address exceptional situations
▪ Suited for non knowledgeable shareholders ▪ Lower cost of compliance
Disadvantage: Disadvantage:
▪ Inflexible ▪ Subjective
▪ Unable to address exceptional situations ▪ Not suited for non-knowledgeable shareholders
▪ High cost of compliance ▪ Lack of consistency across industry
Code of Corporate Governance

A Code of Corporate Governance is a document issued by Regulatory Authorities or Stock Exchanges and covers
all matters of corporate governance, including role of the Board, risk management, internal controls,
remunerations, reporting, etc.

The purposes of Codes of Corporate Governance are:

▪ Specify behavior of corporate governance
▪ Ensure companies are well run in line with shareholder’s interest
▪ Boost confidence of investors
▪ Reduce frauds
▪ Encourage best practices
▪ Bring consistency across companies
Governance Codes For Multiple Jurisdictions

Two organisations have published corporate governance codes intended to apply to multiple national
jurisdictions. These organisations are:
▪ Organization for Economic Cooperation and Development (OECD); and

▪ International Corporate Governance Network (ICGN)
OECD Principles
OED principles were developed in 1998 and revised in 2004 and grouped into 5 broad areas:
1. Rights of shareholders (voting, electing/removing directors, access to information)

2. Equitable treatment of all shareholders (minority / overseas shareholders)
3. Rights and protection of stakeholders (access to information, protection against fraud)
4. Timely/accurate disclosures of material matters (transparency)
5. Responsibility of the board (i.e. work in best interest of the company, treat all stakeholders fairly, etc)
ICGN Principles
ICGN report was issued in 2005 and revised in 2009 to provide practical guidance on OECD principles. It emphasis
on the following matters:
1. Shareholders (create long term value, protect their rights, fair treatment)
2. Directors (board structure, skills, term, remuneration, election, evaluation)
3. Corporate culture (ethics, integrity, bribery/anti-corruption, whistle blowing)
4. Risk management (analyze, manage, risk appetite)
5. Remuneration of Senior Management (link with performance)
6. Audits (external, internal, relationships)
7. Disclosures and transparency (material financial & non-financial info)

Common Themes Amongst All Codes

▪ Shareholders
▪ Stakeholders
▪ Directors
▪ Auditors and Audit Committee
▪ Disclosures and Transparency
▪ Risk Management, Ethics & Culture
Objectives of Governance Codes for Multiple Jurisdictions

▪ Helps in globalization of investments, i.e. cross border investments
▪ Increases comfort level of investors
▪ Global consistency
Limitations of Governance Codes for Multiple Jurisdictions

▪ Represents lowest common denominator
▪ Regional differences in culture, legal structures, economy, capital / financing structures, openness /
maturity of stock market, insider vs outsider system, development stage of the country, etc.
▪ Cost of following a global standard may be high
Practice Questions
P1 – Jun 2010 Q2: Remuneration Committee | Reward Package (Tomato Bank)
P1 – Jun 2012 Q4: Insider Business | Induction & CPD | Two Tier Board (Lum Co)
P1 - Dec 2013 Q4: Director Leaving | Technology Risk | Professional Ethics (Lobo Co)
P1 – Dec 2014 Q3: Role of CEO | Benefits of NED | Conflict of Interest (New Ideas)

Chapter 7
Governance
(Stakeholders Portion)
Organization
Share Holders (B1) Stake Holders (B2)

Agency Theory Introduction
Board of Directors Stakeholder Mapping Model by Mendelow
Corporate Governance CSR
Reporting to Stakeholders:
Environment and Social Reporting
EMAS & ISO 14000
Stakeholders
‘Stakeholders’ are individuals or groups who are either interested in or affected by the activities of the
Organization. There are numerous stakeholders of an organization. Shareholders are one of the stake holders.
Each stakeholder has a different expectation from the organization (called stakeholder claims in conflicts):
Stakeholders Expectations from the Organization

Internal:
Directors & employees Salary, bonus, promotion, job satisfaction, job security, career growth
Shareholders Increase in shareholder’s wealth
Trade Unions Salary, bonus, health and safety
Mirchawala College Chp 8 – Governance: Stakeholders….. Page 1

External:
Customers Good quality, low price
Suppliers Profitable sales, timely payments, long term relations
Banks Security of loan, timely repayment
Auditors Low risk, better internal controls, no fraud
Government Taxes, legal compliances
Public / society Job opportunities, CSR
Pressure Groups Pollution, environment
Voluntary stakeholders are those that engage with the organization out of their own choice and can ultimately
discontinue their stake-holding if they wish too. E.g. includes customers, suppliers, employees, etc.
Involuntary stakeholders are those that get engaged with organization due to their position or physical location,
i.e. not by their own choice. They cannot discontinue their stake-holding if they wish too. E.g. includes society,
government, etc.
Stakeholder Mapping Model by Mendelow
Keep Satisfied Key Players

(handle with care)
High (obtain consent)
e.g. institutional
e.g. major shareholder
Power investors
Minimum Effort Keep Informed

Low e.g. individual (obtain views)
shareholders, pressure e.g. lenders, trade
groups unions, employees
Low High
Level of interest
▪ Stakeholders have three options (by Mendelow):

▪ Voice (influence)
▪ Loyal (no influence, do as they are told)
▪ Exit (leave)

Corporate Social Responsibility

Corporate Social Responsibility
Corporates have primary responsibility to maximize wealth for its shareholders. However, corporates also have
to consider their impact on social and environmental aspects. CSR means extent to which Organization
recognizes its responsibility for social and environmental aspects. These includes organization’s behavior
towards:
▪ Employees
▪ Customers / suppliers
▪ Society / community
▪ Environment (scarce resource, waste disposal, pollution)
▪ Long term sustainability
It is possible to adopt a range of behaviors in the above areas hence it depends on the organization’s approach
and policy towards CSR
CSR Strategy & Strategic CSR

CSR Strategy:
CSR strategy means having formal policies which guides organization’s CSR activities. There is a big range of
CSR activities which an organization can pursue, hence having a CSR strategy will help organization select and
focus on preferred CSR activities in a structured and planned manner.
Strategic CSR:
Strategic CSR means organization undertakes those CSR activities which ultimately aligns with organization’s
business and core strategies. For e.g. a bank gives scholarships to bright young students to pursue a banking
degree.
Corporate Citizenship
Corporate Citizenship is an approach in which organization includes social and environmental aspects in its core
values and principles. All key business decisions considers the impact on society and environment, i.e. business
decisions are closely aligned with social and environmental aspects. The goal is to improve standard of living
and quality life of the community around it while maintaining profitability for stakeholders.

Under corporate citizenship, organization has certain rights as well as responsibilities. Rights include the right
to exist, do business and maximize wealth for shareholders. Responsibilities include compliance with all laws
as well as compliance with social and environmental norms and expectations of the society.
There are three principles of corporate citizenship:

1. Minimize harms to the society / environment, e.g. pollution
2. Maximize benefits to the society / environment, e.g. all raw materials purchased from local suppliers,
using recyclable resources
3. Remain fully accountable to wider stakeholders (society, environment, etc.) thereby balancing
business interest with society interest
Arguments In Favour Of Social Responsibility

▪ Organizations are social citizens hence should contribute to the Society
▪ Society provides resources to Organization, e.g. educated workforce, infrastructure, etc.
▪ Organization should compensate Society for causing pollution, etc.
▪ Helps in building a positive image of the company
Arguments Against Social Responsibility

▪ Organization exists for profits and CSR reduces profits
▪ Organization are not human, hence not responsible for Society
▪ Organization pays taxes to Govt so that Govt takes care of the Society
Reporting to Stakeholders
Introduction
Organizations disclose a wide variety of information, both mandatory and voluntary.
Mandatory Disclosure means information that must be publicly disclosed as per Law or Rules.
Voluntary Disclosure means information which may be publicly disclosed if the Organization wishes to do
so, i.e. it is not legally binding to disclose. E.g. includes:
▪ Business Position & Reviews
▪ Future Outlook & Forecasts
▪ CSR Reports (covered below)
▪ Integrated Report (covered below)
▪ Social & Environmental Footprints Reports (covered below)

Advantages of Voluntary Disclosure

▪ Enhances organization’s image and reputation for transparency
▪ Open and transparent communication with shareholders and wider stakeholders
▪ Shareholders and stakeholders have deeper insight into the organization
▪ Gives competitive edge over other companies
▪ Better understanding and decision making by shareholders, stakeholders and potential investors
▪ Attracts investment at a lower cost of capital (due to availability of greater information)
CSR Report
CSR report discloses initiatives taken by an organization to fulfil its social responsibilities. It facilitates
shareholders, customers, employees, governments, etc. to assess CSR activities of an organization. The CSR
report consist of initiatives relating to the following and includes both monetary and non-monetary activities:
▪ Employees
▪ Customers and Suppliers
▪ Society and community
▪ Environment (scare resources, waste disposal, pollution)
▪ Long term sustainability
Background
In case one wants to decide whether or not to invest in a particular company, the starting point would be the
latest Annual Report and Financial Statements. However, there are certain drawbacks of these documents.
The financial statements show historic performance only (i.e. not forward looking). Also, it lacks certain
information such as core business strategies, competitor analysis, social and environment factors, etc.
Integrated reporting was developed in 2013 by International Integrated Reporting Council (IIRC) and is a
‘principle’ based framework aimed at achieving a balance between flexibility and prescribing strict headings.
Just like financial accounting and reporting follows IFRS, Integrated reporting follows International Integrated
Reporting Framework.

Definition
An Integrated Reporting is a concise communication demonstrating the link between:
▪ Governance (Mission / objectives)

▪ Strategy
▪ Financial performance; and
▪ Social and environmental context
And shows how organization creates ‘value’ in short, medium and long term. By integrating these areas,
organizations are in a better position to allocate scarce resources more effectively and make decisions which
are more socially and environmentally friendly.
An Integrated Report enables investors and other stakeholders to understand how an organization is really
performing and hence would enable them to assess organization’s long-term strategy. In some jurisdictions,
Integrated Report is now a primary report replacing Annual Reports.
The aim of an Integrated Reporting is to:

▪ Enable more effective decision making at board level
▪ Improves information available to investors
▪ Encourage ‘integrated’ thinking and strategies
Contents of An Integrated Report
▪ Organization’s overview
▪ External environment (PESTEL / P5F)
▪ Opportunities and risks
▪ Strategies and resource allocations
▪ Business model (e.g. value chain, technology, E-business, etc,)
▪ Future plans
▪ 6 capitals

The Six Capitals

All organizations depend on various forms of capital for their success. These capitals increase or decreases
over passage of time. Hence organizations should be able to measure and monitor the use these capitals:
▪ Financial Capital
Overall financial performance and position of the company with focus on availability of sources of funds
(i.e. equity financing or debt financing) so that it can be used to acquire other capitals such as
manufactured capital or intellectual capital
▪ Manufactured Capital
Tangible assets used by an organization to create value. E.g. plant & machinery, infrastructure, fixed assets,
inventories, etc.
▪ Intellectual Capital
Includes R&D, innovation, brand, patents, etc. as well as technical / skilled staff. This is critical to
organization’s future earning potential.
▪ Human Capital
Knowledge, skills and experience of the management and employees of the organization. Includes
productivity, efficiency, staff turnovers, etc.
▪ Social Capital
Relationship and trust built with key stakeholders i.e. customers, suppliers, government, communities,
employees etc. Build long term relationship, e.g. loyal customers, motivated employees.
▪ Natural Capital
Availability of natural and environmental resources to be used in operations, e.g. water, oil, metal,
minerals, forests, chemicals, carbon footprint, climate change, etc.

Difference Between Financial Statements and Integrated Report
Financial Statements Integrated Reporting

Focus on financial information Focus on overall business performance
Focus on share capital Focus on 6 capitals
Focus on historic performance Focus on future strategies
Less emphasis on social and Integrates social and environmental
environmental aspects aspects in strategies and decision making
Short term results Long term value creation
Advantages Of Integrated Reporting

▪ As IR is voluntary disclosure, it enhances organization’s image and reputation for transparency
▪ Focus on 6 capitals of the organization
▪ Demonstrate how organization creates value
▪ Integrates social and environmental aspects in strategies and decision making
▪ Better understanding and decision making by shareholders, stakeholders and potential investors
▪ Attracts investment at a lower cost of capital (due to availability of greater information)
▪ Gives competitive edge over other companies
Audit of Integrated Reports

▪ In conventional financial statements, the measurement and presentation are strictly regulated by
accounting and reporting standards.
▪ However Integrated Reports are much more subjective, for e.g. how can an organization reliably
measure value of human capital or social capital?
▪ This subjectivity of measurement reduces the value of Integrated Reports and poses considerable
challenges for the auditing process

Social & Environmental Footprint

Org’s Economic Activities has
Social Footprints Environmental Footprints
Means impact on People & Society: Means impact on Natural Environment:

1. Employees 1. Depletion of scarce resources
2. Customers / Suppliers 2. Disposal of wastage
3. Society / Community 3. Emission, pollution & spillage
Social Footprint
Social footprint assesses the impact organization has on people and society. Impacts could be positive such
as jobs creation or it could be negative such plant closure leading to unemployment. It covers impact on:
Employees Customers / Suppliers Society / Community
▪ Gender equality ▪ Ingredients used in ▪ Job opportunities

▪ No discrimination product ▪ CSR
▪ Diversity ▪ Product safety
▪ Working conditions ▪ Personal data and privacy
▪ Health and safety ▪ Fair play with suppliers
▪ Better pay ▪ Fair business practice
Social Report & Audit

A Social Report is prepared which includes details about Organization’s social policies, social objectives and
actual performance there against. It also includes measures taken by the Organization to restrict or reverse
negative social impacts caused through its business activities.
As with any other audit, the purpose of a Social Audit is to assure that the information given in Social Report
is true and fair. Social Audit provides additional information on corporate activities over and above those
disclosed in the traditional financial statements.

Social Report / Audit and Integrated Report

The inclusion of Social Audit Reports in Integrated Report would provide users greater assurance that the
actions claimed by the organizations are verified through independent audits. The Social Audit Report will be
placed under ‘Social Capital’ headings.
Environmental Footprint
Environmental footprint assesses the impact of organization on the natural environment in variety of ways
including:
▪ Depletion of scarce resources (e.g. oil, energy, trees, etc.)
▪ Disposal of wastages (e.g. re-cycling)
▪ Emissions, pollutions and spillage (carbon emission, smoke, etc.)
Ideally every organization should target for zero environmental footprint by restoring the natural resources
consumed and taking steps to remove emission and pollution.
To assess the environmental footprint, core activities are reviewed, such as delivery/storage of raw materials,
production processes, delivery/storage of finished goods, overall infrastructure, etc.
Environmental Report
Environmental Report is a voluntary initiative taken by an organization to publish details of its impact on the
natural environment (environmental footprint). The Report contains:
▪ Environmental policies and procedures
▪ Information on company’s ‘direct’ environmental affect (through its own manufacturing and
distribution)
▪ Information on company’s ‘indirect’ environmental affect (through forward and backward supply chain)
▪ Actual performance against targets relating to:
 Consumption of scarce resources (oil, energy, trees, etc.)
 Disposal of wastages (e.g. re-cycling)
 Emission, pollution & spillage (carbon emission, smoke, etc.)
Environmental Audit
As with any other audit, the purpose of an Environment Audit is to assure that the information given in
Environmental Report is true and fair. It assesses the impact an organization has on the environment and
involves measurement against pre-determined environmental standards, such as EMAS or ISO 14001.

An Environment Audit has 3 elements:

▪ Agreeing what should be measured and how (i.e. suitable metrics)
▪ Measuring and verifying actual performance against agreed measures (on sample basis)
▪ Reporting findings and any significant deviations
Advantages of Social or Environmental Reports

▪ As these are voluntary disclosures, it enhances organization’s image and reputation for transparency
▪ Demonstrates organization’s commitment to society and environment
▪ Shareholders and stakeholders have detailed insight on organization’s social and environmental
initiatives
▪ Strengthens relations with wider stakeholders and society
▪ Helps in reduction of risks relating to society and environment aspects (e.g. legal compliance, fines, etc.)
▪ Enhanced monitoring and accountability
▪ Gives competitive edge over competitors
Environmental Audit Report and Integrated Report

The inclusion of environmental Audit reports in Integrated Report would provide users greater assurance that
the actions claimed by the organizations are verified through independent audits. The Environment audit
report will be placed under ‘Natural Capital’ headings.

Environmental Accounting
Introduction to Environmental Accounting
Environmental Accounting means maintaining systems for assessing organization’s impact on the
environment. As financial accounting has its own Framework (i.e. IFRS), similarly Environmental Accounting
has few frameworks:
▪ ISO 14000
▪ Eco-Management And Audit Scheme (EMAS) by European Commission
ISO 14000 EMAS
Series of International Standards on environmental It’s a voluntary EU initiative to improve

management and supporting audit program Organization’s performance
Specify an Environmental Management System and Rewards organizations who go beyond minimum
organization is evaluated against this Standard legal requirements to improve environmental
through audit and then certified if meets Standard performance
Need to implement ISO 14000 requirements and Comply by initially implementing ISO 14000 and
then demonstrate compliance through audits then implementing EMAS standards
Organizations produces a plan for compliance with Organizations required to improve their
the Standards and then monitors performance environmental performance over time
Sustainability
Introduction
Sustainability means that needs of present are met without compromising the needs of future generation. In
simple words, it means that organization should have positive impact on economy, social and environment in
the long-run.
Economic Sustainability means that organizations are able to grow and maximize shareholders wealth in long
term. The balance between economic sustainability and environmental / social sustainability is quite delicate as
these contradict with each other and most of the time economic sustainability is given more importance.
Social Sustainability means that organizations are able to improve their positive contribution on the society in
the long run.

Environmental Sustainability means resources should not be taken from the natural environment (or emission
should not be made to the natural environment) at a rate greater than that which can be corrected or
replenished. The impact on the natural environment should not exceed the ability to replace used resources or
clean up emission.
Input resources must only be consumed at a rate at which they can be reproduced or replaced. Outputs (such as
waste and products) must not pollute the environment at a rate greater than can be cleared or offset. Business
activities must take into consideration the carbon emissions, other pollution to water, air and local environment,
and should use strategies to neutralise these impacts by engaging in environmental practices that will replenish
the used resources and eliminate harmful effects of pollution.
Accounting for Sustainability

A number of reporting frameworks have been developed to help in accounting for sustainability including
EFCA (Environment Full Cost Accounting):

It’s a method of accounting in which also all costs and benefits to the Society and Environment is calculated
TBL (Triple Bottom Line Sustainability Framework):

TBL expands traditional financial accounting to include environmental and social performance as well. This
reporting is encouraged by international body called Global Reporting Initiative (GRI).
There are three areas of performance under TBL – Financial, Social and Environment. They are also called 3Ps
(Profit, People, Planet). There is some degree of subjectivity / assumptions involved in TBL as the three areas of
performance do not have common unit of measure.
Financial Social Environment
▪ Profitability ▪ Employees ▪ Scares resources

▪ ROI  Gender equality ▪ Disposal of wastages
 No discrimination ▪ Emission, pollution, carbon
 Diversity footprint
 Working conditions ▪
 Health & safety
 Better pay
▪ Customers / Suppliers
▪ Society / CSR


Types of Organizations
▪ Commercial: Profit seeking organizations
▪ Not for profit: Charitable organizations or NGOs
▪ Public sector: Organizations owned and funded by State or Government, providing goods or services not
normally provided by commercial organizations. Primary objective is public service i.e. social wellbeing of
the people, hence measuring performance and output is more complex because the usual profitability or
financial criteria cannot be used.
Difference Between Commercial, Charitable and Public Sector Organizations
Commercial Org Charitable Org Public Sector Org
Mission Maximize profit Social wellbeing Public delivery
Measure of success Profitability / ROCE Social targets Social indicators / Value for
Money (VFM)
Source of funding Equity, debt financing Donations, grants Tax payers’ money / Govt
funding and subsidies
Pay scales Market based / high Restricted / low Restricted / low
Principal Shareholders Owners / Donors Public / Tax payers
Agent Director Trustees Govt Officials
Governance Structure Board of Directors Board of Trustees Ministry / Board of Trustees
Accountability To shareholders Owners / Donors To tax payers / citizens
Agency Relationship in a Public Sector Org

In a commercial organization, the shareholders are principals and directors are agents. In a public sector
organization:
Principal: Tax payers / citizens
Agent: Government / Ministry
Sub-agent: Board of Trustees or Directors who are accountable to the Ministry and the public

Governance Structure and Role

The governance structure and roles vary from country to country. Normally a public sector organization will have
a Board of Governors or Board of Trustees or an Oversight Committee, with the following roles:
▪ Comply with government rules and instructions

▪ Performance measurement and ensuring objectives are achieved (effectiveness)
▪ Organization if well run (efficiency and economy)
▪ Appoint / replace senior officials
▪ Report back to Government
Problems of Public Sector Organizations

▪ Multiple objectives (e.g. prevent heart diseases as well as cancer)
▪ Difficulty in measuring outputs (e.g. how you measure if people are healthy)
▪ Financial constraints (limited budgets)
▪ Democratic appointments
▪ Political influences and popularity
▪ No direct competition
▪ No profit motivation

Value for Money (VFM) – 3 Es Framework

Public sector organizations normally use Value for Money (VFM) framework to select between projects as well
as to demonstrate the performance. It is important to demonstrate value for money as public sector
organizations uses public funds and tax payer money, which is limited in supply.
▪ Effectiveness: Measures whether the desired objectives are achieved or not

▪ Efficiency: Measures productivity or how well scarce resources are used (maximum output with minimum
input)
▪ Economy: Measures actual cost and time spent time (e.g. budgetary aspects)
Practice Questions
P1 – Jun 2015 Q2: Institutional Sh Holder | Strategic CSR | Stakeholder Conflict (Rosey & Atkin)
P1 – Sep/Dec 2015 Q2: Corp Citizenship | Advantages of IR | Six Capital (Plantex)

Chapter 8
Risk Management
Introduction
Introduction to Risk
▪ Risk means exposure to adverse consequences due to any uncertain event in future
▪ Risk management means how risks are identified, measured and managed by the company
▪ Risks varies from company to company, depending on:

 Size of the company (small, medium, large)
 Geographical location / region (single country, multinational, law and order, economy)
 Growth phase of the company (setup phase, growth phase, maturity phase)
 Business model / strategies (physical, online)
 Financing structure (capital, loan financing, gearing)
▪ Risks also varies from industry to industry. For e.g. banks are more exposed to financial risks and
manufacturing organizations are more exposed to health & safety risks. Industry risks depends on:
 Nature of product and industry (e.g. financial industry vs manufacturing industry)
 Investment (e.g. capital-intensive industry)
 Regulations (e.g. higher laws for banks)
 Ecological aspects (e.g. oil & gas industry)
 Technology (hi-tech industry)
Mirchawala College Chp 8 – Risk Management….. Page 1

Various Types of Risks

▪ Business Risk
Risk that threatens the survival of the whole business and can lead to going concern issue. They can arise
from many sources, but mainly due to wrong strategies, decision or business model.
▪ Financial Risk
Risk of reduction in revenue or profitability of the company or adverse effect from the way the business is
financially structured (e.g. high gearing), debt financing and management of working capital and cash
flows.
▪ Credit Risk
Risk that customers fail to pay their dues on time.
▪ Liquidity Risk
Risk that company does not have sufficient cash to pay off its current liabilities. This mainly arises from bad
working capital management.
▪ Exchange Rate Risk

Risk of adverse movement in foreign currencies in which the organization deals with. For e.g. if it is
importing raw material in foreign currency or a foreign customer owes money in foreign currency.
▪ Interest Rate Risk

Risk of adverse changes in interest rates on borrowings or interest rates on investments / deposits
▪ Market Risk
Risk of losses from capital markets from adverse changes of share prices of the company, e.g. difficulty in
raising capital to fund expansion plans
▪ Investment Risk
Risk that the value of investment may fluctuate adversely
▪ Reputation Risk
Risk of harm to organization’s image, brand, goodwill or reputation including negative publicity and
adverse public sentiments
▪ Health & Safety Risk

Risk of harm, injury, disability, death or adverse health effects on people (e.g. employees, customers,
society) due to the operations of the company

▪ Political Risk
Risk of government instability or higher intervention in business activities
▪ Regulatory Risk
Risk of adverse changes in laws and regulations directly or indirectly affecting company operations
▪ Legal and Compliance Risk

Risk of breaching any law or regulation leading to fines or possible shut down of operations
▪ Technology Risk
Risk from changes to technology essential to support the business e.g. plant and machinery, IT, software, e-
commerce, etc.
▪ Environmental Risk
Risk of liability or losses from any damage to the natural environment caused by the organization, e.g. risk
of oil spillage by an Oil Company. It includes depletion of scare resources, disposal of wastages and
emission / pollution / spillage.
▪ Fraud Risk
Risk of fraud by employees, customers, suppliers or other parties
▪ Intellectual Property Risk

Intellectual property is the knowledge, skills, designs, secrets, formula, etc. that the company’s staff has
built over the passage of time. Intellectual property risk is key employees leave the organization and joining
a competitor.
▪ Probity Risk
Risk of company or its employees’ involvement in dishonesty, unethical behavior or corrupt business
practices, e.g. bribery or facilitation payments.
▪ Entrepreneurial Risk
Risk of associated with any new business venture or opportunity, new products or new markets

Terminologies
Risk Awareness, Assessment & Management

Risk awareness means ability to IDENTIFY the risks associated with any activity or investment.
Risk assessment means MEASURING the ‘impact’ and ‘probability’ of each risk and then prioritizing those risks
accordingly.
Risk management means how the risks are IDENTIFIED, MEASURED AND MANAGED by the company. Risk
management is important as it protects the company from unforeseen adverse events in future. Directors who
fail to manage risks are failing in their duties to the shareholders.
(More details below)
Risk Appetite
Risk appetite is the amount of risk an organization is willing to take. It is based on the assumption that higher
risks have higher returns and lower risks have lower returns. Risk appetite varies from company to company
depending on its shareholders attitude towards risk. In other words, the organization needs to decide whether
it wants to be risk averse or risk seeker (called risk attitude – see below).
Risk appetite also affects organization’s Risk Policy and Controls e.g. higher the risk appetite, higher the
controls needed to manage the risks and protect the organization from adverse effects.
Risk Attitude
Risk Averse organizations have lower risk appetite as they are more cautious and wants to minimize risks.
Hence, they are willing to accept lower returns e.g. public sector or charitable organizations
Risk Seeker organizations have higher risk appetite as they are willing to take more risks in expectation of
higher returns
Strategic Risks & Operational Risks

Strategic risks arise from the overall strategic position of the company, such as type of industry and markets,
competitors’ strategies, business model (e.g. Online), etc. They affect the entire organization, hence are
managed at Board level. However, strategic risks take time to affect the company i.e. it does not have an
immediate effect.
Operational risks arise from normal day-to-day operations and are more likely to affect some part of the
business and not the entire organization, such as procurement, manufacturing, warehousing, logistics, after
sales service, etc. Operational risks have immediate effects and hence have to be addressed urgently.

Risk Perception – Objective Risks & Subjective Risks

Risk perception is the ‘belief’ that a particular risk may happen. Some risks can be assessed with high degree of
certainty using historic data and scientific tools, hence these risks can be ‘objectively’ assessed. Some risks
cannot be assessed objectively, e.g. the risk is theoretically present but has never occurred in the past. For e.g.
earthquake or natural disasters. It is difficult to assess their probability and impact. Hence subjective risk
perception presents a dilemma to the Board on how to deal with such risks, as the costs for mitigating such
risks are high.
Related and Corelated Risk

Related risks mean that two or more risks are related with each other or may have a common cause. E.g. if an
organization breaches any law and pays fine (legal risk), then its reputation will get adversely affected
(reputational risk). In this case, legal risk is independent variable and reputational is dependent variable.
Correlation shows the relation between related risk. Positive correlation means that if one risk increases, then
the other risk will increase too (e.g. legal risk vs reputational risk). Negative correlation means that if one risk
increases, the other risk decreases (e.g. As more money is spent on reducing Environmental risk by taking
loans, there is an increase in the financial risk facing the company).
Risk Diversification
Risk diversification means that the company spreads risks across many areas. Risk can be diversified as follows:
▪ Product diversification (having multiple products)

▪ Industry diversification (operating in more than one industry, either related or unrelated)
▪ Geographical diversification (variety of cities and countries)
The more the risk diversification, the lessor the impact of a particular risk.
Risk Capacity
Risk capacity means having resources available to deal with risks. A company cannot take high risks if they do
not have the resources to deal with risks. Risk capacities includes technical expertise, financial resources, etc.

ALARP Principle
As Low As Reasonably Practical
Most risks cannot be eliminated completely. The primary focus of risk management is to reduce the risk to a
tolerable level. Level of tolerable risk is a balance between the impact / likelihood of risk versus the cost to
mitigate the risk.
It is the role of the Board to decide the ALARP level for the business to operate at a safe level expected by
government, customers and public. The residual risk after ALARP level should be also be constantly monitored
as risks are dynamic in nature

Risk Management
Risk Management
Risk management means how the risks are IDENTIFIED, MEASURED AND MANAGED by the company. Risk
management is important as it protects the company from unforeseen adverse events in future. Directors who
fail to manage risks are failing in their duties to the shareholders.
Risk management strategy is linked with organizations corporate strategy. For e.g. if an organization is seeking
rapid growth, it is likely it will have to take more risks than an organization that is seeking to maintain its
current position.
Risk management is a continuous process as risks are dynamic in nature. Risk level changes over time
depending upon the external environment of the business. Also, it is important to update the ‘probability’ and
‘impact’ analysis so that risk management strategies can remain up to date and effective.
Advantages of Risk Management

Risk management leads to extra costs. However, there is no incremental revenues from risk management. The
advantage of risk management is indirect in nature, i.e. it helps in prevention of major exposure, business
interruption and losses. Following are the advantages of risk management:
▪ Identifies risks which prevents organization from achieving its objectives

▪ Helps in avoiding or mitigating those risks
▪ Prevents business disruptions or slowing down of operations
▪ Prevents reputational loss
▪ Prevents penalties
▪ Allows organizations to grow in a controlled and safe manner
Risk Mitigation Techniques

▪ Embedding risk in organization’s culture
▪ Enterprise Risk Management (ERM) framework
▪ Risk management strategies (TARA Framework) and heatmaps
▪ Risk Registers
▪ Risk committee
▪ Risk manager
▪ Risk audits
(All covered below)

Embedding Risk In Org’s Culture

Risk awareness is not sufficient at board of directors level only. It needs to be embedded across the entire
organization. It is not an activity but a mental approach which should be built into the Org’s culture. Following
are the ways in which risk awareness and management can be embed in an organization:
▪ Commitment from top level (place high importance)

▪ Create a risk focused environment
▪ Have a formal Risk committee
▪ Adopt ERM framework, implement internal controls, have risk audit
▪ Human resources / employees:
 Orientation of new employees upon joining (induction training)
 Include in individual’s Job Description
 Regular trainings and workshops
 Periodic performance appraisal
 Appreciate and reward good risk behaviors
Enterprise Risk Management Framework

▪ Most organizations adopt COSO’s ERM Framework to manage their risks
▪ Committee of Sponsoring Organizations (COSO) – Enterprise Risk Management (ERM) Framework
▪ ERM Framework links business strategies with risk management across all level of the. It is designed to
identify risks and how to manage them within the risk appetite of the organization. ERM Framework
comprises of EIGHT stages:
1. Control Environment
Commitment from top level. Risk management should be embedded in company’s culture and
values (already covered above)
2. Objective Setting
Company’s risk appetite / ALARP level to be determined in line the business strategies
3. Event Identification
Make list of all possible risks (both external as well as internal risks)

4. Risk Assessment
Assess the impact and probability of each risks and prioritize them in accordance with Expected
Value (EV)
5. Risk Response
Decides appropriate action to each risk based on EV (e.g. TARA Model)
6. Control Activities
Implement risk responses and actions effectively
7. Information & Communication

Regular training of employees and communication with key stakeholders
8. Monitoring
Undertake ERM process regularly so that changes in risks can be incorporated / updated
Risk Management Strategies (TARA Model)

Transference: Transfer risk to third party, e.g. insurance, outsourcing or franchising
Avoidance: Eliminate risk by totally avoiding activities which causes risk
Reduction: Reduce the impact and probability of the risk by implementing controls
Acceptance: Accept the consequence of the risk, should it happen. Normally adopted for small risks
High Reduce Avoid

Probability
Low Accept Transfer
Low High
Impact

Heat Maps
A heat map is a diagrammatic presentation of the various risks faced by the organisation. It shows all risks in
one picture and helps organization in prioritizing and focusing on high risks
High
Probability Medium
Low
Low Medium High

Impact
Risk Register
A risk register is a formal document which lists all the risks which a company faces, along with its possible
impact and probability. This list helps to prioritize risks and to decide which risks need most attention. The
register can then be used as an objective and consistent basis to manage risk, committing sufficient resources
as necessary and providing a holistic view of how risk is being managed throughout organization.

Risk Committee
The Risk Committee is responsible for oversight of the risks which the company faces and ensuring that a sound
system of risk management and internal controls exists to deal with those risks. Risk Committee comprises of
majority of NEDs with some Executive directors, as specialist expertise of Executive directors can benefit the
committee.
Roles of the Risk Committee:

Relating to Risk Management Process
▪ Implement formal risk management process / ERM framework
▪ Advice board on risk appetite and ALARP levels
▪ Embed risk management in organization culture
▪ Identify key risks and recommend risk management procedures and controls
▪ Monitor overall risk exposure of the company and ensure it remains within limits set by the board
▪ Ensure risk management procedures and controls are effective
▪ Informing board and shareholders of any significant change to company’s risk profile
▪ Monitor performance of Risk Manager
Relating to Internal Controls

▪ Review and implement internal control systems, policies and procedures
▪ Assess effectiveness of internal controls
▪ Review Internal Controls Report sent to Shareholders
▪ Provide early warning to the board of emerging weakness in the internal control system
Advantages of Having a Separate Risk Committee:

▪ More focused and specialized
▪ More time can be spent by committees as full board has limited time
▪ Higher involvement by NEDs (e.g. in audit or remuneration committees)
▪ Board can focus more on strategic and business matters
▪ Increases shareholder confidence

Risk Manager
A risk manager is a person whose main role is to manage the entire risk management process of the
organization. He/she reports to Risk Committee. Key tasks include:
▪ Establishing overall risk management policies, systems and controls
▪ Suggesting risk appetite and ALARP levels to the Risk Committee
▪ Implementing risk management framework (COSO) and risk management strategies (TARA)
▪ Updating risk registers
▪ Embedding risk management in the organizational culture
▪ Compliance with risk management related regulations and statutes
▪ Reporting
Risk Audits
A risk audit provides an independent assessment of the risk management process and controls in place. Risk
audits can be done by external firm as well as internal audit department. Some regulations require mandatory
risk audits (e.g. SOX). Risk Audits includes four stages:
1. Risk identification (e.g. maintenance of risk registers)

2. Risk assessment (impact & probability)
3. Review of controls (effectiveness of internal controls put in place to mitigate the risk)
4. Report (issue report to management commenting on the quality and effectiveness of the risk
management process and identifying shortcomings / recommendations)
Risk audit by an external firm (as compared to internal audit dept) is more beneficial due to:
▪ More independence
▪ Fresh pair of eyes
▪ Brings external experience and best practices
▪ Avoid familiarity threat
▪ Enhance shareholder’s confidence

Benefits of Accepting Some Risks

In order to grab new opportunities and increase profitability, some extra risks need to be taken. Organizations
are now seeking higher risks to benefit from higher rewards. Hence risk management is being used to take
higher risks to increase the probability of positive outcomes and profitability.
Look for more & Assess Very

Competitive High
build on these Carefully
Advantage
Accept All
Low Avoid
opportunities
Low High
Risk
Practice Questions
P1 – Jun 2009 Q4: Risk Mgr | Framework | Risk Management (H&Z Company)
P1 – Dec 2015 Q3: Risk Committee | Risk Appetite | Type of Risks (Branscombe)
P1 – Mar/Jun 2017 Q4: Embed in Culture | ALARP | Mitigation Tech (RMBE)

Chapter 9
Organizational Control & Audit
.
Internal Control Systems

Internal Control System
An internal control system comprises the whole network of systems established in an organisation to provide
reasonable assurance that organisational objectives will be achieved and the assets will be safeguarded.
Furthermore, internal controls are critical for risk management, as it helps in mitigating the various risks which
organization faces. Strong internal controls cover all aspects of business, including operations, finance, HR, IT,
data, regulatory compliance, financial reporting, frauds and errors, etc.
Purpose / Importance / Advantages of Internal Control System

▪ Achievement of organization’s objective
▪ Orderly and effective conduct of business
▪ Assurance to board in discharge of their corporate governance responsibilities
▪ Mitigates risks faced by the organization
▪ Safeguarding of assets
▪ Completeness and accuracy of accounting records
▪ Accurate and timely financial reporting, both external and internal
▪ Prevention of fraud and error
▪ Compliance with regulatory laws and standards
▪ Provides reliable information to board to enable key decision making
Five Elements of Sound Internal Control System (as per COSO ERM Framework)
▪ Control environment
 Tone at the top (Board)
 Overall attitude by Board and Management
 Create a culture of strong internal controls
Mirchawala College Chp 9 – Org Control & Audit….. Page 1

▪ Risk assessment
 Identify all risks
 Prioritize based on impact and probability
▪ Control activities
 Design formal policies, procedures & systems
 Implement internal controls across all functions
 Some key internal control includes:
✓ Authorization and approvals
✓ Segregation of duties
✓ Supervision
✓ System checks and validations built into the software
✓ Screening and training of personnel
▪ Information and communication

 Staff training
▪ Monitoring
 Regular reviews by management
 Internal and external audits
Why Internal Control System Fails Sometimes
▪ Controls could be insufficient / weak

▪ Deliberate circumvent by employees (e.g. collusion)
▪ Misuse of authority by Senior personnel
▪ Some unforeseen events / risks were not considered while designing internal controls
▪ Internal controls may become obsolete or redundant due to changing environment
▪ Human error or negligence
▪ It is impossible to cover 100% risks through internal controls (inherent risks)

Role of Internal Controls in Regulatory / Financial Reporting

It is critical that effective internal controls system are in place to ensure that the information being reported is
accurate, complete, reliable and timely. Non-compliance with regulations have serious consequence, including
threat to going concern of the organization. Effective internal controls relating to regulatory reporting includes:
▪ Formal allocation of responsibility to specific persons and departments

▪ Controls to generate and collect accurate, complete, reliable and timely information
▪ Controls to detect or highlight any non-compliance or exception
▪ Have formal review and approval process before the information is published / reported
▪ Information is collected consistently in same manner year on year in order for prior year comparisons
▪ Internal audit to review the entire process and key controls
Need for Information Flow to Management relating to Internal Controls

i.e. why Board needs assurance that internal controls are working adequately?
▪ Board is responsible to manage risks, hence they need to know that whether internal controls are
working properly or not
▪ Board makes decisions based on ‘information’, and strong internal controls will generate reliable
information
▪ All reporting to shareholders, external, regulatory and internal reporting is based on internal control
system
▪ Internal and external auditors use information in order to perform their tasks

Internal Audit & Compliance

Internal Audit
Internal audit is an independent, objective assurance function established within the organization, with the aim
of ensuring that governance process, risk management and internal controls are working effectively. It may be
a statutory requirement to have an internal audit or it may be strongly recommended under codes of
corporate governance. The primary objective of internal audit is to assist other functions in the effective
discharge of their responsibilities. The work of internal audit is quite varied and includes financial / internal
controls review, compliance, operational audits, fraud investigations, etc.
Roles / Importance of Internal Audit

▪ Evaluating internal control system
▪ Reviewing accounting controls and financial information
▪ Reviewing operational effectiveness and efficiency
▪ Reviewing compliance with laws and regulations
▪ Reviewing risk management procedures including identification of significant risks
▪ Special investigations or assignments (e.g. fraud investigation)
Factors To Decide Whether Org Needs An Internal Audit

▪ Any mandatory requirement by regulations / code of corporate governance / regulated industry
▪ Size, complexity and growth of organization
▪ Number of employees
▪ Geographical dispersion (i.e. multiple / overseas locations)
▪ Centralized or decentralized set-up?
▪ Cost benefit considerations
▪ Key risks facing the organizations / risk level
▪ Quality of current systems and internal controls
▪ Increased frequency of breaches or unacceptable events
Independence of Internal Audit

Internal audit has to be independent and objective, otherwise it will not be able to give accurate picture to the
Board whether internal control systems are working effectively throughout the organization. If internal audit is
not independent, then there is a risk that they might fail to report breaches, turn a blind eye to unethical
practices, ignore discrepancies, accept explanations without checking, become sympathetic to fellow
employees, etc.

Independence is assured through following measures:
▪ Having appropriate structure within internal audit works:

 Internal auditor should not be involved in operational activities or systems they are auditing
 Internal Auditor should be appointed by Audit Committee (and not by Exec Management)
 Internal Auditor to report directly to Audit Committee
 Internal Auditor to have direct access to Chairman of the Board
 All remuneration, promotion, bonus to be decided by Audit Committee (and not by Exec
Management)
▪ Internal auditor following principles of professional ethics:

 Threats: self-interest, self-review, advocacy, familiarity, intimidation
 Principles of professional ethics: Integrity, objectivity, professional competence & due care,
confidentiality, professional behavior
Importance of Internal Audit in Highly Regulated Industry

Internal audit is generally considered to be more important in highly regulated industries because there is a
need to ensure compliance with regulatory requirements. The organization has to provide confirmation and
information to the regulator regarding compliance. This requires implementing systems for collecting
information and producing reports to demonstrate the levels of compliance. Also, the Board needs assurance
of compliance. Hence it is important that the auditor is independent of those being audited and, for this
reason, a formal internal audit function is more necessary.
Internal Audit Recommendations

When suggesting recommendations, internal audit department must ensure that the recommendations are:
▪ Practical
▪ Cost effective
▪ Reduces risks to a tolerable level
The internal auditor should also conduct a post-implementation review to ensure that the recommendations
have been actioned by the management

Audit Committee
Introduction to Audit Committee
The Audit Committee is responsible to ensure that auditors remain independent and financial reporting is
accurate and reliable. All members are NEDs with atleast one NED having recent expertise in financial reporting
and audit. This is to ensure that shareholders receive independent and accurate financial information of the
company.
Roles of the Audit Committee

▪ Financial statements and reporting:
 Ensuring accuracy and integrity of financial statements and regulatory filings
 Review accounting policies
 Review internal controls relating to financial reporting
 Compliance with relevant laws and regulations
▪ Monitoring internal audit function:

 Ensure independence and objectivity of internal audit
 Appoint internal auditor and monitor his/her performance
 Approve annual internal audit plan
 Ensure effectiveness and efficiency of internal audit function
 Ensure that internal audit recommendations are implemented timely
▪ Managing External Auditors:

 Recommendation appointment, re-appointment or removal of external auditor
 Approve terms of engagement / audit scope
 Approve auditor’s remuneration
 Ensuring independence and objectivity of external auditor
 Review any non-audit services provided by external auditors (e.g. tax consultancy)
 Audit closure meetings, including discussing issues and weaknesses identified during audit
▪ Provide Whistleblowing arrangements to prevent fraud and mis-reporting

Report on Internal Controls

Report on Internal Controls to Shareholders
The board should conduct an annual review of the effectiveness of the company’s internal control systems,
which should then be formally reported to shareholders. The review covers all material controls relating to
finance, operations, risk management, compliance, etc. The review is generally conducted against the COSO
Framework elements.
Contents of a report on internal control system includes:

▪ Formal declaration by directors acknowledging their responsibility for ensuring sound internal controls
▪ Reference to COSO framework for sound internal controls
▪ Overview of the internal control system in place
▪ Summarize how the board ensured effectiveness of internal controls
▪ Any material control weakness identified
▪ Corrective and preventive actions taken to address weaknesses
Advantages / Importance of Report on Internal Controls to Shareholders

▪ Directors will work more responsibly when an activity needs to be reported to shareholders
▪ Shareholders will be fully updated
▪ Provides assurance to shareholders and other stakeholders hence increasing their confidence
▪ May attracts investment at a lower cost of capital
Practice Questions
P1 – Jun 2013 Q2: Imp of Int Audit in Regulated Ind | Audit Comm | Regulatory Rep (Bulp Co)
P1 – Dec 2014 Q4: Need for Int Audit | Why Int Ctrl Fails | CPD (Loho Co)

Chapter 10
Professional Marks & Formats
Professional Marks
General Professional Guidelines As per Examiner
1. Linking answer to EXHIBIT IS A MUST. No marks for general answer
2. Mention most important or crucial points FIRST
3. DO NOT INCLUDE unnecessary points
4. DO NOT REPEAT same points in one answer
5. Strictly STICK TO THE REQUIREMENTS AND THE MARKS, do not give excessive information
6. Answer should follow a LOGICAL FLOW rather than haphazard points
7. Report, Briefing Note, Letter, Press Release or Slides FORMAT TO BE USED when required
8. Conclusion not required unless specifically required in the question
Mirchawala College Chp 10 – Prof Marks & Formats….. Page 1

Analysis
Thoroughly review given information and investigate reasons of the current status
Hint: Explain and comment in detail on a particular set of info / data and
question appropriateness of any assumptions used
Evaluation
Assess proposals or arguments in a balanced way (i.e. giving both pros and cons) so that it
could be used for decision making. Demonstrate professional judgement
Hint: Mention both pros and cons
Communication
Express clearly and convincingly keeping in mind the target audience, for e.g. are you writing
to Chairman, NED, Finance Director, HR Director, Shareholders, General Public, etc.
HINT: Use appropriate format for Report, Briefing Notes, Presentation Slides,
Letter or Press Release wherever required

Commercial Acumen
Understanding of overall business and external factors. To be able to able to give
commercially sound comments and recommendations.
HINT: Use words like opportunities, threats, customers, competitors, market-

share, risks, etc.
Scepticism
Ask questions or challenge someone’s views or opinions with facts and figures in order to
present the complete issue picture or issue
Hint: Adopt a questioning tone in your answer, using words like ‘I disagree’, or
‘its incorrect’, or ‘its not clear’ or ‘should be further investigated’

Formats
Report Format:
Report
To: {Addressee}
From: {Your role}
Subject: {From question}
Date: dd-mm-yyyy
Introduction:
This report {copy from question}
Conclusion :
IF required in the question, otherwise NO
Briefing Paper / MEMO Format:

Briefing Paper / MEMO
FAO: {Addressee}
From: {Your role}
Subject: {From question}
Date: dd-mm-yyyy
Opening Para (for e.g. this briefing paper analysis …….)

Presentation Slide Format:
Slide 1:
HR Issues
▪ High turnover
▪ Low staff morale
▪ Salaries not aligned with market
Supporting notes:
{Explain above headings in paragraph form in 7-10 lines in total}

Letter Format:
Assistant Auditor
National Audit Authority
Beeland
DATE: dd-mm-yyyy
Chairman
Rail Co Trust Board
Beeland
Subject: Internal Controls and CEO Fiduciary Duties
Respected Chairman,
I have reviewed the effectiveness of the internal controls and below are my
findings and comments:
Press Release / Web Release Format:

Press / Website Release
{Subject}
{From}
{Company Name}

Business Case Format:

Current Situation
XXX XXX XXX
Proposed Option
XXX XXX XXX
Benefits of Proposed Option

XXX XXX XXX
Weakness and Recommendation:

Weakness Recommendation
Risk and Mitigation Factors:

Risks Mitigation Factors

Project Initiation Document (specimen answer for online system):
Scope & Objective Implement online system to increase revenue and customer
satisfaction
Cost Benefit Analysis Detailed CBA to be undertaken

Costs:
Hardware, software, website development, maintenance,
licenses, etc.
Benefits:
Increase in revenue
Project Sponsor IT Director
Project Manager IT manager / consultant
Project Team Full time team
Key Stakeholders ▪ Customers

▪ Board of Directors
Duration 12 months
Key Risks ▪ Technical issues

▪ Time overrun
▪ Cost overrun
▪ Internet related risks (cyber, outage, hacking, virus, etc.)
Constraint ▪ Human resource / expertise

▪ Funding
Governance / Reporting Board of Directors (or Project Steering Group)
Monitoring Monthly progress report

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What are the main terminologies discussed in strategic management?

What are the main terminologies discussed in strategic management?

What are the three stages involved in strategic management according to the rational model?

What are the three stages involved in strategic management according to the rational model?

SBL Notes – JUNE 2020 Attempt

Sir Hasan Dossani – MHA

• Vision (or strategic intent):

Objectives should be S-M-A-R-T (Specific, Measurable, Achievable, Result-Oriented, Time-Bound). E.g.

Mirchawala College Chapter 1 – Strategy….. Page 1

Strategic Management - Rational Model by JS&W

1. Strategic Position / Analysis

• Brand / corporate image

3. Strategy into Action

Mirchawala College Chapter 1 – Strategy….. Page 3

Types of External Environment

Mirchawala College Chapter 1 – Strategy….. Page 4

PESTEL (Macro Environment)

▪ Stable business environment ▪ Law and order situation

Example: Government is supporting Professional Education industry through tax incentives.

▪ Inflation ▪ Interest rates

▪ Tax implications ▪ Financing options

Example: The economy is going through recession.

▪ Believes / Religious systems ▪ Literacy levels

▪ Standard of living ▪ Unemployment

Mirchawala College Chapter 1 – Strategy….. Page 5

▪ Tech Infrastructure of the country ▪ Availability / shortage of skilled labour

▪ Health and Safety Law ▪ Data Protection Act

▪ Environmental laws ▪ Tax Law

▪ Competition / monopoly Acts ▪ Marketing and Sales (warranty, damage)

Mirchawala College Chapter 1 – Strategy….. Page 6

Porter 5 Forces (Micro Environment)

1. The bargaining powers of Customers

2. The bargaining powers of Suppliers

3. Threats of new- entrants (and barriers)

▪ License / Government approval required

Mirchawala College Chapter 1 – Strategy….. Page 7

4. Current competition / rivalry

Factors affecting intensity of competition:

5. Threats of substitute products

Mirchawala College Chapter 1 – Strategy….. Page 8

Porter Diamond Model

3. Related and Supporting Industries

4. Firm Strategy, Structure and Rivalry

Mirchawala College Chapter 1 – Strategy….. Page 9

Strategy Evaluation Criteria - SFA Framework by J&S

SFA Framework is used to evaluate a “proposed” strategy

Mirchawala College Chapter 1 – Strategy….. Page 10

SWOT / TOWS Model

Threat S-T W-T

Opportunities S-O W-O

▪ SO: Use Your Strength To Avail Opportunities

▪ WO: Overcome Your Weakness To Avail Opportunities

Mirchawala College Chapter 1 – Strategy….. Page 11

▪ ST: Use your Strength To Avoid or Counter Threats

▪ WT: Minimizes Weaknesses and Avoid Threats

• Reasons for segmentation:

Mirchawala College Chapter 1 – Strategy….. Page 12

• Marketing Mix (4 P plus 3 Extended P for services)

1. Product (means satisfying customer needs):