SBL Strategic Business Leader

A. Leadership, culture and ethics

Leadership is the ability to set direction and to influence others to follow it. Trait theories look for the personal qualities of leaders, style theories describe how leaders behave (for example autocratic, democratic and laissez-faire), and contingency theories say the best style depends on the situation, the followers and the task. Transactional leaders work through rewards and targets, and transformational leaders inspire people with a vision and a sense of purpose. Tannenbaum and Schmidt describe a continuum from a leader who decides and tells to one who allows the group to decide within limits. At senior level, leaders set the strategy, the values and the 'tone from the top', and develop the next generation of leaders.

Culture is the set of shared beliefs and ways of working in an organisation. It can be analysed using Schein's levels (artefacts, espoused values and basic assumptions), Handy's four types (power, role, task and person), Hofstede's national dimensions and Johnson's cultural web (stories, symbols, power structures, organisational structures, control systems, rituals and routines, and the paradigm). Culture affects strategy, risk-taking, ethics and the success of change, so a strategy that conflicts with the culture is likely to fail. Leaders shape culture through what they say, what they reward and what they tolerate.

Professionalism and ethics. Professionals have a duty to act in the public interest, which means putting the interests of society and the users of their work before their own. The fundamental principles are integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. Ethical frameworks help with dilemmas: deontological approaches judge actions against duties and rules, consequentialist (utilitarian) approaches judge them by their results for the greatest number, and virtue approaches ask what a person of good character would do. Corporate social responsibility can range from a minimum legal view to a view that sees the organisation as a citizen with wider duties. In case studies, identify the ethical issue, the parties affected, the principles at stake, the options and the recommended action, with a clear justification.

Key terms

• Transformational leadership: Leadership that inspires followers with a vision and a sense of shared purpose.
• Cultural web: A model that shows the elements that make up an organisation's paradigm and culture.
• Public interest: The collective wellbeing of the community that a professional serves.

Study tip: In a case study, link a cultural or leadership problem to its consequence for strategy, risk or reputation.

Practice questions for section A

B. Governance and sustainability

Agency theory describes the relationship in which owners (principals) appoint managers (agents) to act for them. Agency costs arise because the interests of the two differ and because owners cannot see everything that managers do (information asymmetry). The costs include monitoring, bonding and the loss from decisions that favour managers. Good governance reduces them through supervision by independent non-executive directors, committees, transparency and incentives linked to shareholder value.

Stakeholder analysis identifies those with an interest in the organisation. Mendelow's matrix plots their power against their interest to decide how to manage them: key players (high power and high interest) need to be managed closely, those with high power and low interest need to be kept satisfied, those with low power and high interest need to be kept informed, and the rest need to be monitored. Organisations show social responsibility by considering the impact on stakeholders, and sustainability means meeting present needs without harming the ability of future generations to meet theirs. The triple bottom line looks at people, planet and profit.

Governance approaches. A rules-based approach sets detailed requirements that must be followed, and a principles-based approach states the principles and requires organisations to comply or explain any departure. Rules are clear and easy to enforce but they can be avoided and they are costly to apply, while principles are flexible but need judgement and can be applied weakly. The board is accountable to the shareholders and is responsible for strategy, oversight and risk. Good practice includes separating the roles of chair and chief executive, having a balance of executive and independent non-executive directors, and using committees for audit, remuneration, nomination and risk. Public sector governance has different features: accountability is to the public and to politicians, and there are many objectives and funding constraints.

Reporting to stakeholders goes beyond the financial statements. Integrated reporting <IR> sets out how an organisation creates value over the short, medium and long term using six capitals: financial, manufactured, intellectual, human, social and relationship, and natural. It presents strategy, governance, performance and prospects together. Sustainability reporting shows environmental and social performance, with disclosures that investors can use, and assurance can increase credibility. The risks are information overload, a lack of comparability and greenwashing.

Key terms

• Agency cost: A cost that arises because managers act for owners and may pursue their own interests.
• Comply or explain: A principle under which organisations follow the code or give reasons for not doing so.
• Integrated reporting: Reporting that explains how an organisation creates value over time using six capitals.

Study tip: For governance questions, name the weakness, say which principle it breaks, and recommend a specific change such as an independent chair or a risk committee.

Practice questions for section B

C. Strategy

Strategy is the long-term direction of an organisation that gives it an advantage in a changing environment. Strategic analysis looks at the external environment with PESTEL (political, economic, social, technological, environmental and legal factors) and Porter's five forces (threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitutes and rivalry), and at the internal position using the value chain, resources and capabilities, and SWOT. Resources are tangible (such as plant and cash) and intangible (such as brands and knowledge). The resource-based view says that resources that are valuable, rare, hard to imitate and supported by the organisation give a sustained advantage, and core competences are the skills that underpin it.

Strategic choices. Porter's generic strategies are cost leadership, differentiation and focus. The Ansoff matrix shows growth by market penetration, market development, product development and diversification, in order of increasing risk. The Boston matrix classifies business units as stars, cash cows, question marks and dogs according to market growth and market share, and helps to balance cash generation and investment. The methods of pursuing strategy are organic growth, acquisition and merger, joint ventures, strategic alliances and franchising, each with different control, speed and risk.

Strategic options are evaluated by suitability (does it fit the position and objectives), acceptability (will stakeholders accept the returns, risk and effects) and feasibility (can the organisation do it with the resources and time). Strategic change often comes from changes in the environment, technology, leadership or performance, and it needs to take account of culture and resistance. The role of the leader in a case study is to make a clear recommendation, supported by an assessment of the alternatives.

Key terms

• Value chain: The set of primary and support activities through which an organisation adds value.
• Core competence: A skill or resource that underpins competitive advantage and is hard to copy.
• Ansoff matrix: A model that links growth options to products and markets.

Study tip: Use frameworks to structure an answer, but always apply them to the facts of the case. A bare list of the five forces gains few marks.

Practice questions for section C

D. Risk

Risk is the possibility that an event will affect the achievement of objectives, and it can be negative (a threat) or positive (an opportunity). Risks can be strategic, operational, financial, compliance-related, reputational, technological and environmental. Risk appetite is the amount and type of risk that an organisation is willing to accept to achieve its objectives, and risk capacity is the amount it can bear. Organisations with a culture that is aware of risk make better decisions.

Identification, assessment and measurement. Risks are identified through workshops, scenario analysis, checklists and reviews, and recorded in a risk register. They are assessed by the likelihood of the event and the size of its impact, and many organisations use a heat map. The expected loss is the probability multiplied by the impact. Risks are then prioritised, taking into account interrelationships and the speed at which they could materialise.

Management, monitoring and mitigation. The usual responses are to avoid the risk by stopping the activity, to reduce the likelihood or the impact through controls, to transfer part of the risk through insurance, contracts or hedging, and to accept it. Enterprise risk management takes a company-wide view, with the board setting appetite and governance, and with risk owners assigned. Monitoring uses key risk indicators, internal audit and reporting to the board, and the board should review the effectiveness of risk management and controls regularly.

In a case study, recommendations should link a specific risk to a specific control, assign responsibility and say how the control will be monitored.

Worked figures

A risk has a 40 percent likelihood of occurring in the year and an impact of $2,000,000. The expected loss is 0.4 x 2,000,000 = $800,000. If insurance costs $500,000 a year and covers the full loss, it is worth considering because its cost is below the expected loss, although the organisation should also consider the effect on reputation and on the risks that are not insured.

Key terms

• Risk appetite: The level and type of risk an organisation is willing to accept to meet its objectives.
• Risk register: A record of identified risks, their assessment, owners and responses.
• Key risk indicator: A measure that gives early warning of a rise in risk exposure.

Study tip: For each risk, give likelihood, impact and a response. Do not just list the risks.

Practice questions for section D

E. Technology and data analytics

Cloud computing gives access to servers, storage and software through the internet. The service models are infrastructure as a service (IaaS), platform as a service (PaaS) and software as a service (SaaS). The benefits are flexibility, lower capital cost and quick scaling, and the risks are loss of control, security and data protection issues, dependence on the supplier and connectivity. Mobile and smart technology, including the internet of things, enable new products and services and produce large amounts of data.

Big data is data of high volume, velocity, variety, veracity and value. Data analytics extracts insights, ranging from description and diagnosis to prediction and prescription. Machine learning is a form of artificial intelligence in which systems learn from data. In supervised learning the model is trained on labelled data, and in unsupervised learning it finds patterns in unlabelled data. Robotic process automation uses software to do rule-based tasks. The benefits include speed and consistency, and the risks include bias in data and models, lack of transparency, privacy issues and the loss of jobs and skills.

E-business uses technology to run the value chain: for example online purchasing, e-procurement, digital marketing, online sales and customer service, and electronic data interchange with suppliers. It can lower costs and widen markets, but it also raises issues such as competition, trust and the need for secure systems.

IT security and control. The main objectives of information security are confidentiality, integrity and availability. Threats include malware, ransomware, phishing, denial of service attacks, insider misuse and loss of devices. Controls include access management, multi-factor authentication, encryption, firewalls, patching, backups, monitoring, incident response plans and staff awareness training. Governance covers who is responsible, how often controls are reviewed, and how incidents are reported.

Key terms

• Software as a service: Software delivered over the internet and paid for by subscription.
• Supervised learning: Machine learning in which the model is trained on labelled examples.
• Ransomware: Malicious software that locks data until a payment is made.

Study tip: For technology questions, give a benefit, a risk and a control. Examiners look for all three.

Practice questions for section E

F. Control, audit and finance

A system of internal control is the set of policies and procedures that give reasonable assurance about reliable reporting, effective operations and compliance. The components are the control environment, risk assessment, control activities, information and communication, and monitoring. Limitations include human error, collusion, management override and cost. Management is responsible for the system, and the audit committee oversees it.

Audit and compliance. Internal audit is an independent function that evaluates governance, risk management and control, reporting to the audit committee, while external audit gives an opinion on the financial statements. The audit committee reviews the financial statements and the work of both auditors. Compliance covers legal, regulatory and ethical requirements, supported by policies, training, whistleblowing arrangements and monitoring. Management reporting should be timely, accurate and relevant, and designed for the decisions of the people who use it.

Finance in planning and decision-making. Finance transformation means changing the finance function from transaction processing to a partner that supports decisions, through automation, shared services, better data and analytics. Financial analysis includes ratio analysis, investment appraisal using NPV, IRR and payback, and the use of forecasts and budgets. Cost and management accounting techniques such as activity-based costing, target costing, life-cycle costing and variance analysis help with pricing, cost control and performance. In a case study, you may be asked to calculate and then to advise, so always state the decision and its limits (for example, forecasts are uncertain and non-financial factors matter).

Worked figures

An investment of $5,000,000 returns $2,200,000 a year for 3 years and the cost of capital is 10 percent. The NPV is 2,200,000 x 2.4869 - 5,000,000 = $471,074, so the project adds value on financial grounds, but the board would also consider risk and strategic fit.

Key terms

• Internal audit: An independent appraisal of governance, risk management and internal control within an organisation.
• Finance transformation: Changing the finance function to focus on decision support through technology and better processes.
• Whistleblowing: The reporting of suspected wrongdoing inside an organisation.

Study tip: Pair every calculation with a recommendation and a caveat.

Practice questions for section F

G. Change, projects and professional skills

Enabling success. Organisations are structured in ways such as functional, divisional, matrix and network forms, and the choice depends on strategy, size and environment. Disruptive technologies (a term from Christensen) start in niche markets and then displace established products, so leaders must watch for them. Talent management covers attracting, developing and retaining people, succession planning and reward. Performance excellence uses tools such as the balanced scorecard, benchmarking and continuous improvement.

Managing strategic change. Lewin's model has three steps: unfreeze (create readiness), change and refreeze (embed). Kotter's eight steps set out a path from creating urgency to anchoring the change in the culture. The type of change can be described as incremental or big bang, and as evolution, adaptation, reconstruction or revolution. Resistance to change comes from fear, loss of status, habit and lack of trust, and it is reduced by communication, participation, training and support. A change agent leads the change and must have credibility.

Projects. A project has a defined scope, time, cost and quality, and managing it involves initiation, planning, execution, monitoring and control, and closure. Tools include the work breakdown structure, Gantt charts, critical path analysis and risk logs, and methods such as PRINCE2 give a structure with defined roles and stages. Project success depends on sponsors, a clear business case, stakeholder engagement and effective monitoring of progress.

Professional skills are examined in every task: communication (clear, structured and suited to the audience, in the required format), commercial acumen (understanding the business and its context), analysis (breaking down information and drawing conclusions), scepticism (questioning information and its sources) and evaluation (weighing evidence to reach a justified recommendation). Up to 20 percent of the marks are for these skills.

Key terms

• Unfreeze: The first step in Lewin's model, in which the need for change is made clear.
• Critical path: The longest sequence of dependent tasks, which sets the minimum duration of a project.
• Disruptive technology: A technology that starts in a niche and displaces established products.

Study tip: Always write in the format and role that the task asks for, such as a briefing note to the board. Marks are given for this.

Practice questions for section G