Business Management and Strategy
Strategic analysis
Strategy questions test frameworks for analysing the environment, the organisation and its choices. Know PESTLE for the macro environment, Porter's Five Forces for industry attractiveness, SWOT for internal and external fit, and the value chain for competitive advantage. Understand the difference between corporate-level strategy (portfolio, diversification) and business-level strategy (cost leadership, differentiation, focus).
Performance and control
Be able to interpret financial and non-financial performance measures, use budgets and variance analysis, and understand responsibility centres (cost, revenue, profit, investment) and metrics such as ROI and residual income. Know the balanced scorecard perspectives: financial, customer, internal process, learning and growth.
Traps
Questions often confuse strategy formulation with implementation, or present a framework in the wrong context. Watch for ROI encouraging under-investment because it ignores the cost of capital, whereas residual income does not. Distinguish fixed from variable cost behaviour when analysing variances, and separate planning from operational variances.
Worked example
A division has operating profit 120,000 on invested capital of 800,000. ROI = 120,000 / 800,000 = 15%. If the cost of capital is 10%, residual income = 120,000 - (10% x 800,000) = 120,000 - 80,000 = 40,000. A project earning 12% would raise ROI above 15% only if it exceeds the current ROI-showing ROI's bias against good projects below the division's average.
Rule of thumb
Match the framework to the question: environment to PESTLE/Five Forces, internal capability to value chain/SWOT, and performance to ROI/residual income with the cost of capital in mind.